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FX MANAGERS

Interview with Ugo Lancioni

Manager of the Diversified Currency Fund and of the Currency Overlay assets at Neuberger Berman

In this interview Ugo Lancioni explains what it takes to be a good investor and the importance of a strategy  based on a diversified approach and macro economic fundamentals

 

Manager

Ugo Lancioni

Strategy

Diversified Currency Strategy

Location

London / NY

Assets Under Management

Diversified Currency Fund: 28 Mln Usd
Active Currency Overlay Management: 410 Mln Usd
Passive Currency Overlay Management:727 Mln Usd

Type

Discretionary

Style

Fundamental

Instruments

FX Spot/Fwd/options

Currencies

G10 & Selective EM

 

fx managers macroeconomic fundamentals strategy Ugo LancioniFXTM

How long have you traded foreign exchange and what first attracted you to this industry? Tell us about your career evolution. 

UL

I started my career at JP Morgan as an assistant trader in the rates and FX department in 1996. I worked as trader and market maker in FX forwards and rates before moving to JP Morgan Asset Management (“JPMAM”), which at the time was a pioneer in currency management. At JPMAM I performed a numbers of roles ranging from trading to currency strategist and portfolio manager. In 2007 I left JPMAM to develop the currency capabilities at Neuberger Berman.

FXTM

What do you particularly like about your job?

UL

The challenge. The currency market is exciting. It is a market full of opportunities and, of course, risks.  Any new story can have a direct or indirect impact on currencies and every time there is new information you need to quantify its effect on exchange rates. People always have different views and interpretations, which leads to volatility. You have to work constantly to evaluate new information and reassess its potential FX impact before the opportunity disappears.

FXTM

Is FX a unique market? In what trading currencies is different from trading other financial instruments?

UL

Currency trading is continuous. Except for weekends, the markets are always open and currencies never stop moving. Currency volume worth several trillion US Dollars go through the over-the-counter market every day, traded against the USD, the EUR or in different currency crosses. The massive trading volumes executed both by currency professionals and a variety of market participants make this market the most liquid in the world.

FXTM

When was Neuberger Berman born?

UL

Neuberger Berman was established in 1939 in the US to manage money for individuals and families. The firm thrived and grew, earning a reputation for excellent performance and integrity. Today, our capabilities include traditional equity, fixed income and alternative strategies, in addition to portfolio advice and wealth planning services.

FXTM

How is the company structured today in terms of headcount and offices/geographic distribution?

UL

The firm currently employs over 1,600. Our global headquarters are located in New York, with regional headquarters in London and Tokyo. Investment Management representatives are located in London, New York, Chicago, Tokyo, Hong Kong, Melbourne and Singapore. 

FXTM

What are the key positions in an FX Management company?

UL

Portfolio managers and traders are obviously the people responsible for generating the returns and implementing portfolio strategies, but there are also a number of key control functions. At Neuberger Berman, we have independent Risk and Compliance groups that oversee the clients’ portfolios independently of the investment team.

FXTM

Which authority regulates Neuberger Berman? Do you keep and update procedure manuals and compliance and risk management policy? How time consuming, and how important, is it to comply with regulation requirements on one side, and internal procedures on the other?

UL

The company is regulated by the UK Financial Services Authority (FSA). We have a number of key policies and procedures that all employees must follow. 

We take regulatory requirements and operational risk very seriously. As a result, the currency team has developed a highly automated and efficient process to ensure that trades comply with limits and restrictions. Prior to trade execution, portfolio holdings changes are filtered through a pre-trade compliance module in order to ensure that the portfolio managers comply with the guidelines. The compliance rules are maintained and monitored independently from the portfolio management team.

FXTM

You are in charge of the currency program. How would you describe your investment strategy?

UL

Our Diversified Currency Strategy is based on a fundamentally driven, relative value investment approach. The strategy is discretionary in nature but we make extensive use of quantitative indicators and tools in order to maintain discipline and consistency in the investment process over time. We continually improve and enhance our framework of indicators, used as the basis for the analysis; however, the qualitative judgment remains the key element of our process. This discretion enables us to take into account information and events that cannot be easily quantified. Diversification is central to our investment philosophy and it is achieved at various levels within the portfolio. Our fundamental approach analyses a large number of variables and factors or drivers; we do not simply rely on a limited number of factors such as carry or momentum, meaning that ultimately we are able to implement a truly diversified portfolio. We also have multiple time horizons to capture dynamics in the short, medium and long term, implemented using different trading strategies to translate relative value opportunities into currency positions in portfolios.

FXTM

How and when did you develop your current FX management strategy?

UL

Our investment process today is the result of our trading and risk management experience. You simply get wiser over the years as you learn from good or bad experiences. During my career, I gradually came to the conclusion that in order to be able to add value consistently you need to get organized and follow a disciplined approach. In my opinion, there is no single currency strategy that can consistently deliver attractive risk-adjusted returns. Investors tend to focus on different dynamics over time and the market environment changes continuously. Unfortunately, there is no magic formula. You need to employ a diversified approach and follow the macro economic fundamentals which ultimately define currency equilibrium levels.

FXTM

Risk, an exciting yet dangerous word. How do you manage risk it?

UL

In my view, in order to be a good investor you need to be a good risk manager first. Before implementing any trade we always ask ourselves a number of questions: How much are we prepared to lose if we are wrong? What could be the P&L impact in the worse case scenario? What impact would the new trade have in the portfolio? 

We normally perform simulation analysis and stress tests in order to assess the potential impact on portfolio risk before implementing changes; portfolio managers use a variety of tools to monitor risk and to ensure that the level of risk falls within the limits defined by the guidelines of every currency portfolio. For example, at a portfolio level we monitor risk measures such as Value at Risk (VaR) and tracking error, which we control on a daily basis. 

Additionally, at Neuberger Berman the risk control function does not report to the business and therefore the independent Risk Management team generates additional extensive daily risk reports, which cover and monitor size limits, tracking error and VaR (1-day, 5-day and 1-month figures). The team produces separate risk analyses for each currency on an isolated and contributory level providing robust overall control.

FXTM

Could you give an example of a trade you did in the past but would never repeat today, and what did you learn from it?

UL

In certain cases, you may be tempted to buy a currency because it has fallen in value; the currency may look cheap and the trade appear attractive. Over the years, I have learned that even if sometimes the market seems to act irrationally, it should be respected as there is always a good reason behind a certain price action, and often that reason becomes evident only after the fact. When you don’t fully understand what is behind a move, it’s better to wait and trade when the picture becomes clearer.

FXTM

Do you use a blend of strategies for diversification or one only?

UL

Diversification is at the centre of our portfolio construction process so we aim to build portfolios that are diversified on a number of levels: by fundamental factor or drivers incorporated in our analysis, by time horizon (short, medium and long term inputs) and by trading strategies that are used to implement our views

This diversification allows us to construct portfolios that are not reliant on a single idea or theme and are not unduly exposed to a small number (or single) dominant risk factor. We believe that this diversified approach enables us to generate more consistent returns for our clients over the long term.

FXTM

How has your performance been over time? 

UL

Since we implemented the Diversified Currency Strategy, it has produced an annualized rate of excess return of 3.35% with an annualized volatility of 5.87%. Due to the diversified nature of the strategy and the low correlation to other asset classes, our performance was not negatively impacted by the market crash in late 2008. We have designed the investment process in a way that the strategy should perform across all market conditions.

FXTM

Can you give us an example of one of your winning decisions?

UL

During the second half of 2008, we avoided most of the unwinding of the popular carry trade as we felt uncomfortable with running positions in currencies which were heavily overvalued from a long-term perspective.

fx managers macroeconomic fundamentals strategy

 FXTM

Do you also use less mature currencies?  Or do the relative lack of liquidity and wider dealing spreads outweigh any potential gains from being able to capture more inefficiencies?

UL

In order to be able to offer daily liquidity to our clients, we take currency exposures mainly in the G10 currencies. Even if the majority of the portfolio risk is normally taken in G10 currencies, our investment universe also includes the most liquid emerging market currencies. When you move to the less liquid end of the spectrum, you often find attractive investment opportunities but also more variable market conditions. The liquidity you see today may not necessarily be there tomorrow and this is a factor we take into account before implementing any strategy. 

FXTM

Do you think some of the less mature currency pairs are viable for individual traders, who don’t have to worry so much about huge liquidity? Would you suggest to trade them?

UL

I would suggest trading them, but in addition to good liquidity I would also recommend considering other factors: we prefer trading in currency markets that offer transparency, limited political interference and reliable macroeconomic data. Our fundamental analysis is also based on historical data and, for this reason, we prefer countries that have good quality data over several economic cycles.

FXTM

How much time do you allocate to research and development of existing or new trading strategies?

UL

We are always working to improve our investment process and we have ongoing projects to develop additional strategies and analysis in order to further diversify our portfolio construction process.

FXTM

Do you believe in ever-valid rules, or every strategy loses its accuracy sooner or later? Have you ever found strategies that come back into phase after a long time in negative?

UL

Some technical strategies might lose their accuracy as trading patterns can change over time. As for fundamental strategies, the currency markets are constantly shifting focus from one driver to another. Hence, there are no strategies that consistently make positive returns. Every strategy will have its period of bad performance as markets might be paying attention to other dynamics. However, with the constantly shifting focus, previous losers can become winners. One great example is the long-term valuation strategy (PPP) which was generally not performing from 2004 to 2007 but then took off as the carry strategy went out of favour among investors.

FXTM

Do you agree that one way to react to the ever-changing market is to adjust parameters? Do you already use changing parameters based on volatility measures or filters?

UL

When constructing investment strategies or investment processes, we always use fundamental and sound assumptions for parameters. We do not believe in optimizing parameters as that can lead to data mining. Our idea is that over the long run, a good strategy with fundamentally determined parameters should produce positive returns. With that said, measures based on volatility and expected returns constantly re-parameterize but that is an automatically dynamic process.

FXTM

Do you favour any particular time frames in your strategies, or do you diversify across a range of them? What is your average trade duration, and how high is the trading frequency?

UL

We tend to use several time frames in our strategies. These timeframes obviously have different trade durations. The shorter the timeframe, the shorter the trade duration. Some trades are tactical and might only be in portfolios for a few days, whereas other trades reflect longer-term macro economic views and can be in place for months. We usually adjust portfolios once per day but when a significant amount of new information becomes available we may review the portfolio more frequently in order to assess the impact of the new data.

FXTM

What should an inexperienced trader watch when choosing the time frame to trade on?

UL

Time horizons, size of the trade and expected volatility are all interconnected. Traders should carefully define the time horizon and the sizing of the trades, taking into account the expected volatility, their price targets and their stop-loss levels.

FXTM

What are your average and maximum leverage used?

UL

Our strategy is implemented on a variety of accounts at different levels of risk. The Diversified Currency Fund, a UCITS III fund has an expected volatility of about 7% p.a. and is allowed to use leverage up to a maximum of 150% per currency. There is however a Value at Risk limit which is an appropriate way of controlling overall exposure. In any case, we normally do not use leverage (i.e. normally no position exceeds 100%) even though the Fund’s prospectus allows for it.

FXTM

How many execution brokers do you use? How do you split execution between electronic and phone orders?

UL

The currency team has the ability to execute with most of Neuberger Berman’s approved counterparties, always major banks. However, in order to minimize transaction cost, a fewer number of “top” counterparties are usually used. We estimate that we execute about 90% of all trades electronically and 10% of all activity over the phone.

FXTM

What historical data do you use when developing your strategies? How important is that?

UL

Reliable historical macroeconomic data and market data is crucial for our analysis. New and historical data is gathered on a daily basis using a framework of quantitative tools. This enables the portfolio management team to incorporate a large quantity of data into their investment decision-making process. Data is gathered across fundamental factors for short, medium and long-term time horizons.

FXTM

Which tools do you use in the strategy development process? A generic trading/strategy development platform, or specific statistical/quantitative tools as well? Proprietary or third party software?

UL

We have developed a framework of tools that enables us to analyse and standardise a large amount of data.  

FXTM

How does liquidity impact the efficiency of your strategies? Have you already explored to what AUM limit the strategies would allow you to grow to?

UL

Liquidity is not a major concern for the efficiency of the strategy since we mainly take views in the G10 space. However, as assets under management grow, this could become a concern. We estimate that we can grow the product up to several billion USD without incurring any major efficiency issues.  

FXTM

What is the biggest strength of your team? 

UL

The primary advantage of our team is that it is small and flexible and, thus, capable of taking efficient decisions and reacting to market movements. While decisions are made by a small group of investment professionals, the team is supported by the wider fixed income and alternatives businesses and benefits from research and information sharing.   

FXTM

How do you see the EurUsd evolving over the next 6/12 months?

UL

The sharp Euro depreciation seen in January and February can, without any doubt, be associated with the concerns around the debt in peripheral Europe. The market is now very short and the bad news is probably in the price. We see the Euro higher in the short term but in the absence of significant improvement on the macroeconomic front we expect Euro weakness to persist in the long run.

FXTM

What’s the best advice you’d give to an individual trader and to a semi-professional traders who want to enter the FX fund management industry?

UL

Individual traders often have gut feeling and good trading ideas but in my view, on top of that, you also need to work hard on three key areas: investment process, discipline and risk management.