Mellon Investments Corporation has built up its quantitative risk premia and risk parity capabilities and offerings with the recruitment of a specialist team. Roberto (Rob) Croce, the new managing director and senior portfolio manager, made his first visit to Australia last week.
Mellon is a US$525 billion ($A770.8 billion) investment firm – one of eight – in the US$1.8 trillion BNY Mellon stable, which operates under an independent multi-affiliate model. Its strategies range from active fixed income and equities, through indexed funds and Croce’s multi-asset and multi-factor products and strategies.
When he orchestrated the lift-out from his former firm of Salient Partners into Mellon last year, Croce went from a team of four quants, who had been working together for about seven years, to a team of 30-plus. He is based in Mellon headquarters in Boston while most of the team is based in the spiritual, if not geographical, home of quants, in San Francisco. He was accompanied on the Australian trip last week by San Francisco-based Michael Chu, the international relationships manager.
Salient Partners, based in Houston, Texas, was launched in 2002 and, by 2011determined that it needed to diversify beyond being a fund-of-funds manager and began to build a direct investing capability. The firm acquired an infrastructure manager and recruited Croce to build out an alternatives range of strategies.
“We wanted to, at first, get the beta right,” Croce says. “And we did this through a risk parity strategy, which we launched in 2012. Then in 2013 we launched a managed futures strategy, which took the tactical sleeve out of our risk parity product, and then in 2014 we launched our alternative risk premia strategy.”
Croce’s quant-based multi-asset and multi-factor unit at Mellon has about US$32 billion under management. He says that he and his colleagues were fortunate enough to win a US$1 billion mandate from a client within their first quarter at their new firm.
His team had a history of customising its strategies for individual clients, which it did while at Salient Partners with the risk parity offering in 2016. “The performance of that strategy has been the best in the space,” Croce says.
Alternative risk premia, about which a lot of Australian investors have shown interest in the past few years, is his current area of emphasis, even though last year was not the best for managers in that asset class strategy.
“What we saw last year was that the traditional correlation between alternative risk premia and stocks, of 0.3 to 0.5, went up with the increased market volatility, which is what happens… It was a bad year for everyone. Our more defensive approach, which is designed to be more neutral to changes in the risk environment, fared much better.”
He says that alternative risk premia strategies tend to be a more multi-factor than historically, effectively replacing the higher-cost global macro strategies of the past. The lower fees attached to alternative risk premia strategies represent a bonus for fee-conscious institutional investors.
Until Mellon’s increased interest in Australia and New Zealand with its new risk premia offering, the main potential providers of such a strategy have been Connecticut-based AQR, Paris-based CFM and Zurich-based GAM. AQR, which has the largest Australian presence, was the worst effected by last year’s market gyrations.
Croce says that risk premia strategies tend to best when investor risk appetites are consistent, “supporting consistent pricing and yields”. He says: “True risk premia are compensation for taking an explicit risk that most other investors avoid.”