Mistakes made, lessons learned

1234

Zverev’s investment team, which looks for positive company change before it’s discovered by the broader market, noted in 2015 that the Italian banking system had been undergoing a number of fundamental changes.

“[In Italy] the speed of bad loan recovery and the sale of collateral underpinning the loan has historically been slow, up to seven years. It’s a dysfunctional process. The government put measures in place to shorten it to two years. As a result, the bank saves costs, recovery goes up and the cost of credit goes down. So collateralised lending is more powerful. For us that was a powerful change.”

Another signal was the government persuading the small, fragmented Italian banks to consolidate for efficiency.

“We felt the larger banks were going to lead that consolidation.

“In the second half of 2016, post-Brexit, investors looked at Europe and thought Brexit was the beginning of Europe’s problems. With further elections coming, people questioned whether the EU was wobbling and Italy was one of the most at-risk countries. So Italian banks sold off badly.

“At the industry level, changes played out as we thought. What exactly is [priced-in] is what we got wrong. We knew Italy had dysfunctional politics and banks had bad debt. We thought that was reflected in the price.”

Also on the theme of Brexit, Zverev said in 2016 the problem of “unintended biases” in a portfolio was made clear.

“In 2016 we realised the accumulation of residual exposures. This is when you are unintentionally over-exposed to sector, regional or style bets. Last year, any unit or percent of that risk you had cost you a lot more in terms of performance than previously. It was a big headache for us. The market reacted to these events a lot harsher than in the past.

“Therefore, we must run our risk profile much tighter than in the past. We haven’t changed the way we look for stocks but as we construct a portfolio we become aware of accumulating unintended biases.”

1234