Dresdner RCM's head of UK and European equities Neil Dwane has re-implemented portfolio risk control...
Dresdner RCM's head of UK and European equities Neil Dwane has re-implemented portfolio risk controls that had become relaxed in the TMT momentum market of 1999 and early 2000, writes Robert Stock.
In the three months since his recruitment from JP Morgan Fleming, following Fowler's move to Axa Investment Management, Dwane has conducted a thorough review of risk and performance expectations of Dresdner's UK and European retail funds.
The review was designed to put into place a more sustainable and scaleable investment process without altering Dresdner's growth philosophy.
It has led to the reinstatement of risk controls that would have limited the 'unacceptably high' technology bet that caused its successful stable of UK funds to falter over the past 14 months, he said. 'The firm has been frustrated that we haven't taken in as much business as we should have given the strong performance numbers we have generated. One key reason is that the institutional market felt that there was an emphasis on very talented stockpickers rather than a cohesive investment process.
'I have thoroughly reviewed all the risk and portfolio construction parameters with the idea of wanting the team to buy into them. We have sat down and come up with what I feel is an appropriate target for each fund.'
That was necessary because, Dwane said, the levels of risk the group was taking when the market turned were unacceptably high in retrospect.
He gives the example of the Dresdner UK Equity Income fund which saw its tracking error hit 8%, when he said 5% would have been more appropriate.
Another example of larger than acceptable bets included the positions that Neil Baston inherited when he took over as manager of the Dresdner UK Smaller Companies Fund in September.
The fund had a tech weighting of 50%, including 30% in software and around 7% in blue-sky internet start-ups. Following the review, for example, the Dresdner RCM European Trust is now limited to sector bets of plus or minus 10% and a tracking error of 2.5% to 5%.
The Dresdner RCM UK Growth Trust is to invest mainly in FTSE 100 stocks with sector bets limited to plus or minus 10% with a tracking error of 3.5% to 7.5%, and the Dresdner RCM UK Mid-Cap Trust is limited to a tracking error of 5% to 12%.
Also at the group, a bonus structure has been created which links 75% of a fund manager's bonus to the performance of their funds and 25% to performance of related funds and non-performance contribution to the firm.
The phantom equity incentive scheme, designed to allow fund managers to earn up to three times their basic salaries on a three year view, is based on the performance of a notional equity which captures the performance, positive or negative of the asset management division of Allianz.
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