Country Report: Switzerland
Country Report: Switzerland
Contents
Interviews, video and special reports
InvestmentEurope editorial director Jonathan Boyd highlights key aspects of the market
Pictet’s Mussie Kidane and Prime Partners’ François Savary offer observations on the most pressing issues for the Swiss market
InvestmentEurope’s first Swiss Summit
Speakers, video presentations & tweets from the Swiss Summit 2018
Falling equity ETFs sales drives weaker turnover in ETFs on the SIX Swiss Exchange
Seven fund selectors offer their views on a variety of topics
Reyl & Cie’s fixed income bets
InvestmentEurope in Switzerland
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“Switzerland remains a key destination for manufacturers and distributors of funds in Europe”
Jonathan Boyd, editorial director of InvestmentEurope
Rock solid
It should come as no surprise that Switzerland remains a key destination for manufacturers and distributors of funds in Europe.
There is a relatively well funded institutional market – as evidenced by InvestmentEurope’s own event, Pensionskassenforum Zurich 2018, which takes place 13 November, and will draw fund selectors and other financial professionals from across the country to discuss latest developments in the country’s pension system.
And there is a group of significant domestic suppliers, which according to figures from the Swiss Funds & Asset Management Association includes UBS, Credit Suisse, Swisscanto, Pictet, GAM, Vontobel, Lombard Odier and Swiss Life. SFAMA suggests that industry assets overall in the past five years increased from some CHF735.9bn to CHF1,117.8bn (roughly €645bn to €980bn).
This ezine presents further market views and insights from locally based fund selectors; highlights from our Swiss Summit earlier in 2018, an outlook on ETFs in the Swiss context, and an overview of pending events in 2019.
Jonathan Boyd, editorial director of InvestmentEurope and PPA Independent Publisher Awards 2017 Editor of the Year
SWISS VIEWS
Pictet’s Mussie Kidane and Prime Partners’ François Savary offer observations on the most pressing issues for the Swiss market
Mussie Kidane, global head of Fund Selection at Pictet Wealth Management
ACTIVE MANAGEMENT: TIME FOR A COMEBACK?
Adrien Paredes-Vanheule talks to Pictet’s Mussie Kidane
In a recent interview, you said pressures on active asset managers on fees will persist, how is that likely to occur?
Given the prevailing market environment in recent years, active managers as a group have struggled to materially outperform passive strategies. Indeed, the quantitative easing tide has lifted all boats indiscriminately.
Furthermore, there is an element of cyclicality in the alpha generation patterns of active manager’s and I believe that we are currently rather at the bottom of the cycle.
As monetary policy gradually normalises, we think active managers – and by that I mean those genuine active managers building high conviction portfolios with high active shares – will be in a better position to capitalise on fundamentally-driven return dispersion that is likely to occur.
Now the industry is seeing two significant and structural trends: first, beta is essentially a commodity and highly price sensitive. It is not surprising to see investors’ enthusiasm for ETFs and the asset growth therein. Investors are voting with their wallets preferring cheap vehicles to gain core exposure in most efficient markets where alpha is inconsistent, if it ever exists.
Where are we now in the action against so-called closet tracker funds in Europe?
The pressure on closet indexers is mounting both from investors abandoning such strategies to the benefit of mostly passive strategies and from regulators, especially in the UK, forcing some asset managers to reimburse investors for misselling their products as active funds.
In Continental Europe, the fund industry is still not efficient enough in putting the required pressure on such funds to either live up to expectation or die. However, I do feel that closet indexe funds are faced with an existential threat although the threat may take some time to materialise.
A Lyxor study has suggested an optimal portfolio should be theoretically composed of 70% passive funds and 30% active funds. What is your view on this?
I believe that there is definitely room for both active and passive strategies in any given portfolio. The proportion, however, may depend on investors’ investment objectives, their tolerance for relative performance risk, the investment horizon, etc.
If the case for equity ETFs is crystal clear, I remain very sceptical about passive investments in the fixed income space. Take credit for instance: the endgame is more about avoiding torpedoes rather than picking the winners. Why would then investors willingly accept lending more money to the companies with the largest debt burden simply because they have higher weights in the index? It is utterly counterintuitive.
“There is an element of cyclicality in the alpha generation patterns of active manager’s and I believe that we are currently rather at the bottom of the cycle”
Mussie Kidane, Pictet Wealth Management
What has been your equity allocation recently?
At this point in the cycle, we are more comfortable with equity risk rather than credit where many sectors are priced for perfection. Thus, we are overweight equities especially in developed markets.
We think the macro environment is supportive, company fundamentals are sound although valuations seem demanding especially in some sections of the US market for instance.
Talking about the US equity market, it has been very challenging for active managers to outperform consistently the S&P 500 index. In terms of market leadership, it’s been concentrated on a handful of mega cap stocks, which is a challenge for active managers.
As a matter of fact, one way of outperforming the S&P 500 consistently over the last five years would have been to create a portfolio made up of 90% of an ETF that tracks this index and 10% in the so-called FAANG stocks (2 % each), and rebalance that portfolio every year. That’s how concentrated the market leadership has been in the US over that period!
Any particular theme played?
With regard to thematically driven investments such as robotics, we do have exposure and we do it through the products managed by Pictet Asset Management, which is a prominent and highly performing player in this segment. For instance, the Pictet Megatrend Fund provides our wealth management clients a broad and well-diversified exposure to these multi-year themes or trends.
What about your current fixed income stance?
Fixed income is probably the most challenging area right now, especially for euro and Swiss franc-based accounts. Valuations in most sectors are quite stretched and in some cases such as European high yield outright expensive. We believe that investors are not fully compensated today to take excessive risk either by going down the credit quality ladder or by extending the duration of their portfolios. We think there is a time for offence and a time for defence and in, fixed income, we think it is time to scale back risk.
Do you use unconstrained fixed income funds?
Yes, we do. In the context that I mentioned earlier, these products make much sense. We believe that well-managed, unconstrained fixed income strategies should be able to better navigate the prevailing market environment.
What is your view on absolute return funds that some of your peers find disappointing in terms of performance?
I think it is unfair to pass a collective judgement on an entire segment. Granted that there are products that have disappointed big time but there are also a significant number of funds that have achieved their stated return objectives.
The main discrepancy with absolute return funds is how we measure their performance. If we expect these products to match directional strategies’ performance in an upmarket, we will surely be disappointed. With the exception of one fund, we are very happy with our absolute return fund selection as they have matched if not exceeded their stated return objectives.
The inclusion of ESG criteria in long only funds seems on the rise, is it a trend you are monitoring?
Yes, we are. Not surprisingly, most asset managers have already taken measures to integrate ESG consideration in their investment processes, with more or less significance and intensity. At this stage, what’s important to us is to assess who is doing what in this field.
Looking forward, in which asset classes are you looking to focus or strengthen fund research over coming months?
We have been busy in streamlining our approved list of funds. Our primary objective is to reduce rather than add to our current offering. However, we continue to look into some areas where we have gaps such as real estate.
Summit Highlights
The InvestmentEurope Pan-European Summit Lausanne 2018 took place at the Beau Rivage Palace in Lausanne.
Participating groups included Acadian Asset Management, Baillie Gifford & Co, Brandes Investment Partners, Candriam Investors Group, Eurizon Capital, Fiera Capital, Invesco PowerShares, Investec Asset Management, Old Mutual Global Investors, Origen Asset Management (a boutique of Principal Global Investors), Tokio Marine Asset Management, and Wellington Management.
Swiss differentiation
Integration of sustainability into investments of Swiss asset managers is booming. Ridhima Sharma reports
According to a number of metrics, the Swiss market has remained positive through the course of 2018.
There have been shifts noted, such as the increasing weight to defensive sectors in allocation decisions, specifically in the pharma sector. Moreover, the defensive nature of the Swiss market is attractive down the road and a bit more cautious on equities for the medium term.
Swiss boutiques are currently in the process of redefining their business model due to the change in market conditions, both in terms of revenue and cost. The process induces some consolidation that should continue over the medium term. Levels of service remain key to moving forward for Swiss boutiques.
A lot of foreign asset managers are seeking entry to the Swiss market. But they must focus on a few products with a clear strategy and management style. The offer should exhibit a differentiation for the investor as the supply of products is already quite important.
ESG INTEGRATION
The number of Swiss institutions implementing ESG has grown over the years. They are not only buying ESG products, but also actively implementing strategies into investments. Also, the shareholder engagement has widened to include international companies.
Sustainable investment funds represent 8.7% of the Swiss fund market according to SFF report. Not surprisingly, most asset managers have already taken measures to integrate ESG consideration in their investment processes, with more or less significance and intensity. At this stage, what’s important to us to assess is who is doing what in this field.
The interest for ESG/SRI investments on the rise and not only in Switzerland.
“I do not see any reason why the trend should go into reverse, on the contrary,” says François Savary, CIO, Prime Partners.
“The growing importance of ESG/SRI is also resulting from the demands of clients. It is very interesting to notice this development among the younger generation, that is to say that ESG/SRI is clearly a significant ‘component’ of the Millenial mentality.”
“The growing importance of ESG/SRI is resulting from the demands of clients… ESG/SRI is clearly a ‘component’ of the Millenial mentality”
François Savary, Prime Partners
EU-SWISS RELATIONS
Relations between Switzerland and UK are close and multifaceted. And Brexit will certainly impact the EU-Swiss relationship.
A new model of cooperation should emerge, but will it work? Nobody knows. What will be the challenges of the UK-EU relations down the road? What will it mean for the future of the EU? Could a working UK strategy induce other members of the EU to go for an exit solution?
A lot of questions are open when it comes to the consequences of Brexit.
All in all, Savary thinks that the tendency will be for the EU to adopt a stiffer attitude when it comes to negotiate with other parties; that is, a more difficult and less flexible attitude of the EU in negotiations, at least in the short term.
Recent comments by Jean-Claude Juncker, the president of the European Commission, concerning the Swiss-EU relations are clear: the EU wants an overarching agreement with Switzerland, and the EU refuses the idea of partial agreements. This sets the tone for any existing agreement, ie, the durability of each of them will be dependent on the ability to reach an overarching agreement between the two parties.
The Swiss National Bank has done a good job in dealing with the risk associated with the strength of the Swiss franc. Economic conditions in Switzerland are good and inflation is back in positive territory.
Considering the recent rise in uncertainties (trade, emerging markets), the Swiss franc has appreciated over the last few months. Therefore, the current stance of the SNB is appropriate, and to err on the side of cautioun when it comes to a change in monetary stance is the right strategy.
Swiss Summit 2018 event report
Alpha in bear territory
Alpha in bear territory
Switzerland’s capital Bern hosted InvestmentEurope’s first Swiss Summit recently, when eight asset managers presented across various asset classes. Adrien Paredes-Vanheule and Ridhima Sharma report
Bears may be the symbol of the city of Bern where the InvestmentEurope Swiss Summit took place 7-8 June - but not only. The animal also illustrates defensive times in markets. However, the outlooks presented at the Summit were anything but bearish.
For example, although US mortgage-backed securities may still give investors goose bumps for their role in sparking the global financial crisis in 2007/8, those listening to the relevant presentation at the Hotel Bellevue Palace heard of the recovery in the asset class and entry into portfolios for investors starved of returns in a low-rate environment.
This was the message from AllianceBernstein’s senior fixed income portfolio manager Markus Peters, who exposed opportunities in the asset class.
Outlining fixed income and other opportunities
Peters highlighted the robustness of the US economy; nearing full employment it is supporting the local housing market, with housing prices stable or even rising, he said.
Thus, as distinct from the speculative demand driving US MBS a decade ago, the primary driver currently is the low supply of houses, which is unlikely to revert, he suggested. The quality of US MBS puts it between investment grade and high yield, he added.
Another point raised concerns the quality of borrowers for US residential mortgages which has reached historic highs.
Looking across the spectrum of US MBS instruments, the manager’s preference is for agency MBS – bonds issued by the US Federal Reserve, guaranteed by the US Treasury – and agency credit risk transfer (CRTs), which are seen as an attractive alternative to bank loan exposure.
FROM AB TO AI
Artificial intelligence as a sole investment theme was the proposition of Smith & Williamson whose partner and portfolio manager Chris Ford outlined the secular growth opportunities carried by the topic.
Smith & Williamson's AI fund holds some 35 positions, of which about half are outside the US, and half related to technology.
In Ford’s words, AI has potential to double economic growth rates over the next 20 years. As an example, he highlighted that AI could bring some €6.72bn per year in economic benefits to the European utility sector.
Ford noted that seven out of the 10 biggest organisations globally by market capitalisation are already engaged with AI. Smith & Williamson itself relies on an AI-enabled investment process which acts as a filter by reading thousands of company documents about stocks.
“As history has shown, few companies can embed themselves in such a way for the long term, and the future winners in 50 years’ time may look very different to those we have now.
“But what is clear is that businesses are using AI to consolidate what are already strong positions within their existing markets, and these are unlikely to be overtaken any time soon,” Ford recently said, commenting on Apple becoming first $1trn listed company.
JAPAN
Why invest in Japan? Because it is still a cheap value market according to Chris Taylor, investment director and head of Research at Neptune Investment Management.
Reasons for considering Japan a sweet spot include the following: it has not been rerated since 2012; corporates now pay back shareholders through dividends or buybacks and do not hold cash.
Additionally, Japanese company earnings growth remains underestimated despite upheavals and a strong yen, Taylor pinpointed. Japanese listed firms are experiencing rising profits and diversification that offsets the effects of persistent domestic government deficits.
Therefore, Taylor’s fund, which has 30 to 50 holdings, invests in sectors dominated by Japanese firms, such as advanced materials (carbon fibre, paints), engineering (vehicles, power plant), electronics and government spending-related (defence, construction).
However, consumer demand-driven sectors (retailing, food, clothing, utilities) are avoided. Regarding the Topix index, Taylor noted that foreigners selling out over the past year has left Japanese buyers supporting the market. He also pointed out that over 40% of positions in the market are short.
EMERGING MARKETS
Overshadowing the EM sector recently has been US president Donald Trump’s comments on trade with China and Turkey.
But in the view of Danske Invest’s Sorin Pirău, portfolio manager and economist emerging markets debt hard currency, risk triggers are common in the space. When some dissipate, new ones appear.
EM fundamentals are proving resilient, Pirău said, noting broad-based recovery across emerging markets, which he characterised as being in its early stages.
Moreover, he expects a widening of the growth alpha between EM and DM that should be supportive of the EM debt asset class in the medium-term.
Pirău stressed a turning point in credit quality in EMD. After credit fundamentals were badly hit in 2017, improvement is being driven by growth recovery, fiscal adjustment and stabilised debt.
EUROZONE
According to First Trust Global Portfolios, investing in the eurozone has been a hot topic of discussion. The manager’s AlphaDEX methodology scours the European markets looking for the best value and growth stocks, which FTGP highlighted through its detailed review of the performance and attribution of European stock market returns year to date.
Sticking with the ETF trend, Christopher Gannatti, head of Research Europe at WisdomTree presented two ETFs, one focusing on contingent convertible (CoCo) bonds and the other on S&P 500 put options. He also gave an overview of the strategies that are considered interesting in the current market environment. These include looking for quality dividend growth opportunities in the US, eurozone and global equities asset classes. Japan too is interesting from a currency hedged approach focused on export-orientated companies, he suggested.
Kames Capital outlined the importance of dividend income and dividend growth as key drivers of long-term total returns for equity investors. Mark Peden, investment manager explained why detailed analysis of companies is important to avoid damaging dividend cuts and identifying potential positive dividend surprises.
Investec Asset Management shared views on a flexible and dynamic approach to global credit investing. Garland Hansmann, portfolio manager talked about how Investec applies a multi-asset approach to investing across the credit spectrum.
He also discussed the manager’s Global Total Return Credit fund and how it seeks to create a high yielding yet comparatively defensive global credit portfolio built from the bottom up. Hansmann also provided an overview of the portfolio showing where Investec is currently positioned.
Watch out for the third-party risk!
Ethical hacker and social engineer ‘FC’, also known as ‘FreakyClown’ provided the Summit with a keynote based on insights from his 25-year experience of breaching security on behalf of clients.
FC has broken into hundreds of banks, offices and government facilities. He said businesses he has worked with have failed to understand that good business security is a balance between digital security, physical security and human nature.
“One bank we worked with had issues with people getting into their facilities. They bought the most expensive security door for £60,000 and asked me to test it and make sure it is secure. I watched the door for three or four hours and on the day after, I walked to the door and it randomly opened without any need to hack it. There was an engineering mode that every 15 minutes does a revolution to ensure the door is working. All I did was get that timing precise.
“The door was not the issue. People trusted the wrong people as they thought engineers would have correctly installed the door and engineers assumed that people running the door would use it correctly.
The management had never thought of this risk,” FC told the Summit audience.
A co-founder and head of Ethical Hacking at Redacted Firm, FC told another story about a US company from which 30 million credit card details and some $470m were robbed through air conditioning devices in 2014. Hackers targeted the air conditioning company as a third-party in their plans to break into the business.
“There is a third-party risk. You cannot fully trust a third-party and perhaps you may be the third-party of someone else for other plans,” he said.
IN THEIR OWN WORDS
Speakers, video presentations &
tweets from the Swiss Summit 2018
CHRIS FORD, SMITH & WILLIAMSON
Chris Ford is partner and portfolio manager of the Smith & Williamson Artificial Intelligence fund. He joined the company in 2015, having previously held roles of global and US equities portfolio manager at Pictet AM and Schroders.
MARKUS PETERS, ALLIANCEBERNSTEIN
AllianceBernstein’s fixed income senior portfolio manager Markus Peters joined the firm in 2014, representing market views and investment strategies of AB’s fixed income portfolio management team. He previously worked for M&G.
SORIN PIRĂU, DANSKE INVEST
Sorin Pirău is a portfolio manager and economist in the emerging market debt hard currency team at Danske Invest. He is responsible for the team’s overall macro research and the development of quantitative models.
Key tweets
#FSSUMMIT Smith & Williamson's Ford calls AI fastest growing economic phenomenon at the moment Smith & Williamson
#FSSUMMIT Housing prices not driven by excessive speculative demand, but by very low supply @investecam_uk
#FSSUMMIT EM fundamentals are forecasted to continue improving, closing the development gap with DMs Danske Invest
CHRISTOPHER GANNATTI, WISDOMTREE
WisdomTree’s head of Research for Europe Christopher Gannatti joined the firm at the end of 2010 as research analyst. He is responsible for WisdomTree research within Europe as well as supporting the Ucits platform globally.
Chris Taylor is head of Research and Japanese Equities at Neptune Investment Management since June 2004. Prior to joining Neptune, he worked at Fuji Investment Management for 15 years, where he was a managing director.
GARLAND HANSMANN, INVESTEC
Garland Hansmann is a co-portfolio manager of the Investec Global Total Return Credit fund at Investec AM, Previous roles were with Intermediate Capital Group and Credit Suisse Asset Management, focusing on high yield credit.
KEY TWEETS
#FSSUMMIT Japanese equities close to record earnings and dividend per share @WisdomTreeETFs
#FSSUMMIT Japanese national debt showed a steady rise - IMF 2017 level now raised to Yen 1307trn Neptune IM
#FSSUMMIT The credit spread offsets the aspect of the credit negative duration effect. A solution is to move defensive portfolio into credit @investecam_uk
GREGG GUERIN, FIRST TRUST GLOBAL PORTFOLIOS
Gregg Guerin is is senior product specialist at First Trust Global Portfolios. Prior to working in London, Guerin was a member of the First Trust Institutional Team. He has been working in the ETF industry for over 10 years.
MARK PEDEN, KAMES CAPITAL
Mark Peden is an investment manager at Kames Capital. He joined the firm in 1992, focusing mainly on European equities. He has built and manages the Kames Global Equity Income strategy since its inception in 2011.
KEY TWEETS
#FSSUMMIT FTGP's AlphaDEX methodology looks at value stocks and momentum stocks Apple is cheap but what moves its stocks is sales, says Guerin. When sales up, stock up, sales down, stock down. Same with Amazon, Netflix, Starbucks and other big names First Trust Global Portfolios
#FSSUMMIT The de-equitiser plans to return $44bn of $67bn if repatriated offshore cash @kamescapital
Declining Dynamics
Turnover in ETFs on the SIX Swiss Exchange declines
ETF sales suffer from Declining Dynamics
Weaker turnover in ETFs on the SIX Swiss Exchange was due primarily to equity ETFs in Q2 2018. Ridhima Sharma reports
For Western stock exchanges, the second quarter of 2018 was like a roller coaster ride. Overall, they were able to maintain their level. The situation on the stock markets in several emerging countries was completely different, for example, as the strength of the dollar contributed to lost ground.
The Swiss Market Index SMI closed the first half of the year at 8,609.30 points, down 1.51% as of the end of March. Growth in ETFs continued. Following the listing of 106 ETFs on the SIX Swiss Exchange in the first quarter, the number of tradable ETFs surged by 73 in the second quarter. In the first half of 2018, 179 new ETFs found their way into trading on the Swiss stock exchange, setting a new record.
In Q2 2018, demand on the Swiss ETF market eased. As a result, trading turnover fell to CHF25.4bn compared to the previous quarter. Following a very strong Q1, investors were more cautious, in particular with equity ETFs. This was also reflected in the significantly lower number of trades. As a result, 253,605 ETF tickets were generated in Q2 2018, representing a decrease of 67,957 on the record Q1 level. However, compared to the same period of the previous year, the number of ETFs trades has increased by more than 6%. The increase in lower value trades indicates increased interest on the part of private investors.
ETF TURNOVER
Weaker turnover in ETFs on the SIX Swiss Exchange was due primarily to equity ETFs in the second quarter. They recorded a decline of 21.28% but remained the most important asset class by far with CHF22bn in trading turnover. As against the same period last year, equity ETFs developed in an almost identical fashion. Turnover in bond ETFs held up comparatively well, down 4.06% on the first quarter. Among other factors, they also benefited from numerous new listings. Turnover in commodity ETFs fell by 12.44% to CHF2bn, the lowest quarterly level in the last seven quarters.
In Q2 2018, three UBS ETFs on the MSCI ACWI Index took pole position on the list of the top 20 most traded ETFs, albeit with significantly lower volumes compared to Q1. In fourth place was the UBS ETF EGUSAS on the MSCI Emerging Markets, which was the only one of the seven highest ranked that achieved higher turnover. Lyxor’s ETF MSE on the Euro Stoxx 50 took eighth place and iShares's ETF CSNDX on the Nasdaq 100 was ranked tenth. The two ETFs focus on developed stock markets.
UBS defended its top position in turnover with a share of 39.75% (Q1: 42.88%), followed again by iShares, whose share increased by 0.24% to 32.88% in Q2.
For the second time in a row, Lyxor was ranked third (13.74% vs. 11.09%) and PowerShares in fourth position (4.24% vs. 3.78%) and both achieved significant gains in market share quarter-on-quarter.
JP Morgan is a new entry to the list, which launched four ETFs on the SIX Swiss Exchange on April 18, 2018. Two out of the four ETFs from JP Morgan are active ETFs. A portfolio manager actively checks and optimises the composition of the fund by buying or selling selected stocks or other securities. Thus, they can respond more quickly to market trends.
EUROPEAN MARKET
Again there have been net new assets in ETFs at the European level over the last few months, especially in the bond asset class. Net new assets of $5.8bn in total were invested there in the first half of 2018 alone. In June, the greatest net outflows were seen in the biggest asset class, equity ETFs.
Overall, only the alternative, bond, leveraged and commodities asset classes attracted new assets in the last trading month. However, investors took assets out of the other asset classes.
“A common misconception is that ETFs are passive/index tracking tools. ETFs are much more than that”
Ivan Durdevic, JP Morgan Asset Management
“A common misconception is that ETFs are passive/index tracking tools. ETFs are much more than that,” said Ivan Durdevic, executive director, and head of ETF Distribution Switzerland at JP Morgan Asset Management, based in Zurich.
“We think ETFs can bring innovative solutions to clients. We have already shown that we can leverage passive, strategic and active capabilities across fixed income and alternatives and will continue to build out an innovative ETF range across all asset classes for our clients across the board, fitting private banks or institutional needs. We have capabilities which span the spectrum from passive, strategic beta and active.
“We see the ETF wrapper as a technology to wrap these strategies in. Increasingly clients are looking to leverage this wrapper to build portfolios therefore we are working to develop our capabilities to better serve our clients,” he added.
SELECTORS' VIEWS
Regulation, the role of boutiques, ESG/SRI and the impact of the SNB figure among the views of top local fund selectors
Name: Léonard Dorsaz
Company: Banque Piguet Galland & Cie
Role: Head of External Fund Selection, alternative and long-only funds
Base: Geneva
What has been the impact of new regulation (LEFin, LSFin, Mifid II) on your fund selection?
New regulation has increased dramatically the complexity of our work.
On the fund selection side, some issues have emerged, for instance regarding share classes. Where BlackRock will launch 50 different share classes for each type of client, smaller fund providers, especially focused on niches, will only have three or four share classes to propose. It means that some of our clients cannot access this last fund because of regulation.
If we see an excellent niche fund that can only be invested in by some of our clients and a very good one that is opened to a larger audience, we would unfortunately rather pick the latter. If I look at all share classes of the funds we hold on our recommended list, we may reach around 1,000 share classes in total. This is insane. I am of those who think regulation has never helped preventing the next financial crisis
Name: Cédric Ozazman and Jonathan Cohen
Company: Reyl & Cie
Role: Head of Investments and Portfolio Manager, in charge of long-only fund selection
Base: Geneva
How do you play European and Swiss equities?
We have a bias on European small and mid caps. In these segments, we can still find innovation even if it will never reach the level of innovation seen in the US market. A number of niche companies are worldwide leaders in their markets and provide growth perspectives that we would not see in the large cap segment.
A number of European small and mid cap equity funds, especially Swiss small-mid cap funds, have reached a size that is not coherent with its investment policy. They carry an important liquidity risk. Liquidity-wise you cannot only rely on three Swiss large cap stocks. If the market overheats or is subject to an aggressive sell-off phase, we would not be confident being in this type of funds.
Name: Stephan Germann
Company: Pleion Asset Management
Role: Chief Investment Officer
Base: Geneva
How do you see the impact of new regulation on local independent wealth managers?
Independent players are doing relatively fine at the moment. They are all looking at each other. Though I do not have ten wealth managers at my door seeking to partner or merge with us.
When LSFin will be effective, the situation will dramatically change. However there will be a difference between the small private bank that has clients in 20 or more countries and that which has a strong clientele located in a single place. The former may not survive while the latter could still overcome forthcoming regulation.
Name: Stéphane Monier
Company: Lombard Odier Private Bank
Role: Chief Investment Officer
Base: Geneva
As a Swiss fund selector, which challenge(s) do you face the most?
In our view, one of the main difficulties is identifying style drifts and for this, transparency is key. Investors need to know whether managers remain committed to funds’ stated strategies, and they need to be able to detect any divergence.
Furthermore, having a diversified client base – with one-third residing in Switzerland, one-third in Europe, and one-third in emerging market countries – means that we have to ensure our fund selection covers a range of regulatory and fiscal requirements specific to each client’s domicile.
Tax events that investors incur, in case we would like to change a manager, represent another important factor. In addition, tracking performance and understanding funds’ risk management practices can be hard for both selectors and investors.
Name: Rafael Anchisi
Company: Bordier & Cie
Role: Head of Fund Research
Base: Geneva
Sustainable investment funds represent 8.7% of the Swiss fund market according to an SFF report. Do you expect Swiss asset managers to do more around ESG/SRI?
At the bank level, we have always been conscious about sustainability. We consider that it is our responsibility to transmit something positive for the next generations. For instance, our Under The Pole III sponsorship reflects our alignment between values and acts.
On the investment side, ESG/SRI is becoming a strong global trend. Swiss asset managers should stay in the run if they don’t want to be left behind.
We are still in a quite early stage phase with respect to the private clients’ state of mind. Moreover, ESG and SRI semantics are overused and wrongly look as if it was a new standard. As a result, investors are still lost in translation because of the lack of visibility between the concept and the reality.
Name: Sébastien Gyger
Company: Gyger Advisors
Role: Financial Advisor
Base: Saint-Livres/Geneva
What is your view on Swiss boutiques?
Highly regulated, high costs of production, hard to find customers: these are the most pressing challenges voiced by Swiss asset managers. It should have come as no surprise in the current binding regulatory, fiscal and political environment.
Overall though, it has to be noted that the industry has been pretty resilient and the top league company table has barely budged. Under the surface, we observe that asset management boutiques are bubbling when their offering is meeting client requirements for performing, focused and well-priced strategies.
To name a few, Bellevue, Decalia, Holinger, Quaero and Sectoral belong to this group of local actors actively shaping the Swiss competitive landscape in the asset management industry.
Name: Emmanuel Ferry
Company: Banque Pâris Bertrand
Role: Chief Investment Officer
Base: Geneva
What is your stance on the current SNB monetary policy?
The SNB has no choice but to continue to keep a dovish bias. The Swiss economy is highly exposed to the euro area from an economic point of view (main trading partner) and from a risk point of view (safe haven). A rate driven appreciation of the euro vs the Swiss franc seems very unlikely over the next quarters, as the ECB should also maintain a dovish bias until the end of 2019 at least.
We do not see the SNB moving before the ECB.
An early monetary easing by the Fed would be a major problem for European central banks, as a cheaper dollar would coincide with a US economic slowdown. This scenario is inevitable and sheds light on the unsustainable monetary policy disconnect between the US and Europe.
FUND SELECTORS IN THE NEWS
Each month, InvestmentEurope highlights the views of fund selectors in its magazine section called Fund Selectors in the News. To make sure that you get an opportunity to put forward your views as a buy side professional, please contact the editorial team.
Details are available here: http://www.investmenteurope.net/contacts/
Latest issues of the magazine can be downloaded here: http://www.investmenteurope.net/archive/
Allocator profile
Reyl & Cie’s fixed income bets
Pursuit of niche categories adds value
Jonathan Cohen, portfolio manager in charge of traditional long-only fund selection and Cédric Özazman, head of Investments and Portfolio Management, reveal Reyl & Cie’s fixed income bets to Adrien Paredes-Vanheule
CÉDRIC ÖZAZMAN & JONATHAN COHEN
Cedric Özazman (left) has been head of Investments and Portfolio Management at Reyl & Cie since 2010. Prior to that, he was head of Discretionary Portfolio Management at KBL (Switzerland). His team includes Jonathan Cohen (right), portfolio manager responsible for traditional long-only fund selection at Reyl & Cie since 2015. His previous roles were with Merill Lynch and KBL (Switzerland).
It is to just two of Geneva-headquartered private bank Reyl & Cie’s nine or so investment professionals that responsibility for – respectively – long-only fund selection and liquid alternatives fund selection falls.
Each brings expertise on a particular asset class hence gets involved in fund selection decisions as, for example, is the case for European equity funds with Reyl’s head of Investments and Portfolio Management Cédric Özazman - a specialist in the segment.
“We have a concentrated buy list of 15 to 20 funds, quite the opposite of a shopping list that encompasses all segments. It is a way to implement our convictions. Though the model carries some limits, we try to find the adequation between our human resources – one cannot follow 40 funds at a time – and clients’ needs which can differ from our convictions,” says Cohen.
“Fund selection at Reyl is first aimed at matching the various client investment profiles and needs we have to fulfill for portfolio construction. It logically includes allocation to classical funds in the US or in Europe on the equity side for instance.
“Now, given our model, we can bring added value by selecting funds that fall into the niche category and stand out from the rest of the market. As an example, we have conducted funds research on Nordic credit,” he adds.
Funds are generally kept in the portfolio for over a year. A three-year track record is required for the portfolio manager as well as $100m in assets under management for a minimum fund size. Though Cohen pinpoints these rules can be circumvented it the team has a strong enough conviction on a manager.
The use of ETFs? A rarity in Reyl’s allocation grid says Özazman, whose team utilises passive funds when active ones cannot fit the team’s allocation view – for example, to obtain exposure to a specific theme.
“Given our model, we can bring added value by selecting funds that fall into the niche category and stand out from the rest of the market”
Jonathan Cohen, Reyl & Cie
“We currently hold an ETF focused on US medtech. There are, perhaps, active healthcare equity fund managers maintaining a US medtech bias, but it remains hard to find. Sometimes a sectorial ETF will do the trick. Obviously, we also use ETFs for tactical purposes on a limited investment horizon - 6-9 months,” he says.
SUB DEBT FAVOURED
In the fixed income bucket, the Geneva bank’s investment unit avoids European government bonds, since the European Central Bank’s first interest rate hike is not expected before mid-2019 and returns do not look appealing.
“Nordic debt forms an interesting alternative. Once we are hedged against currency risk, we perceive more returns compared to eurozone debt,” Özazman argues.
Cohen adds that subordinated debt has long been a favoured play of the unit, especially through a fund from Algebris.
“Subordinated debt suffered a bit last year, but not as much as US credit. We are raising the question of whether it has become overcrowded or not. We are beyond the mid-cycle point and need to be more cautious on the asset class at some point,” Cohen assesses.
Özazman notes: “What we liked is that European banks took measures long after their US counterparts, but at least they have acted to resolve structural issues. These issues haven’t been resorbed fully yet in some countries like Italy. Banks in Spain, France are being well recapitalised. Their balance sheets are robust enough to avoid systemic risk off sovereign debt.”
“The asset class has recorded high levels of net inflows in recent years. As a result, positions taken by subordinated debt funds are quite large. There is perhaps a need to bring more granularity and diversification. We look at corporate hybrid bonds, which carry a less aggressive profile and are even more niche.”
Another strong credit bet over the last couple of years has been emerging market local currency. Cohen says the unit took profits on the asset class at the end of last year and that the idea is to reallocate this bucket to another part of the EM debt spectrum, namely increasing the bucket of EM high yield corporate bonds.
Also, Reyl & Cie has decided to lengthen its portfolio duration following the Federal Reserve’s interest rate hikes.
“We stay short duration through inflation-linked funds while some other funds, mainly US credit, keep a 6-7 year duration in aggregate.
“We have no reason now to pursue a pronounced bet on short duration and being underweight US credit,” Reyl’s investment head highlights.
A longer version of this article is available on www.investmenteurope.net.
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