Let’s face it, Geneva is wealth. And it knows how to handle it, having lived with the irritations of the problem for some time.
Pictet & Cie is part of that club and evidently proud of its traditions and history as one of the world’s leading private banks. Gated doors mysteriously slide open without bell or knocker to announce arrival. Porters graciously refuse to take names in order to preserve confidentiality. It’s enough to make you feel like a high net worth individual. Some of us lesser mortals (for which read journalists) are quite happy to run with that – for an hour or so, at least.
Founded as de Candolle, Mallet & Cie in 1805, Pictet has been working at looking after other people’s money for nigh on two centuries. Today it is the largest private bank in Switzerland and asset management and related services are its sole business. It is one of Europe’s leading fund managers with around $45 bn under management. Prior to our interview, one external source suggested that the real figure might well be closer to $60 bn, adding: ‘My guess is that they never tell anyone the real figure.’
That element of secrecy and confidentiality is what Swiss private banking was built on, of course. But things have opened up to a certain extent and Pictet wants people to know about it.
Sitting opposite Jacques de Saussure, one of seven partners behind the bank, it’s hard not to let your mind wander for a moment. The partners hold unlimited liability for the bank’s operation – a level of monetary responsibility not to be sniffed at and something that ‘serves as a guarantee to Pictet’s clients’, according to the marketing blurb. The group comprises ten offices worldwide, with over 900 employees – nearly 200 of whom are investment professionals.
‘We value our independence and lack of conflicts of interest,’ says de Saussure. ‘The partners are not members of boards of big corporations and we don’t make loans to those corporations.’ He believes that independence is particularly valuable in attracting the private clients on which the bulk of the business is based, rather than the institutional clients which have been an increasing part of the target market in recent years. No mention here from de Saussure of the alleged courting of Nestl by Pictet’s analysts so as to preserve Pictet’s contract for the custody of Nestl’s pension fund. But that’s another story.
As the Pictet tale unfolds it leaves an impression of a slightly stuffy institution which has gra{BBed hold of itself over the past couple of decades and given itself a partial shaking. Some of the stuffiness still remains but some has been replaced by young blood, innovation and a waking up to today’s competitive reality. It seems analogous to the experiences of many a British law firm in recent years.
De Saussure illustrates this change of heart by jocularly recalling the initial shock in some quarters when the idea of a corporate logo was raised a decade or so ago. Note, however, that his business card has no sign of the subsequently adopted logo which is carried on everyone else’s card. Some things, it seems, remain below partner level.
Changes are evident in other areas, too. The speed of agreement to an interview, for one. The increased courting of institutional business, for another. Witness the growth of the London office which looks after most of the institutional business sourced outside of French and German speaking countries. It was established in 1980 as an SEC-registered entity exclusively to manage US Erisa pension funds. That remains a significant chunk of its business but the London operation has brought in new clients as a result of expanding its investment outlook. Not least of these was its early step into emerging markets in 1986 (see box, page 109).
Going along with the idea of the ‘new’ Pictet which has just been eloquently expounded by de Saussure, can he reveal where the bank’s clients are sourced? This is where the ‘new’ Pictet comes into conflict with its traditions. ‘We don’t publish that information,’ says de Saussure.
On further questioning he reveals that the domestic base remains ‘rather small’ although it has been growing fast due to successes in attracting Swiss pension fund clients. ‘Our domestic client base was originally just some wealthy Geneva individuals and we never marketed ourselves to the German-speaking private client base. But since we’ve addressed the Swiss pension fund market the domestic base has grown.’
In the absence of hard figures the client base can best be summarised as having a heavy bent towards private clients – and that’s important to IROs because it has a significant effect on the bank’s investment decisions. Take into account that Pictet London is responsible for institutional clients from the Anglo-Saxon world and accounts for only $4 bn out of $45 bn plusand you get an idea of the private client weight behind the funds. De Saussure says that those funds tend to be more stable, although an institutional account will have a larger impact in one move.
‘There are probably very few groups in the world with such a diverse base of clients,’ says de Saussure. ‘We have private clients from virtually every country as well as a much more {geographically} focused institutional client base. These include Swiss, Dutch, British, US and Japanese institutions, as well as some smaller institutions from elsewhere. All of their investment needs are quite different.’
Those different investment needs are repeatedly stressed by de Saussure. He continually refers back to the importance of separating private clients from the institutional clients. They may draw on the same resources of the bank but it’s a different world in terms of asset allocation: ‘They’re totally different games,’ he says.
On the private client side that game entails a large element of hand-holding and a recognition that their goals might not lead to the highest available returns. Often they are individuals with no business experience who have come into wealth and have no idea what to do with it. ‘Widows, artists, footballers, or whatever,’ says de Saussure. The only rule is that every client is totally different from the last and will have their own individual constraints. Risk and reward profiles have to be built up from discussions rather than being presented at the outset. And there is a need to determine a reference currency and provide clear, easily understood reporting.
‘Private clients do not define their benchmarks as most do not understand what a benchmark is,’ de Saussure says. ‘We have to find out what their objectives are, it is one of the most important rules of the relationship. Most of the time, private clients are intereste in absolute returns not relative returns. And they don’t like the downside and would accept missing part of the upside in compensation.’
The desire for absolute returns has a large impact on stock selection for the private clients. The time horizon on investments will tend to be longer-term than for institutions. That involves a review at least every six months but can lead to investments in companies being held for 10-15 years or more. Many of the stocks selected will veer towards what de Saussure terms a ‘defensive-type’ of investment. ‘These are household names with lower volatility and long-term stability,’ he says. ‘They fit the needs of the private client better than trying to find the sector which will outperform all the others over the next quarter.’
The institutional side of the business is approached from a different angle and is largely product driven, that is by asset classes and investment processes. The products originate from the offices in Geneva, Zurich and London and include emerging markets, small caps and UK equities which are largely run from London. In Switzerland the primary institutional products are Swiss equities; domestic and international bonds; international equities; and balanced accounts. There is also a quantitative management side for both passive and active management. De Saussure says the passive quantitative management accounts are not a high fee generator but have to be offered to clients nevertheless.
The decision-making process revolves around a three-tier level. At the head of this is the global investment committee for the bank’s worldwide operation (see box, below).
The bulk of this committee’s work is dedicated to private clients and looks at areas such as interest rate and valuation predictions. Its findings are strongly influenced by research and are then fed down to lower level committees or directly to portfolio managers.
De Saussure cites an example of the committee’s work at the start of 1995 when the dollar and markets were on their way down. ‘Our economist suggested that there was no dollar weakness, rather it was yen and mark strength. That meant that there was no reason for the US to tighten monetary policy but there were very good reasons for the Japanese and Germans to loosen their monetary policy. The consequence of that decision was that we became very bullish on bonds and equities which had a major influence on asset allocation.’
Below the global investment committee, the institutional division has a strategy committee responsible for defining global asset allocation, balanced mandates and the currency mix to be employed. The strategy committee meets once a week and consists of six members (see box, right) two of whom also sit on the global investment committee.
In advance of the strategy committee meeting, the four specialist teams which hold responsibility for the allocation within their own field – such as Swiss and foreign equities – have separate discussions and then a joint discussion to share views. The heads of each team then represent their agreed views on the strategy committee.
Alain Freymond, head of the Swiss equities team, believes that this decision-making system gives portfolio managers the best of both worlds. In one sense they have enormous room for manouevre because each is a member of a specialist team and has a chance to take part in the discussions. On the other hand, once the committee has taken a decision the portfolio managers have little flexibility and have to adopt the general policy in accordance with the specific guidelines for each client.
Portfolio managers have the strategy committee’s decisions posted to their screens each Thursday morning detailing the impact on allocation and the reasons underlying the decision. It is then up to the portfolio managers how they move to the new position to meet the requirements of their various clients. ‘Some clients don’t want us to use derivatives even for hedging purposes,’ says Freymond. ‘The strategy committee defines the position in terms of overweighting and underweighting and it is then up to the portfolio managers to move to those positions as best they see fit for each client.’
Pictet claims that overall its asset allocation process provides a ‘fair basis for comparison across markets, neutralises the bias of individual country specialists and applies quantitative factors to a process that is often highly judgmental.’
That implies a heavy reliance on in-house analysts as well as a network of brokers to provide research according to guidelines. In-house analysts use as wide a range of information sources as are available including Reuters, Bloombergs and First Call. The amount of time spent on company visits is heavily dependent on the type of market, size of company and level of knowledge. That means that emerging market and small cap companies are likely to be paid the most attention in this regard. The bigger the company the greater the knowledge of the business and the less time it will warrant for visits from analysts. However, Pierre-Yves Bacchetta, head of research, says that there has recently been an increase in visits to non-Swiss European companies.
This is one area where Jacques de Saussure is keen to improve electronic communication between the various offices. For example, stock selection for UK equities is provided by the London team and its recommendations and valuations are then delivered over the network. ‘I’d like to extend that system to all the markets,’ he says, ‘with specialists in one location providing services to the rest of the group. Then we can have portfolio construction methods which can be used in different places.’
In other words, although traditions and history have their value, Pictet is working hard to ensure that its future remains just as secure as its past.
Emerging Tradition
Pictet’s London office doesn’t have quite the same historical profile as its Geneva counterpart but it has built up an impressive tradition of its own in its short existence.
Established in 1980, the operation was initially established as an SEC-registered subsidiary exclusively focused on managing US Erisa pension funds. That still forms a significant chunk of its business but it has branched out in recent years to snap up institutional business worldwide.
Rod Hearn, executive director, is at pains to point out that the office has recently had ‘an outstandingly strong record in UK equities and international investments’ but it is its expertise in emerging markets and small caps which has made its name and been largely responsible for doubling its assets under management in the last few years.
Pictet London now manages around $4 bn of institutional money with roughly half of that accounted for by its emerging markets and international small companies sector. Fabien Pictet took the office into the emerging markets arena back in 1986 – fairly innovative for any fund manager at that time, let alone for a Swiss private bank. ‘Frankly, there was little demand for it and there wasn’t a great deal of competition,’ says Hearn. ‘Whereas today we sit on a ten year history of this specialist equity category. It’s come of age.’
The Pictet definition of emerging markets takes in those countries not in the MSCI world index with a GNP per capita of under $8,000. It also adds in Israel, Korea, Mexico, South Africa and Taiwan for good measure, as well as companies in other markets which gain a majority of their revenues from emerging markets. That tallies up to around 70 countries at the moment and the bank continues to look at new markets.
The Pictet approach to these markets is bottom-up. Safe custody arrangements are needed before any investment is undertaken and the bank is by no means averse to setting these up if they are not locally available. Some of the former Soviet states have been opened up in this way over the past few years, with the launch of the Russian Frontiers Trust in 1994.
After custody is assured, stock selection is based on value. Three main methods of analysis are used: cash generative power to identify stable, growing companies; undervalued industrial capacity for cyclicals and turn-arounds; and capital strength and business franchises for financials.
Hearn waxes lyrical about the proprietary database the office has built as the ‘locomotive behind our research and investment process.’ It gobbles up information from external databases, an international network of stockbrokers, a Reuters link and direct input from analysts and managers to produce facts and figures concerning over 7,000 companies worldwide.
Links with the head office in Geneva are certainly strong and frequent – videoconference facilities lurk in the background – but there is no imposition of investment decisions from above. It’s a two- way street. Hearn cites the example of Mexico circa fourth quarter 1994. ‘We had less than 1 per cent of our clients’ portfolios in Mexico at that time,’ he says. ‘Not because somebody in Geneva told us they didn’t want money in Mexico but because the way in which we analyse companies had brought to light a number of factors. Valuation of companies in Mexico at that time was just totally unrealistic.’
And the results? Pictet London points to a diversified, non-index emerging markets portfolio comprising companies of all market caps. There is a 15 per cent limit on any country and a 2 per cent limit on any holding. Turnover per annum is around 30-40 per cent. The outcome was a 20.4 per cent return for the four years to the end of September 1995 compared to an index return of 11.5 per cent.
Not bad for a young upstart.
