Burkhard Varnholt, one of the best-known investors in Swiss private banking, is hitting the headlines again. Three years ago, as head of a 130-strong Zurich-based financial products team for Credit Suisse, he sent an e-mail update to the bank's army of client advisers.
Most of his recommendations for 2006 centred around emerging market economies, and the demand their rising middle classes would generate for luxury goods such as German sports cars, Swiss watches and Italian designer clothes. To benefit from these trends, Mr Varnholt recommended actively managed thematic funds for private clients, including the Clariden Luxury Goods fund, and the Merrill Lynch New Energy fund. While the Clariden fund performed respectably, investors in the Blackrock/Merrrill Lynch fund enjoyed more than 60 per cent returns over the first two years. And even if they did not heed warnings and stayed invested for the whole of 2008, they would still be nearly 30 per cent up.
For 2009 and beyond, Mr Varnholt’s predictions are even more dramatic. In his new role as chief investment officer of Basel-based Bank Sarasin, he summarises the most important drivers for investors during the global economic crisis in just two words: “asset allocation”.
Investors must be open-minded and contrarian, but if they make their decisions rapidly and decisively, Mr Varnholt believes they can benefit from “once-in-a-generation” investment opportunities.
He has picked out investments including Chinese A-shares, sustainable water companies involved in desalination, treatment, metering and irrigation, rare materials such as platinum, and wheat grain and fertilizer companies.
He also favours currently unfashionable currencies including sterling, and all Asian currencies, bar the Hong Kong dollar.
His optimism for Asia comes against a background of grim economic numbers for China, Taiwan, South Korea and Japan. The contrarian in Mr Varnholt, and the fact that the region has a history of overcoming economic crises means he is tipping it to bounce back. “Regions are like individuals,” says Mr Varnholt. “They have track records that suggest future performance.”
To hedge against potential policy and economic failures, he recommends private clients take a 10 per cent allocation to gold, which can also hedge against reflation and US dollar devaluation.
Among key Swiss banks, nobody doubts Mr Varnholt’s assumption that the crisis has thrown up huge opportunities. The shared belief is that top-down shouts must be the loudest, before funds and other products are chosen to fill the allocated parking spaces.
Balancing long and short terms
UBS, the world’s largest and best-known wealth manager has totally redrawn its allocation models for discretionary clients under Michael Strobaek, global head of Investment Solutions, and member of the group’s managing board. The move is in part a response to huge outflows from clients who are losing faith with major private banking groups.
The notions of currency risk, following wild swings during 2008, and home bias to a country or region versus global diversification are today’s key building blocks. “If there was one thing we learned out of the tech boom and bust, it was that nobody cared a whole lot about long-term strategic asset allocation, they just wanted to get into the most important asset class, which was equities during the boom years,” says Mr Strobaek.
But once clients have seen a bear market, they realise they need to diversify risks and that equity is not the only long-term asset class. The new thinking is that yes, clients are concerned about long-term allocations, but they also expect their bankers to take bigger and broader shorter-term tactical bets.
These elements are taken into account in the newly launched UBS Managed Wealth Portfolios, which blend third party and UBS funds. The key, dramatic change, compared to discretionary wealth management even last year, is the extensive use of exchange traded funds (ETFs) for asset allocation.
The rise of passive investments
With the realisation that most active managers have failed to effectively manage core, long-only equities, UBS expects passive investments, such as ETFs, to account for up to 50 per cent of the typical portfolio.
“The very traditional country and regional space will increasingly be inhabited by passive instruments,” confirms Mr Strobaek at UBS. But he expects more niche strategies to also get a strong look-in. “In the fund business, clients are increasingly looking for themes, which give access to specialists. Eco efficiency, infrastructure investment and emerging market themes are all very important.”
For these thematic plays, he believes it may be a good time for well-regulated, transparent mutual funds to regain some of their lost ground. These products are believed to include funds focussing on European companies paying growing and sustainable dividends, such as ING Invest Europe High Dividend; and socially responsible energy plays such as Sarasin New Power. Default hedge fund allocations will remain at 15 to 20 per cent. “We are still strong believers in the role of hedge funds in a portfolio context,” confirms Mr Strobaek. “They are being harshly portrayed for a lot of things they haven’t done.”
