Global investing roundtable, 6 September 2010,
Roundtable participants:
- Jonathan Armitage, Global Fund Manager and Head of US Equities, Schroders Investment Management
- Martin Connaghan, Investment Manager, Aberdeen Asset Management
- Nicolas de Skowronski, Head Investment Advisory, Bank Julius Baer
- Bjoern Jesch, Head of Portfolio Management, Deutsche Bank PWM
- Ash Misra, Head of Investment Strategy & Research, Lloyds TSB Private Banking
- Michael O’Sullivan, Head of UK Research and Global Portfolio Analysis, Credit Suisse Private Banking
- Cesar Perez, Chief Investment Strategist for EMEA, JP Morgan Private Bank
- Markus Taubert, Chief Investment Officer and Head of Private Banking, Berenberg Bank
- Elisa Trovato, Deputy Editor, Professional Wealth Management
Elisa Trovato: The aim of this discussion is to assess different approaches to constructing diversified global portfolios and examine how to translate economic views into investment strategies and products. What are the key steps to constructing a portfolio with a diversified global exposure?
Nicolas de Skowronski: In a pure discretionary portfolio we usually go with a traditional approach, strategic and tactical asset allocation with equities and/or fixed income direct investment. We will use investment funds where we do not have the necessary know how and active management can yield additional return. On a pure advisory basis, clients are less interested in a global, pure traditional asset allocation approach; they may want to invest with a bottom-up approach; we will do direct stock selection to play a very concentrated theme or select the right fund to go into broader themes.
On one side you have the cost aspect of active management; you need to select the right investment boutique. It is more expensive for the client, but you give access to a better diversification. To invest directly, you need to invest more in terms of research, to have your own diversified investments at less cost, but it might be difficult to demonstrate you can really add value in markets you don’t know. In the next five to 10 years, the way forward for private banks will be to charge for advice, and we do need to add value through services.
Bjoern Jesch: You need a proven investment process with a top-down approach. As we found out in 2008, having a correlation and volatility view into the future is crucial for portfolio optimisation. Our unconstrained portfolio, which is the source of our different strategies, is aimed at preserving wealth and generating inflation-linked returns. This is the profile private clients are looking for, more than in the past, when they were looking for benchmark strategies. The client expects us to put their money with the best manager in the world, whether it is ourselves or not. Clients also expect cost reduction and home-bias. Especially in segregated accounts, the portfolio must include German stocks and bonds, plus cheap beta in the form of ETFs. Otherwise, clients will not be satisfied, even if performance is OK.
In discretionary portfolio management, where we are able to use much more derivatives, futures and options, than previously, we are definitely able to underline risk management more than in the advisory space. In advisory, when you offer single stocks or ETFs, the margin will decrease heavily, so we have to think about active advisory mandates, where we can charge for the added value of risk management.
Ash Misra: Pre-crisis, there was a strongly emerging view that there could be fairly homogenous regional trends, which you can profit from; the need to desegregate regional trends into country and sector-specific ones was not such a huge imperative. The one thing this crisis has thrown up is that different countries, different themes, different sectors would react differently to the exact same set of macroeconomic exogenous inputs.
We do not take big bets in any one direction. The portfolios are constructed in a way that not only diversifies clients’ portfolio risk, but also allows them to grab alpha from different developments in sub-sectoral, sub-regional trends. We have three primary building blocks in structuring portfolios: an income fund, a growth fund and there is a yield-kicker/yield-enhancer fund. The first thing we do is assess client risk appetite and categorise them across one of 10 different risk categories.
Declining levels of cross asset class correlation is actually a great opportunity as well. We have a golden opportunity to genuinely start generating genuine alpha.
At the asset allocation level, style investing is not that relevant. Every once in a while something comes up and hits us in the face as a very obvious style call. However, by and large what we do is present our clients with a very robust, asset allocation-level portfolio construction process. Between half to two-thirds of returns come from the big asset allocation calls. If you deconstruct that further, on a country/sector theme, the second level calls drive probably another quarter of returns. Before you even get to stock picking you have covered about 80-90 per cent of theoretical portfolio returns across cycles.
