Swiss banking, though, is historically based on privately owned, family-run institutions perched around Lake Geneva like little cuckoo clocks. Life at UBS, on the other hand, is noisier. It’s a giant investment bank like any other in London or Manhattan, where the offer of financial reward may lead to unrestrained risk taking.
Partners at private banks know that unrestrained risks could lose them their shirts and their jobs, and this fear is what has made Swiss bankers, or most of them, sensible.
Renaud de Planta, a managing partner at Pictet & Cie, along with six other managing partners, is personally and entirely liable for the bank’s commitments. Consequently, de Planta, who is also CEO of Pictet Asset Management, seems like one of those sensible people.
“During the crisis we called back our lending book even though assets were with good borrowers,” he says, referring to stock lending, which had been less than 5% of assets under management at its peak. “Had Pictet not been a partnership but publicly listed instead, probably we would have been tempted to do various things including more stock lending. But as an unlimited liability partnership, we have every incentive to behave responsibly.”
Further to this, he explains that Pictet would generally lend out equities and not bonds, but it always asks for bonds in return as collateral.
“When we lend, we ask for over 100% cover and we ask for top-quality government bonds as collateral. In a crisis equities typically go down and bonds go up,” says de Planta, adding: “I guarantee there were banks and asset managers out there that collateralised with stocks of financial institutions, even lending their bonds out and collateralising with equities.”
The financial crisis vindicated Pictet’s business model, de Planta says. The focus of the business is wealth and asset management. There is no investment banking.
“I would bet that a lot of asset management executives within banking organisations were distracted by their banks’ trading divisions and their fragile wholesale funding during the weekend of the Lehman collapse. But we are an agent, not a principal trader, we don’t have to borrow so we had no funding concerns to consider.”
The story was not the same at UBS at the time of the Lehman collapse. The crisis there subsequently saw redundancies, executive departures and calls for the business to be split up. Clients left too, and Swiss banks and asset managers picked up many of them.
De Planta says: “There must have been a lot of asset managers that gained from UBS, and we did win some clients who were worried about the problems in the banking sector.”
Yet he adds: “But we regret very much what happened to UBS. If UBS had not got into trouble the Swiss banking community would have stood out as being effectively immune to the crisis.”
Struck by equity
During the financial meltdown, de Planta indicates he was surprised at the amount of equity capital that Pictet had at a time when other banks and asset managers were looking to raise more equity.
“I was struck by how much excess equity capital we had relative to others. Most chief executives of financial firms over the past 18 months or so have wanted to find more equity capital and we wouldn’t want to be in that position at a time of crisis. In a crisis the better use of executive time is to focus on investment opportunities, reassure clients and win new ones over.”
It is unlikely that Pictet would use this finance to make acquisitions; de Planta says it is part of the bank’s business model to expand organically. This is a principle he is again pleased about in light of the financial meltdown.
“There were many asset managers in the middle of acquisitions when the crisis began,” he says.
He believes that Pictet’s model, which includes not leveraging its balance sheet, means Pictet was “much less stressed than over 90% of the asset management market”, vindicating its business philosophy.
“Our balance sheet is a tool to sustain our investment management and custody business, not something to make money from. The balance sheet is necessary to facilitate transactions, but it is not an object to gamble with.”
But the asset manager, like others, has not been totally immune from difficulties in recent months. The firm has a significant emerging markets strategy. Asia ex-Japan performance has suffered. De Planta says this is now turning around, and adds: “Our long-term track record is very good in Asia but last year, if you got it right, you got it right by a very big margin. If you were wrong, you were very wrong. Our style is more value biased and this style was not rewarded.”
Although only 7% of its assets under management are in emerging markets, the sector is one of six asset classes. The others are developed markets, fixed income, absolute return, Swiss balanced and quant, including socially responsible investment.
It does not appear that the Asia experience has changed Pictet’s view of emerging markets in the longer term. However, de Planta says: “We are more cautious about emerging markets at the moment as a place to invest but we still believe in the secular bull case. Most of our valuation indicators say emerging markets are a bit extended at the moment, and historically this has coincided with a turning point.”
However, he adds: “But I have yet to find a pension fund that does not wish to increase its emerging market exposure.”
Pictet is also a keen sector and theme investor with a fund launch in agriculture in 2009 and timber and water in 2008. In 2009 also it launched the Global Megatrend Selection fund, which invests equally in water, timber, clean energy, security, biotech, digital communication, generics and premium brands.
De Planta adds: “We have a successful track record in funds of hedge funds. We initially offered the underlying funds in-house but these have been marketed externally starting three years ago. In addition we run successfully two proprietary hedge funds in house, a small-cap long-short fund and a multi-strategy market neutral fund.”
Pension funds and other traditional institutions account for about 40% of revenues and the rest is from wholesale distribution clients. Assets under management and custody totaled CHF373bn (€246bn) at the end of September 2009.
De Planta is a keen supporter of the open architecture model of fund distribution and clearly expects this business channel to open up as a result of the financial crisis – which has hit plenty of other banks worse than his own.
“Open architecture was less than 10% of the distribution market ten years ago but is now over 50%, and what is happening now is very interesting.”
He continues: “The industry has been discussing the captive nature of its clients for 20 years. During that time many European banks from Italy to Scandinavia have opened up a little bit, but this only gives the impression of open architecture.
“However, many of those banks are now gradually exiting the fund management industry, such as Credit Suisse, Société Générale, Barclays, Citi and Merrill Lynch and these big distribution powerhouses, now that they do not have their own fund managers, will open up even more.”
This, Renaud believes, will probably benefit independent asset managers the most. It may well do - at least those investment managers that are able to keep their shirts on their backs too
©2009 Funds Europe