Magazine Issues » September 2010

INTERVIEW: Bruno Lèbre, SG Private Banking

Bruno_LebreSociété Générale Private Banking aims to offer clients wide access to the market through the best products, which include those of sister company Lyxor.

Angele Spiteri Paris reports:

The increased desirability to bring more transparency to hedge fund investing through managed accounts and Ucits funds is seen at Société Générale Private Banking, where there are plans to increase the number of hedge fund products on offer.

Bruno Lèbre, global head of investment solutions at the bank, says the business has added two managed account platforms to its investment offering and plans to increase the number of hedge fund products on the roster as high-net-worth individuals are starting to accept certain levels of illiquidity once again.

Lèbre explains that in the aftermath of the financial crisis, an important factor in servicing client demand is to increase the number of hedge fund products available – but also to satisfy the growing need for transparency and liquidity in the sector.

“We aim to increase the number of products selected. There is more demand through managed accounts and Ucits products so the number of vehicles we have in our selection will need to increase,” he says.

Lèbre adds: “We maintain our interest in funds of hedge funds and we will increase the number we offer to our clientele. Our current selection relies on five asset managers, with several funds of hedge funds selected with each of them. Then there are ten funds of hedge funds in our current selection, and this number has recently increased by the introduction of a new asset manager in the long/short equity bracket.” 

But Lèbre adds: “The number of funds is not our objective – it’s about identifying the best product available for our clients… There are quite a few good players in the managed accounts market and we want to be close to them.”

Included in that list of “good players” is Société Générale subsidiary Lyxor.

With regard to managed accounts, Lèbre says: “As Lyxor Asset Management is a global market leader in this industry and, with it being part of Société Generale Group, Société Générale Private Banking has a very satisfactory relationship with them, we decided to offer our clients access to the platform, after having negotiated a high level of service. This offer was very successful given the timing, in the light of the market crisis and loss of confidence in hedge funds.”

Selection and choice
Asked about the sometimes controversial practice whereby banks offer internally managed products, Lèbre says: “The Lyxor platform is in line with our open architecture approach. Approximately 110 managers onboard aren’t linked to Société Générale Group, but our principles and business model oblige us to offer our clients wide access to the market and to identify the best products for them, in terms of their risk profile, expectations on returns and investment strategy. This can include Société Générale subsidiaries. Lyxor is a very good answer to the managed account question, but in order to satisfy the demand for Ucits III products, we recently validated the Bank of America Merrill Lynch’s managed account platform as well.

“But whichever platform we select, we have to have confidence in its risk control; an independent valuation must be carried out by a recognised administrator or valuation agent and there must be a guarantee of liquidity.”

According to Lèbre, the managed accounts approach is most popular with the bank’s mid-range clients; whereas high-net-worth individuals and family offices are interested in managed accounts, they also stay directly invested in hedge funds. He says: “Mid-range clients still have a low risk appetite but are open to new diversification – they’re no longer tied to cash products but are cautious about liquidity and are open to taking the managed account approach to hedge funds.”

The debate around private banks using internal funds is never far from a discussion with a fund selector but Lèbre says that in Société Générale’s case this is not an issue.

“Our business model is based on open architecture and the mutualisation of expertise. It is important that our fund selection process is neutral – internal and external funds are treated the same way. This neutrality is regularly audited by KPMG. More than half of our selection has always been for external funds. And over the last three years internal funds never made up more than 40-50% of our total portfolio of products, although this varies with the market” he says.

Defensive profile
Although hedge funds still rate highly on the bank’s agenda, the second quarter of the year did not prove very favourable for its hedge fund strategies.

In a strategy update for August and September, SG Private Bank strategist Xavier Denis said: “In the second quarter, of the four main hedge fund strategies, the relative value strategy was the only one to record a stable performance. In terms of sub-strategies, the majority of the indices ended the quarter in the red. Three sub-strategies stood out achieving positive performances: CTA short term (+2%), global macro (+1.5%) and long/short corporate credit (+0.1%).”

The main losses, he said, came from strategies with a long equity bias, with the long/short equity strategy posting the biggest loss of 6.1%. Defensive strategies, such as government bond arbitrage, (-0.4%) and merger/acquisition arbitrage (-1.5%) were able to limit their declines during the especially difficult quarter.

“The outlook for the second half of the year therefore remains positive for hedge funds due to their defensive risk profile. However, the effective functioning of the capital markets is an indicator worth watching in terms of credit strategies.”

Custody watch
The crisis has created regulations designed to make it harder for investors to fall foul of fraudsters and other risks. Much of these controls centre on the depositary and custody functions of the asset management industry, and Lèbre says this has given the back-office activity more significance now to his business.

Private banks, like Société Générale, have begun rethinking their custody arrangements, particularly regarding hedge funds.

Lèbre says: “During the financial crisis, we made amendments to our process. The changes didn’t have an impact on our selection, but what would previously have been a warning now became a constraint.

“For example, with funds we don’t want the asset manager and the administrator to be part of the same entity, unless it’s a massive group like Amundi, which then has Chinese walls and all sorts of methods to keep things separate. But with smaller asset managers this would be of concern.”

Emerging markets
In its mutual fund offering, the bank has around 100 asset managers on its roster with 300 mutual funds having been selected. “Most of the time we move between the funds we favour, depending on what is appropriate for our clients, but the number of funds remains more or less stable,” Lèbre says.

He explains that within mutual funds, as was predictable, clients moved to money market and fixed income funds over the course of the crisis.

“With regard to fixed income, there is still interest for developed corporate bond markets, but the preference is now for emerging market bonds as a whole. In any case, we remain cautious when we proceed to investments on high-yield bonds. Moving to equities, we favour emerging markets against developed markets, with a stronger focus on Russia, South Korea, Taiwan and Mexico. Also, we have a selective approach towards some commodities – it’s a good investment opportunity but most of the time we look for exposure through structured products to limit the risk.”

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