Magazine Issues » November 2010

EXECUTIVE INTERVIEW: Didier Duret, ABN AMRO Private Banking

didier_duretFund managers need to make the most of investor appetite for short-dated exposure to high-yield bonds, Didier Duret, of ABN Amro Private Banking, tells Angele Spiteri Paris

Investors are still being cautious, but this doesn’t mean they aren’t ready to take a certain amount of risk – as long as they’re well rewarded. According to Didier Duret, CIO at ABN Amro Private Banking, one area in which fund managers can better service this need is high-yield credit, especially considering the low interest rates on government bonds.

Duret says: “High yield, that is the lower segment of credit buckets, can be a very risky business and people are wary of going into it.

“However, the low-yielding environment in government bonds makes this segment very attractive. High-yield credit is good because it’s not too leveraged and the default rates are quite favourable for the sector at the moment.”

But for fund managers to capture this and also grab the interest of private banking clients they need to provide something which most currently do not.

Duret says: “There is a need for long-only managers and hedge funds to play the high-yield sector smartly and to consider offering short-dated high-yield funds, because most of those available are long duration.

“Clients would want less sensitivity and are prepared to bear the risk for short-dated bonds. But there are very few funds that offer this.”

Therefore there’s scope for fund managers to manufacture such funds to service this need. So, according to Duret, although investors on the whole are being more cautious, they are prepared to take measured risks.

But the caution on behalf of investors is nowhere more pronounced than in their perception of hedge funds.

Duret says: “The Madoff affair changed the game for hedge funds. Coupled with the crisis, which saw managers having difficulty performing, they went through a harsh Darwinian process.”

Due diligence
Although many experts in the industry talk about increased due diligence, Duret says:  “The due diligence process is now paramount – and has been raised to a much higher level. The good thing that has come out of the crisis and the Madoff scandal is that the hedge fund businesses will now be more specialised and better geared towards their client base. From an investor perspective, it’s about looking at the benefits behind hedge funds because there are still diversification benefits as well as interesting stories in sectors such as M&A and distressed assets.”

He explains that post-crisis, one cannot hope to attract assets without an investment story: “Top-tier clients are interested in exposure to specific strategies. You need specialist managers who know how to bring the investment story to light. You don’t have any investment without a solid story behind it anymore.”

Another thing private banking clients don’t want anymore is complexity. Duret says: “The crisis has cleaned up the offering of private banks – institutions remain invested in complex products, but on the private banking side there’s been a pullback on complexity.

“In the institutional market you still find complex products with CLOs [collateralised loan obligations] or CMBS [commercial mortgage-backed securities] built in, but this is not appropriate for private banks or their clients. The crisis was the nail in the coffin for these types of products.”

A supposedly new product that is being heavily marketed by fund managers is the Ucits hedge funds or ‘newcits’ as some have dubiously dubbed them, in spite of them not being exactly ‘new’.

Although Duret recognises the improvement offered by the Ucits framework, in particular in terms of transparency, he says: “It leaves open the question of understanding whether these funds are simply rewarding the liquidity premium imbedded in instruments or are the result of superior manager skills.”

Common sense
Questioning new constructs and proposals has helped ABN Amro Private Banking avoid some of the big pitfalls of modern investment. And this vigilance is being appreciated now more than ever. Duret says: “Clients are extremely critical of everything. They want simple strategies and simple products. Before the crisis there was a tendency to put the cart before the horse with many investment houses promoting complex products as a core story and leaving basic concepts like asset allocation behind. The crisis put this back in its right order – first comes asset allocation and then the approach gets more granular within each sector or segment. After that, it’s about fine tuning the exposure to alternatives with hedge funds. This is the right order of doing things and approaching investment.

“We’ve gone back to the basics of selecting good money managers. You can delegate part of that responsibility, but investors must have a certain level of common sense.
Now they have rediscovered their common sense and they don’t want to delegate everything anymore.”

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