SWISS ROUNDTABLE: Splendid isolation?

Swiss asset management executives discuss international clientele, barriers to distribution and adapting to changes in Europe. Chaired by Nick Fitzpatrick in Zurich.

The Qatar Financial Centre Authority (QFC Authority) is proud to present the latest Executive Panel in the series of discussions organised in partnership with Funds Europe and Funds Global.

Each panel looks at the core issues affecting the industry and includes some of the leading chief executive officers, chief operating officers and chief investment officers from companies driving the industry forward and shaping change. Many topics discussed are core to the QFC Authority’s beliefs: efficiency, transparency and integrity. It is the QFC Authority’s goal to build a world-class financial services marketplace where all participants, both domestic and international, will benefit from the considerable local market potential which they can use not only as a springboard into other countries in the Gulf Cooperation Council, but also as a powerful regional base from which to tap into the broader growth markets of the Middle East, north and sub-Saharan Africa and the Indian sub-continent.

By supporting and participating in these initiatives, we hope to gain valuable insight into the future development of the global fund management sector and help us to realise our own aspirations to become a regional hub for asset management within the Mena region.

Swiss roundtable

Lionel Aeschlimann, managing partner, head of asset management (Mirabaud)
Peter Bänziger, head of asset management (Swisscanto)
Eftychia Fischer, executive managing director (UBP)
Gerhard Fusenig, head of asset management, (Switzerland, Credit Suisse)
Andreas Schlatter, head of UBS Global Asset Management, Switzerland
Shashank Srivastava, chief executive (Qatar Financial Centre Authority)

Funds Europe: Do clients of Swiss asset managerswant to invest in Swiss assets or are they seeking international exposure?

Lionel Aeschlimann, Mirabaud: Switzerland has been for decades, probably centuries, a country with a diverse international client base in both wealth management and asset management. For its size of population, around eight million, it has the world’s 19th largest economy by nominal GDP and possesses a diverse international array of companies such as Nestlé, Novartis, Xstrata and several world leaders in the luxury and watches sectors, without even considering the banking giants of UBS and Credit Suisse and many high quality private banking and investment management houses, several of which have tradition and experience of more than two hundred years.

Switzerland, as one of the richest and most innovative countries in the world, with a long history of neutrality, has also traditionally had other assets such as the strength of its currency and the stability of its political system. In many ways, it is therefore unsurprising that clients from different countries and continents have wanted to place and invest their asset in Switzerland.

Owing to this demand, we have had to adapt to an international clientele who wanted both to place their assets in Switzerland and invest them locally and internationally. As a result, Swiss actors have developed a strong global expertise.

One of the differentiating factors of Switzerland versus many other financial centres is that international bias.

Gerhard Fusenig, Credit Suisse: Fifty years ago Switzerland was a place where people went because it was safe. Today, it is an international financial services hub. We have a global client base, which does not want to invest just in Swiss cash or Swiss bonds. An Asian client booked in Switzerland needs to be looked at from an Asian perspective. We, as an asset management industry, have had to react to the globalisation of client servicing.

Peter Bänziger, Swisscanto: The Swiss franc bond and Swiss equities are still popular, with good reason, because Swiss equities had good performance over the past 30 years. But investors are very international. For example, corporate bond portfolios are global portfolios, mostly hedged into Swiss francs.

Andreas Schlatter, UBS Global Asset Management: At the end of the 1990s we started talking to our clients about home bias. Since then we have seen a shift in portfolios from a more Swiss domestic-oriented investment bias to a more globally-oriented investment bias. The degree of globalisation in the average portfolio here in Switzerland is high.

Eftychia Fischer, UBP: I doubt whether there is any other jurisdiction in the world where you would find less home bias, both in institutional portfolios and in private client portfolios – all the way down to smaller retail clients.

We have also seen globalisation of fund managers. In private client portfolios we have managers who are based in Poland and specialise in Eastern Europe, or who are based physically in the Middle East specialising in Middle East investments.

Fusenig: I see our international focus as an advantage when you compare that with, for example, Germany, where there is a lot of domestic client expertise but less international. Here, we understand that an Asian client has an Asian view, a different trading horizon and a different investment mentality. You have to look at them from their Asian perspective when you talk about a global portfolio.Funds

Europe: How relevant is Switzerland as a banking and fund location to high-net-worth clients from the East and the Middle East? Will it be challenged by the likes of London, Dubai or Singapore?

Schlatter: What do clients look for? Trust. That’s very important. Trust, along with access to investments and reliable service. That’s a combination Switzerland has traditionally been able to deliver and we will continue to deliver that in future.

Aeschlimann: That’s true, but we must also recognise that the competition worldwide has increased. On the other hand, we have always strived to adapt with competition from other financial centres such as Singapore, London and Dubai and ensure that we continue to provide the best service proposition to clients we serve. That, combined with the continuing trust alongside our constant desire to innovate and create interesting products that fit the needs of our clients, makes me believe Switzerland will continue to be a banking and asset management location for clients all around the world in the future.

Fischer: There are a few political hurdles that still need to be tackled and that have to do with market access to certain neighbouring or non-neighbouring countries, but that work will be done. Switzerland will remain a key centre, despite the increasingly tough competition.

Fusenig: Our clients, whether they are in Russia or the Middle East, want to consolidate their assets in one place. You can have some of your money managed out of the US or London, but it’s up to the solution provider to do the safekeeping and proper reporting, and all that has to come together somewhere. You have to consolidate yourself and here it’s really about the overall service for the ultra-high-net-worth clients. That service quality is something we in Switzerland are experienced in.

Bänziger: One comment for the future is that Switzerland is under pressure from tax disputes with the US and Fatca, and with cross-border problems that we have with the EU. We are at a transformational stage where we have to rely on performance, service and our excellent brand. I doubt we will expand our offshore service, even with clients from the East and Middle East. Onshore money will probably be the future. But the money can be managed out of Switzerland.

Aeschlimann: I’d respectfully disagree. I don’t believe the reasons why existing and future clients come to Switzerland are mainly associated with tax. As a country, we operate some of the most highly respected financial services companies in the world and have a reputation for servicing our clients, second to none. While we must never be complacent, if we continue to strive for excellence then we will retain the loyalty of our existing clients and attract more in the future.

Fusenig: Sure, but we should not forget the reality. We see it in the European rules and regulations, which have a huge impact on Switzerland. We will be more and more dependent on EU and US regulation than before.

Aeschlimann: Yes, but is this really an issue? This has been the case in the past. Switzerland has been implementing most EU directives unilaterally for the last 20 years. For instance, MIFID establishes that you have to know your customer. Is this not anyway at the basis, the heart of our work?

Shashank Srivastava, QFCA: When I came here a few years ago, the sentiment within the industry in Switzerland was quite different. The sentiment was that Switzerland was on a watch list, whereas in Singapore the attitude was optimistic. After a few years it’s good to see the Swiss industry focus on its strengths, which are: the understanding of clients’ needs, the ability to deal with the multitude of jurisdictions and compliance.

Fusenig: Singapore has a lot of challenges. They are working on it, but it takes time to get experience with different countries and figure out what figures have to be delivered for a German taxable client, for instance. It may be eight different numbers for just one Luxembourg fund. It’s not just that you hire a consultant and buy a big database.

London has been involved with the institutional space, investment banking and asset management, but on the private banking side, ultra-high-net-worth private banking, I have not seen London as a challenger.

Schlatter: The market is adapting quickly and this has something to do with the culture of the country. Sometimes we believe this country has lived in splendid isolation for a hundred years. It has never been in splendid isolation. Go back in history and you see it has always been challenged by political situations, changing attitudes, changing views – and it has always managed to adapt.

Funds Europe: Is Switzerland’s non-membership of the EU a help or a hindrance to its asset management industry? How is the country positioned to partake in the cross-border funds industry, like that enshrined in the EU’s Ucits and AIFMD laws?

Aeschlimann: The relationship between Switzerland and the EU is often  misunderstood. Membership of the EU is a difficult topic, because as someone from Switzerland, we take considerable pride in our democracy, federalism and neutrality. They form part of our identity and an EU membership would be felt by many as threatening such identity.

With respect to many financial and commercial aspects, however, we feel and are indeed very much within the EU. The EU is the first trading partner of Switzerland and Switzerland the fourth largest commercial counterparty of the EU. As indicated before, Switzerland often implements EU directives unilaterally.

On the fund side, Swiss domiciled funds still cannot be passported within the EU, although they fully comply with the Ucits regulations, putting us at a significant distribution disadvantage to say a French, UK or Luxembourg domiciled fund. As a Swiss asset manager, we decided, alongside many of our competitors, to domicile our range of funds in Luxembourg to make it as easy as possible for our current and future clients to be able to transact with us across Europe.

As an asset manager, however, where our portfolio managers are physically situated is somewhat academic as long as they have the best available resources to hand and are easily accessible to our customers. Most of our portfolio managers sit between Switzerland and London, independent of the fact that the funds they manage are domiciled in Luxembourg.

Fusenig: Asset management itself is about intellectual capability. The wrapper is a local thing and, honestly, it’s not a big barrier to set up a Luxembourg fund. There are servicing companies for that. You can rent most of the Management Company  infrastructure. Switzerland is an accepted, regulated country from the viewpoint of the Luxembourg regulator, so you can access that market.

Setting up an AIFM structure in Luxembourg takes a little bit more effort. You have to put some more  people in there, but still it is possible.

You cannot just passport Swiss funds into Germany, but if you look at companies in Germany, France and elsewhere, everybody uses Luxembourg funds. You don’t use German funds and distribute them into Spain, and it’s not French funds going into the UK, it’s Luxembourg or Irish funds. Everybody’s going for a more or less established fund hub and that’s also how we do it. It isn’t a big issue.

Bänziger: It’s rather the distribution side that would add to the cost level, because you need the teams and you need the regulations onshore. This sets a kind of minimum efficient size for operations in these countries which makes it more difficult for the small and medium players.

Schlatter: Maybe one point to add is that the amount of regulation applying to all the players in Europe is substantial. What’s interesting is that it’s going along the value chain. It typically started with point of sales regulation, then product sales registration, then custodial services, trading and so on. We have to make sure Switzerland is not missing the boat on rendering services.

Regarding the AIFM directive, say what you will but it has elements which might hinder Switzerland. The directive could make the delegation of portfolio management services into Switzerland for certain EU products more difficult. We have to be watchful.

Funds Europe: Has the financial crisis, which had severe effects for some Swiss banks, affected business models within asset management?

Fusenig: The impact of the crisis is the regulations that have followed it. That’s the severe impact. It’s interesting that while the financial crisis had no severe effect on Credit Suisse, the subsequent regulation had a side effect which affected us. Being a global bank with a US nexus we are subject to the Volcker Rule and we are exiting our private equity business as a result. This was a direct effect on our asset management business resulting out of the crisis, even though we weren’t hit by the crisis as a bank.

For the asset management industry in Switzerland, it did not have that effect. We have not seen any blow-ups. We lost no assets here in Switzerland. It’s actually a safe asset management hub and it weathered the crisis really well.

Fischer: Conditions caused by the crisis affected our industry. They affected what type of service our clients require from us, what our infrastructure costs are, how much we must spend on information technology, compliance, fragmented localised reporting and so on.

Hedge fund management, compared to the total portfolio of asset management in this country, has shrunk back to what is probably a healthier size relative to the rest of the industry. To grow back strategically, the alternative investment industry has to build up a new approach to address the disadvantages of the old fund of hedge funds model – such as lack of transparency, weak governance and high fees compared to performance, to name a few.

Bänziger: The financial crisis changed the business model. The consequences of artificially low interest rates have put pressure on our costs, so we have to make sure that we are cost-efficient, especially on the fixed income side. The top line has gone down. We have to really watch what the client gets after fees.

Schlatter: The crisis had an impact, but large banks have so far adapted their business model. What effect did it have on asset management? The asset management industry in Switzerland weathered the storm.

Funds Europe: Which geographical areas will be the most important for building your businesses in the coming years?

Aeschlimann: For an asset manager based in Switzerland, Europe will remain the prominent area for our distribution efforts, despite its current bleak economic picture. From a demographic perspective, with an ageing population across most of Europe, the requirements for individuals to take more responsibility and save for themselves will no doubt increase. The pension fund and the savings industry, as a consequence, will need to continue to restructure and innovate itself.

With reference to other continents, I believe over the long term that emerging and frontier markets will continue to be engines of global growth. If you assume that asset managers must be close to the points where growth and wealth is, then we will continue to work hard to be aligned to these markets.

Fischer: It will be important to strengthen production capabilities on the ground in places like Southeast Asia. The other aspect is distribution along with client sourcing. Both Latin America and the Middle East are key markets for us, as many ultra-high-net-worth clients who are looking for a trusted adviser rather than a product provider are based in those two geographical regions.

Europe is difficult. On the wealth management side, it is so because of the demographic problem. A large part of the generation that created wealth in the boom years is now spending it. It’s a wealth preservation game, a very defensive game, and defensive games are not particularly profitable.

Bänziger: In emerging markets, you will see that first-time buyers of TVs, cars and so on, will be first-time buyers of asset management services. For Europe, I’m not that pessimistic. We can recover from this crisis. It will last some time but we can recover. There is some value on the periphery. However, we will undergo some kind of political turmoil that is not over yet.

Fusenig: The question is where is new wealth coming from? Asia is definitely a place to look. It’s a huge population with a lot of people going from poor to middle class. Instead of wrapping towels around their baby in the traditional way, they go to buy Pampers or Unilever diapers. So there is consumption and there are many people in wealth-building mode in Asia and the private banking and retail banking channel in that region is important for product distribution in the future.

Of the rest, there’s definitely money in the US. With just a little bit of an impact, we can raise more money in the US than we can probably raise in Asia in several years. But it’s a very competitive game in a fragmented market. The best investment over the next decade is probably in Asia and then probably the Middle East because there’s a generation there who are wealth-building, but not so many in terms of population.

Unfortunately, North Africa has struggled over the last couple of years due to political instability in Egypt and Libya. These people won’t build wealth in the next couple of years.

Schlatter: I could just add one point. Secular trends are tricky. When we extrapolated the GDP growth of Japan in the mid-80s, we assumed Japan would overtake the US by now, but it didn’t happen. We should follow a balanced approach and also see that in the mature markets, although the ratio between active and retirees is not favourable, the asset pools are very big. If we find ways to unlock these pools, it can be a very interesting business. But you shouldn’t focus on that alone.

Srivastava: Would that mean directing your investment more towards acquiring new customers or towards servicing your existing customers, and aiming to grow the share of the wallet? Or do you feel you’ve already reached the hilt of what you can manage for a particular customer?

Schlatter: Growth from new customers across the globe is a very important focus.

Fusenig: There are these huge asset pools in the established markets and just gaining 0.1% market share in the US is tons of money. You have to go for big percentage numbers in Asia to get the same amount of money. However, you have to have a foothold there.

Bänziger: Maybe it’s like Nestlé. They generate one third of their revenues from North America, one third from Europe and one third from Asia and emerging markets. So, that could be our portfolio in the future as well.

©2013 funds europe



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