What challenges is the institutional asset management market currently facing?
There are two types of challenges. The first arises from the fact that interest rates have been very low for several years now, forcing us to rethink our clients’ asset allocations and adjust them to these unprecedented circumstances. One of the main ways we have done this is by shifting assets into unlisted equities and bonds. Secondly, the rise of passive management, driven by the large amounts of liquidity in the markets over the last few years, has created another challenge for players like ourselves that use active management strategies in all market segments. We have had to respond quickly to developments and innovate in order to continue convincing clients that ours is the right approach. The trend towards passive investing now seems to be going into reverse as monetary policies move back to normal.
In your opinion, what are the main risks in the markets?
One of the main threats, we believe, is that investors seem to have total confidence in central banks, and in their ability both to inject liquidity and to raise interest rates gradually without causing a bond crash. However, we have no historical comparison to help us anticipate the outcome of today’s situation, and there is a risk that investor confidence could suddenly evaporate. This would inevitably affect the markets, although the upturn in growth we are now seeing in most major economies is encouraging.
Does this economic upturn represent an opportunity?
Certainly, but we must remain cautious: although we seem to have entered a period of synchronised growth, there have been some disappointments. In the US, for example, Donald Trump’s election promises raised a great deal of hope among economic observers. However, it is increasingly clear that boosting momentum in the US economy will take longer than expected. Nevertheless, the environment remains good for equities, particularly given low bond yields.
Some specialists believe that the financial markets are about to crash. What are the chances of that in your view?
Some of the forecasts are alarmist and need to be taken with a pinch of salt. Governments may have large debts, but debt levels among companies have remained reasonable. In addition, since the last major crash in 2007, new regulations have come into force, restricting the ability to take very short-term positions in the markets and thereby reducing risk. At the same time, to meet their obligations in terms of investment returns, insurers and pension funds are contractually required to invest heavily in the bond markets, regardless of yield, and this is limiting the likelihood of any violent bond correction.
Investors are increasingly interested in sustainable investments. How important are they for you?
Socially Responsible Investing (SRI) is a central part of Union Bancaire Privée’s approach. We signed the United Nations Principles for Responsible Investment (UN-PRI) in 2012 and we were one of the first to create a socially responsible convertible bond fund. In practical terms, we exclude certain types of companies from our investment universe, such as companies that are involved in the weapons trade, and we want to go further, for example by excluding coal-mining companies. We also keep a list of companies that show a high level of risk in terms of social responsibility and we constantly analyse the actions they take to mitigate that risk. We also speak to companies’ management.