What challenges is the institutional asset management market currently facing?
Nicolas Faller: 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.
How important is institutional asset management for UBP?
Our assets under management have been growing constantly for years now and currently amount to more than CHF 30 billion. Institutional asset management has become a crucial part of our business, because it allows us to diversify both our skills and our client base. That is a major advantage, because private and institutional clients normally have different investment cycles. For example, private clients took a while to come back to the markets after the 2008 crisis, whereas institutional investors cannot keep cash in their portfolios forever, and so had to reinvest quickly. However, although the private and institutional client segments are distinct, at UBP we want to provide the best service to all our clients, regardless of their category. To achieve that, all of UBP’s divisions are accustomed to co-operating whenever a project requires it. As a result, our areas of expertise are fully interlinked.
How do you stand out in this highly competitive sector?
Many asset management companies try to have a presence in all market segments, but they are rarely successful. Our strategy is to focus solely on our strengths, and in other areas to join forces with high-quality partners such as Partners Group in Switzerland and SEB in Sweden. We cover a dozen asset classes and have proven expertise in fixed income (high-yield, emerging-market and convertible bonds) and equities in regions including Switzerland, Europe and Asia. Alternative asset management is also important for us. Among the strengths that UBP has always cultivated, I would highlight two that set us apart for institutional clients: our responsiveness and our ability to provide a genuinely customised service, particularly as regards very large mandates. The rapid organic growth we have achieved in the last five years has been partly driven by those two strengths.
Does active asset management still offer good potential in your view?
Yes, I think that’s obvious. Although it may appear that returns have been mixed in the last few years, as massive liquidity flows have favoured passive management, that is misleading. The days of “closet trackers” – i.e. funds that charge high fees without adding any real value – are numbered, and genuine active management, the type that generates outperformance, still has a bright future. Although 2016 was a record year for passive management, with inflows exceeding active management inflows by a factor of five, the picture is more balanced in 2017, with similar inflows into the two categories.
The industry is changing very rapidly. How are you integrating new technologies into your processes?
In institutional asset management, financial technology companies or “fintechs” are providing useful tools in two areas. Firstly, they are using Big Data techniques to analyse and interpret data more effectively, helping us to hone our stock selection. Secondly, they are enabling us to enhance the day-to-day service we provide to our clients, for example in terms of reporting and performance analysis.
co-Head of Asset Management