Country Report: Contents Interviews, video and special reports CONTENTS

INTRODUCTION SWISS VIEWS SWISS SUMMIT In their own

InvestmentEurope editorial Pictet’s Mussie Kidane and 2018 EVENT words director Jonathan Boyd Prime Partners’ François highlights key aspects of Savary offer observations REPORT Speakers, video the market on the most pressing issues presentations & tweets for the Swiss market InvestmentEurope’s first from the Swiss Summit Swiss Summit 2018 CONTENTS

DECLINING SELECTOR VIEWS ALLOCATOR A GROWING

DYNAMICS Seven fund selectors offer PROFILE PRESENCE their views on a variety of Falling equity ETFs sales topics Reyl & Cie’s fixed income InvestmentEurope in drives weaker turnover in bets Switzerland ETFs on the SIX Swiss Exchange For best results when viewing on a a tablet, please orient your tablet in landscape mode. Images: Shutterstock.com Introduction Rock solid Rock solid

It should come as no surprise that Switzerland remains a key destination for manufacturers and distributors of funds in Europe.

There is a relatively well funded institutional market – as evidenced by InvestmentEurope’s own event, Pensionskassenforum Zurich 2018, which takes place 13 November, and will draw fund selectors and other financial professionals from across the country to discuss latest developments in the country’s pension system.

And there is a group of significant domestic suppliers, which according to figures from the Swiss Funds & Asset Management Association includes UBS, Credit Suisse, Swisscanto, Pictet, GAM, Vontobel, Lombard Odier and Swiss Life. SFAMA suggests that industry assets overall in the past five years increased from some CHF735.9bn to CHF1,117.8bn (roughly €645bn to €980bn).

This ezine presents further market views and insights from locally based fund “Switzerland remains a key destination for manufacturers selectors; highlights from our Swiss Summit earlier in 2018, an outlook on and distributors of funds in Europe” ETFs in the Swiss context, and an overview of pending events in 2019.

Jonathan Boyd, editorial director of InvestmentEurope Jonathan Boyd, editorial director of InvestmentEurope and PPA Independent Publisher Awards 2017 Editor of the Year SWISS VIEWS Pictet’s Mussie Kidane and Prime Partners’ François Savary offer observations on the most pressing issues for the Swiss market ACTIVE MANAGEMENT: TIME FOR A COMEBACK?

Adrien Paredes-Vanheule talks to Pictet’s Mussie Kidane

In a recent interview, you said pressures on Now the industry is seeing two significant and active asset managers on fees will persist, how structural trends: first, beta is essentially a is that likely to occur? commodity and highly price sensitive. It is not Given the prevailing market environment in surprising to see investors’ enthusiasm for ETFs recent years, active managers as a group have and the asset growth therein. Investors are voting struggled to materially outperform passive with their wallets preferring cheap vehicles to gain strategies. Indeed, the quantitative easing tide has core exposure in most efficient markets where lifted all boats indiscriminately. alpha is inconsistent, if it ever exists.

Furthermore, there is an element of cyclicality in Where are we now in the action against so- the alpha generation patterns of active manager’s called closet tracker funds in Europe? and I believe that we are currently rather at the The pressure on closet indexers is mounting both bottom of the cycle. from investors abandoning such strategies to the benefit of mostly passive strategies and from As monetary policy gradually normalises, we regulators, especially in the UK, forcing some asset think active managers – and by that I mean those managers to reimburse investors for misselling genuine active managers building high conviction their products as active funds. portfolios with high active shares – will be in a

Mussie Kidane, global head of Fund Selection at Pictet better position to capitalise on fundamentally- In Continental Europe, the fund industry is still Wealth Management driven return dispersion that is likely to occur. not efficient enough in putting the required pressure on such funds to either live up to on a handful of mega cap stocks, which is a “There is an element of cyclicality in expectation or die. However, I do feel that closet challenge for active managers. the alpha generation patterns of indexe funds are faced with an existential threat active manager’s and I believe that although the threat may take some time to As a matter of fact, one way of outperforming the we are currently rather at the materialise. S&P 500 consistently over the last five years would bottom of the cycle” have been to create a portfolio made up of 90% of

A Lyxor study has suggested an optimal Mussie Kidane, Pictet Wealth Management an ETF that tracks this index and 10% in the so- portfolio should be theoretically composed of called FAANG stocks (2 % each), and rebalance 70% passive funds and 30% active funds. What that portfolio every year. That’s how concentrated is your view on this? the market leadership has been in the US over that I believe that there is definitely room for both What has been your equity allocation recently? period! active and passive strategies in any given At this point in the cycle, we are more comfortable portfolio. The proportion, however, may depend with equity risk rather than credit where many Any particular theme played? on investors’ investment objectives, their sectors are priced for perfection. Thus, we are With regard to thematically driven investments tolerance for relative performance risk, the overweight equities especially in developed such as robotics, we do have exposure and we do investment horizon, etc. markets. it through the products managed by Pictet Asset Management, which is a prominent and highly If the case for equity ETFs is crystal clear, I remain We think the macro environment is supportive, performing player in this segment. For instance, very sceptical about passive investments in the company fundamentals are sound although the Pictet Megatrend Fund provides our wealth fixed income space. Take credit for instance: the valuations seem demanding especially in some management clients a broad and well-diversified endgame is more about avoiding torpedoes rather sections of the US market for instance. exposure to these multi-year themes or trends. than picking the winners. Why would then investors willingly accept lending more money to Talking about the US equity market, it has been What about your current fixed income stance? the companies with the largest debt burden very challenging for active managers to Fixed income is probably the most challenging simply because they have higher weights in the outperform consistently the S&P 500 index. In area right now, especially for euro and Swiss index? It is utterly counterintuitive. terms of market leadership, it’s been concentrated franc-based accounts. Valuations in most sectors are quite stretched and in some cases such as is how we measure their performance. If we European high yield outright expensive. We expect these products to match directional believe that investors are not fully compensated strategies’ performance in an upmarket, we will today to take excessive risk either by going down surely be disappointed. With the exception of one the credit quality ladder or by extending the fund, we are very happy with our absolute return duration of their portfolios. We think there is a fund selection as they have matched if not time for offence and a time for defence and in, exceeded their stated return objectives. fixed income, we think it is time to scale back risk. The inclusion of ESG criteria in long only funds Do you use unconstrained fixed income funds? seems on the rise, is it a trend you are Yes, we do. In the context that I mentioned earlier, monitoring? Summit Highlights these products make much sense. We believe that Yes, we are. Not surprisingly, most asset managers well-managed, unconstrained fixed income have already taken measures to integrate ESG The InvestmentEurope Pan-European Summit strategies should be able to better navigate the consideration in their investment processes, with Lausanne 2018 took place at the Beau Rivage prevailing market environment. more or less significance and intensity. At this Palace in Lausanne. stage, what’s important to us is to assess who is What is your view on absolute return funds doing what in this field. Participating groups included Acadian Asset that some of your peers find disappointing in Management, Baillie Gifford & Co, Brandes terms of performance? Looking forward, in which asset classes are you Investment Partners, Candriam Investors I think it is unfair to pass a collective judgement looking to focus or strengthen fund research Group, Eurizon Capital, Fiera Capital, Invesco on an entire segment. Granted that there are over coming months? PowerShares, Investec Asset Management, Old products that have disappointed big time but We have been busy in streamlining our approved Mutual Global Investors, Origen Asset there are also a significant number of funds that list of funds. Our primary objective is to reduce Management (a boutique of Principal Global have achieved their stated return objectives. rather than add to our current offering. However, Investors), Tokio Marine Asset Management, we continue to look into some areas where we and Wellington Management. The main discrepancy with absolute return funds have gaps such as real estate. A lot of foreign asset managers are seeking entry Swiss differentiation to the Swiss market. But they must focus on a few products with a clear strategy and management Integration of sustainability into style. The offer should exhibit a differentiation for investments of Swiss asset managers the investor as the supply of products is already is booming. Ridhima Sharma reports quite important.

ESG INTEGRATION According to a number of metrics, the Swiss The number of Swiss institutions implementing market has remained positive through the course ESG has grown over the years. They are not only of 2018. buying ESG products, but also actively implementing strategies into investments. Also, There have been shifts noted, such as the the shareholder engagement has widened to increasing weight to defensive sectors in include international companies. allocation decisions, specifically in the pharma sector. Moreover, the defensive nature of the Swiss Sustainable investment funds represent 8.7% of market is attractive down the road and a bit more the Swiss fund market according to SFF report. cautious on equities for the medium term. Not surprisingly, most asset managers have “The growing importance of ESG/SRI already taken measures to integrate ESG is resulting from the demands of Swiss boutiques are currently in the process of consideration in their investment processes, with clients… ESG/SRI is clearly a redefining their business model due to the change more or less significance and intensity. At this ‘component’ of the Millenial in market conditions, both in terms of revenue stage, what’s important to us to assess is who is mentality” and cost. The process induces some consolidation doing what in this field. that should continue over the medium term. François Savary, Prime Partners Levels of service remain key to moving forward The interest for ESG/SRI investments on the rise for Swiss boutiques. and not only in Switzerland. “I do not see any reason why the trend should go “The growing importance of ESG/SRI is also younger generation, that is to say that ESG/SRI is into reverse, on the contrary,” says François resulting from the demands of clients. It is very clearly a significant ‘component’ of the Millenial Savary, CIO, Prime Partners. interesting to notice this development among the mentality.”

EU-SWISS RELATIONS Relations between Switzerland and UK are close and multifaceted. And Brexit will certainly impact the EU-Swiss relationship.

A new model of cooperation should emerge, but will it work? Nobody knows. What will be the challenges of the UK-EU relations down the road? What will it mean for the future of the EU? Could a working UK strategy induce other members of the EU to go for an exit solution?

A lot of questions are open when it comes to the consequences of Brexit.

All in all, Savary thinks that the tendency will be for the EU to adopt a stiffer attitude when it comes to negotiate with other parties; that is, a more difficult and less flexible attitude of the EU in negotiations, at least in the short term.

Recent comments by Jean-Claude Juncker, the president of the European Commission, concerning the Swiss-EU relations are clear: the EU wants an overarching agreement with Switzerland, and the EU refuses the idea of partial agreements. This sets the tone for any existing agreement, ie, the durability of each of them will be dependent on the ability to reach an overarching agreement between the two parties.

The has done a good job in dealing with the risk associated with the strength of the . Economic conditions in Switzerland are good and inflation is back in positive territory.

Considering the recent rise in uncertainties (trade, emerging markets), the Swiss franc has appreciated over the last few months. Therefore, the current stance of the SNB is appropriate, and to err on the side of cautioun when it comes to a change in monetary stance is the right strategy. Swiss Summit 2018 event report Alpha in bear territory defensive times in markets. However, the outlooks unlikely to revert, he suggested. The quality of US presented at the Summit were anything but MBS puts it between investment grade and high bearish. yield, he added.

For example, although US mortgage-backed Another point raised concerns the quality of securities may still give investors goose bumps for borrowers for US residential mortgages which has their role in sparking the global financial crisis in reached historic highs. 2007/8, those listening to the relevant presentation at the Hotel Bellevue Palace heard of Looking across the spectrum of US MBS the recovery in the asset class and entry into instruments, the manager’s preference is for portfolios for investors starved of returns in a low- agency MBS – bonds issued by the US Federal rate environment. Reserve, guaranteed by the US Treasury – and agency credit risk transfer (CRTs), which are seen Alpha in bear territory This was the message from AllianceBernstein’s as an attractive alternative to bank loan exposure. senior fixed income portfolio manager Markus Switzerland’s capital hosted Peters, who exposed opportunities in the asset InvestmentEurope’s first Swiss class. Summit recently, when eight asset managers presented across various Peters highlighted the robustness of the US asset classes. Adrien Paredes- economy; nearing full employment it is Vanheule and Ridhima Sharma supporting the local housing market, with report housing prices stable or even rising, he said.

Bears may be the symbol of the city of Bern where Thus, as distinct from the speculative demand the InvestmentEurope Swiss Summit took place 7-8 driving US MBS a decade ago, the primary driver June - but not only. The animal also illustrates currently is the low supply of houses, which is Outlining fixed income and other opportunities FROM AB TO AI Artificial intelligence as a sole investment theme was the proposition of Smith & Williamson whose partner and portfolio manager Chris Ford outlined the secular growth opportunities carried by the topic.

Smith & Williamson's AI fund holds some 35 positions, of which about half are outside the US, and half related to technology.

In Ford’s words, AI has potential to double economic growth rates over the next 20 years. As an example, he highlighted that AI could bring some €6.72bn per year in economic benefits to the European utility sector.

Ford noted that seven out of the 10 biggest the future winners in 50 years’ time may look very organisations globally by market capitalisation are different to those we have now. Why invest in Japan? Because it is still a cheap already engaged with AI. Smith & Williamson value market according to Chris Taylor, itself relies on an AI-enabled investment process “But what is clear is that businesses are using AI to investment director and head of Research at which acts as a filter by reading thousands of consolidate what are already strong positions Neptune Investment Management. company documents about stocks. within their existing markets, and these are unlikely to be overtaken any time soon,” Ford Reasons for considering Japan a sweet spot “As history has shown, few companies can embed recently said, commenting on Apple becoming include the following: it has not been rerated since themselves in such a way for the long term, and first $1trn listed company. 2012; corporates now pay back shareholders However, consumer demand-driven sectors (retailing, food, clothing, utilities) are avoided. Regarding the Topix index, Taylor noted that foreigners selling out over the past year has left Japanese buyers supporting the market. He also pointed out that over 40% of positions in the market are short.

EMERGING MARKETS Overshadowing the EM sector recently has been US president Donald Trump’s comments on trade with and .

But in the view of Danske Invest’s Sorin Pirău, portfolio manager and economist emerging markets debt hard currency, risk triggers are common in the space. When some dissipate, new ones appear. through dividends or buybacks and do not hold domestic government deficits. cash. EM fundamentals are proving resilient, Pirău said, Therefore, Taylor’s fund, which has 30 to 50 noting broad-based recovery across emerging Additionally, Japanese company earnings growth holdings, invests in sectors dominated by markets, which he characterised as being in its remains underestimated despite upheavals and a Japanese firms, such as advanced materials early stages. strong yen, Taylor pinpointed. Japanese listed (carbon fibre, paints), engineering (vehicles, firms are experiencing rising profits and power plant), electronics and government Moreover, he expects a widening of the growth diversification that offsets the effects of persistent spending-related (defence, construction). alpha between EM and DM that should be supportive of the EM debt asset class in the in the US, eurozone and global equities asset medium-term. classes. Japan too is interesting from a currency Watch out for the hedged approach focused on export-orientated Pirău stressed a turning point in credit quality in companies, he suggested. third-party risk! EMD. After credit fundamentals were badly hit in 2017, improvement is being driven by growth Kames Capital outlined the importance of Ethical hacker and social engineer ‘FC’, also recovery, fiscal adjustment and stabilised debt. dividend income and dividend growth as key known as ‘FreakyClown’ provided the Summit drivers of long-term total returns for equity with a keynote based on insights from his EUROZONE investors. Mark Peden, investment manager 25-year experience of breaching security on According to First Trust Global Portfolios, explained why detailed analysis of companies is behalf of clients. investing in the eurozone has been a hot topic of important to avoid damaging dividend cuts and discussion. The manager’s AlphaDEX identifying potential positive dividend surprises. FC has broken into hundreds of banks, offices methodology scours the European markets and government facilities. He said businesses looking for the best value and growth stocks, Investec Asset Management shared views on a he has worked with have failed to understand which FTGP highlighted through its detailed flexible and dynamic approach to global credit that good business security is a balance review of the performance and attribution of investing. Garland Hansmann, portfolio manager between digital security, physical security and European stock market returns year to date. talked about how Investec applies a multi-asset human nature. approach to investing across the credit spectrum. Sticking with the ETF trend, Christopher Gannatti, “One bank we worked with had issues with head of Research Europe at WisdomTree He also discussed the manager’s Global Total people getting into their facilities. They bought presented two ETFs, one focusing on contingent Return Credit fund and how it seeks to create a the most expensive security door for £60,000 convertible (CoCo) bonds and the other on S&P high yielding yet comparatively defensive global and asked me to test it and make sure it is 500 put options. He also gave an overview of the credit portfolio built from the bottom up. secure. I watched the door for three or four strategies that are considered interesting in the Hansmann also provided an overview of the hours and on the day after, I walked to the door current market environment. These include portfolio showing where Investec is currently and it randomly opened without any need to looking for quality dividend growth opportunities positioned. hack it. There was an engineering mode that every 15 minutes does a revolution to ensure the door is working. All I did was get that timing precise.

“The door was not the issue. People trusted the wrong people as they thought engineers would have correctly installed the door and engineers assumed that people running the door would use it correctly.

The management had never thought of this risk,” FC told the Summit audience.

A co-founder and head of Ethical Hacking at Redacted Firm, FC told another story about a US company from which 30 million credit card details and some $470m were robbed through air conditioning devices in 2014. Hackers targeted the air conditioning company as a third-party in their plans to break into the business.

“There is a third-party risk. You cannot fully trust a third-party and perhaps you may be the third-party of someone else for other plans,” he said. IN THEIR OWN WORDS Speakers, video presentations & tweets from the Swiss Summit 2018 CHRIS FORD, SMITH & MARKUS PETERS, SORIN PIRĂU, DANSKE Key tweets WILLIAMSON ALLIANCEBERNSTEIN INVEST

#FSSUMMIT Smith & Williamson's Ford calls AI fastest growing economic phenomenon at the moment Smith & Williamson

#FSSUMMIT Housing prices not driven by excessive speculative demand, but by very low supply @investecam_uk

Chris Ford is partner and portfolio AllianceBernstein’s fixed income Sorin Pirău is a portfolio manager manager of the Smith & Williamson senior portfolio manager Markus and economist in the emerging #FSSUMMIT EM fundamentals are Artificial Intelligence fund. He joined Peters joined the firm in 2014, market debt hard currency team at forecasted to continue improving, the company in 2015, having representing market views and Danske Invest. He is responsible for closing the development gap with previously held roles of global and US investment strategies of AB’s fixed the team’s overall macro research and DMs Danske Invest equities portfolio manager at Pictet income portfolio management team. the development of quantitative AM and Schroders. He previously worked for M&G. models. CHRISTOPHER CHRIS TAYLOR, GARLAND KEY TWEETS GANNATTI, NEPTUNE HANSMANN, WISDOMTREE INVESTEC #FSSUMMIT Japanese equities close to record earnings and dividend per share @WisdomTreeETFs

#FSSUMMIT Japanese national debt showed a steady rise - IMF 2017 level now raised to Yen 1307trn Neptune IM

WisdomTree’s head of Research for Chris Taylor is head of Research and Garland Hansmann is a co-portfolio #FSSUMMIT The credit spread Europe Christopher Gannatti joined Japanese Equities at Neptune manager of the Investec Global Total offsets the aspect of the credit the firm at the end of 2010 as Investment Management since June Return Credit fund at Investec AM, negative duration effect. A research analyst. He is responsible for 2004. Prior to joining Neptune, he Previous roles were with solution is to move defensive WisdomTree research within Europe worked at Fuji Investment Intermediate Capital Group and portfolio into as well as supporting the Ucits Management for 15 years, where he Credit Suisse Asset Management, credit @investecam_uk platform globally. was a managing director. focusing on high yield credit. GREGG GUERIN, FIRST MARK PEDEN, KAMES KEY TWEETS TRUST GLOBAL CAPITAL PORTFOLIOS #FSSUMMIT FTGP's AlphaDEX methodology looks at value stocks and momentum stocks Apple is cheap but what moves its stocks is sales, says Guerin. When sales up, stock up, sales down, stock down. Same with Amazon, Netflix, Starbucks and other big names First Trust Global Portfolios

Gregg Guerin is is senior product Mark Peden is an investment #FSSUMMIT The de-equitiser specialist at First Trust Global manager at Kames Capital. He joined plans to return $44bn of $67bn if Portfolios. Prior to working in the firm in 1992, focusing mainly on repatriated offshore cash London, Guerin was a member of the European equities. He has built and @kamescapital First Trust Institutional Team. He has manages the Kames Global Equity been working in the ETF industry for Income strategy since its inception in over 10 years. 2011. Declining Dynamics Turnover in ETFs on the SIX Swiss Exchange declines almost identical fashion. Turnover in bond ETFs ETF sales suffer from Declining Dynamics held up comparatively well, down 4.06% on the first quarter. Among other factors, they also Weaker turnover in ETFs on the SIX Swiss Exchange was due primarily to benefited from numerous new listings. Turnover equity ETFs in Q2 2018. Ridhima Sharma reports in commodity ETFs fell by 12.44% to CHF2bn, the lowest quarterly level in the last seven quarters.

For Western stock exchanges, the second quarter CHF25.4bn compared to the previous quarter. In Q2 2018, three UBS ETFs on the MSCI ACWI of 2018 was like a roller coaster ride. Overall, they Following a very strong Q1, investors were more Index took pole position on the list of the top 20 were able to maintain their level. The situation on cautious, in particular with equity ETFs. This was most traded ETFs, albeit with significantly lower the stock markets in several emerging countries also reflected in the significantly lower number of volumes compared to Q1. In fourth place was the was completely different, for example, as the trades. As a result, 253,605 ETF tickets were UBS ETF EGUSAS on the MSCI Emerging Markets, strength of the dollar contributed to lost ground. generated in Q2 2018, representing a decrease of which was the only one of the seven highest 67,957 on the record Q1 level. However, compared ranked that achieved higher turnover. Lyxor’s ETF The Swiss Market Index SMI closed the first half of to the same period of the previous year, the MSE on the Euro Stoxx 50 took eighth place and the year at 8,609.30 points, down 1.51% as of the number of ETFs trades has increased by more than iShares's ETF CSNDX on the Nasdaq 100 was end of March. Growth in ETFs continued. 6%. The increase in lower value trades indicates ranked tenth. The two ETFs focus on developed Following the listing of 106 ETFs on the SIX Swiss increased interest on the part of private investors. stock markets. Exchange in the first quarter, the number of tradable ETFs surged by 73 in the second quarter. ETF TURNOVER UBS defended its top position in turnover with a In the first half of 2018, 179 new ETFs found their Weaker turnover in ETFs on the SIX Swiss share of 39.75% (Q1: 42.88%), followed again by way into trading on the Swiss stock exchange, Exchange was due primarily to equity ETFs in the setting a new record. second quarter. They recorded a decline of 21.28% but remained the most important asset class by far In Q2 2018, demand on the Swiss ETF market with CHF22bn in trading turnover. As against the eased. As a result, trading turnover fell to same period last year, equity ETFs developed in an iShares, whose share increased by 0.24% to Overall, only the alternative, bond, leveraged and 32.88% in Q2. commodities asset classes attracted new assets in the last trading month. However, investors took For the second time in a row, Lyxor was ranked assets out of the other asset classes. third (13.74% vs. 11.09%) and PowerShares in fourth position (4.24% vs. 3.78%) and both “A common misconception is that ETFs are achieved significant gains in market share passive/index tracking tools. ETFs are much more quarter-on-quarter. than that,” said Ivan Durdevic, executive director, and head of ETF Distribution Switzerland at JP JP Morgan is a new entry to the list, which Morgan Asset Management, based in Zurich. launched four ETFs on the SIX Swiss Exchange on April 18, 2018. Two out of the four ETFs from JP “We think ETFs can bring innovative solutions to Morgan are active ETFs. A portfolio manager clients. We have already shown that we can actively checks and optimises the composition of leverage passive, strategic and active capabilities the fund by buying or selling selected stocks or across fixed income and alternatives and will other securities. Thus, they can respond more continue to build out an innovative ETF range quickly to market trends. across all asset classes for our clients across the board, fitting private banks or institutional needs. EUROPEAN MARKET We have capabilities which span the spectrum “A common misconception is that Again there have been net new assets in ETFs at from passive, strategic beta and active. ETFs are passive/index tracking the European level over the last few months, tools. ETFs are much more than especially in the bond asset class. Net new assets “We see the ETF wrapper as a technology to wrap that” of $5.8bn in total were invested there in the first these strategies in. Increasingly clients are looking half of 2018 alone. In June, the greatest net Ivan Durdevic, JP Morgan Asset Management to leverage this wrapper to build portfolios outflows were seen in the biggest asset class, therefore we are working to develop our equity ETFs. capabilities to better serve our clients,” he added. SELECTORS' VIEWS Regulation, the role of boutiques, ESG/SRI and the impact of the SNB figure among the views of top local fund selectors Name: Léonard Dorsaz Name: Cédric Ozazman and Company: Banque Piguet Galland & Jonathan Cohen Cie Company: Reyl & Cie Role: Head of External Fund Role: Head of Investments and Selection, alternative and long-only Portfolio Manager, in charge of long- funds only fund selection Base: Geneva Base: Geneva

What has been the impact of new regulation (LEFin, LSFin, Mifid II) on How do you play European and Swiss equities? your fund selection? We have a bias on European small and mid caps. In these segments, we can still New regulation has increased dramatically the complexity of our work. find innovation even if it will never reach the level of innovation seen in the US market. A number of niche companies are worldwide leaders in their On the fund selection side, some issues have emerged, for instance regarding markets and provide growth perspectives that we would not see in the large share classes. Where BlackRock will launch 50 different share classes for each cap segment. type of client, smaller fund providers, especially focused on niches, will only have three or four share classes to propose. It means that some of our clients A number of European small and mid cap equity funds, especially Swiss small- cannot access this last fund because of regulation. mid cap funds, have reached a size that is not coherent with its investment policy. They carry an important liquidity risk. Liquidity-wise you cannot only If we see an excellent niche fund that can only be invested in by some of our rely on three Swiss large cap stocks. If the market overheats or is subject to an clients and a very good one that is opened to a larger audience, we would aggressive sell-off phase, we would not be confident being in this type of funds. unfortunately rather pick the latter. If I look at all share classes of the funds we hold on our recommended list, we may reach around 1,000 share classes in total. This is insane. I am of those who think regulation has never helped preventing the next financial crisis Name: Stephan Germann Name: Stéphane Monier Company: Pleion Asset Management Company: Lombard Odier Private Role: Chief Investment Officer Bank Base: Geneva Role: Chief Investment Officer Base: Geneva

How do you see the impact of new regulation on local independent wealth As a Swiss fund selector, which challenge(s) do you face the most? managers? In our view, one of the main difficulties is identifying style drifts and for this, Independent players are doing relatively fine at the moment. They are all transparency is key. Investors need to know whether managers remain looking at each other. Though I do not have ten wealth managers at my door committed to funds’ stated strategies, and they need to be able to detect any seeking to partner or merge with us. divergence.

When LSFin will be effective, the situation will dramatically change. However Furthermore, having a diversified client base – with one-third residing in there will be a difference between the small private bank that has clients in 20 Switzerland, one-third in Europe, and one-third in emerging market countries or more countries and that which has a strong clientele located in a single – means that we have to ensure our fund selection covers a range of regulatory place. The former may not survive while the latter could still overcome and fiscal requirements specific to each client’s domicile. forthcoming regulation. Tax events that investors incur, in case we would like to change a manager, represent another important factor. In addition, tracking performance and understanding funds’ risk management practices can be hard for both selectors and investors. Name: Rafael Anchisi Name: Sébastien Gyger Company: Bordier & Cie Company: Gyger Advisors Role: Head of Fund Research Role: Financial Advisor Base: Geneva Base: Saint-Livres/Geneva

Sustainable investment funds represent 8.7% of the Swiss fund market What is your view on Swiss boutiques? according to an SFF report. Do you expect Swiss asset managers to do more around ESG/SRI? Highly regulated, high costs of production, hard to find customers: these are the most pressing challenges voiced by Swiss asset managers. It should have At the bank level, we have always been conscious about sustainability. We come as no surprise in the current binding regulatory, fiscal and political consider that it is our responsibility to transmit something positive for the next environment. generations. For instance, our Under The Pole III sponsorship reflects our alignment between values and acts. Overall though, it has to be noted that the industry has been pretty resilient and the top league company table has barely budged. Under the surface, we On the investment side, ESG/SRI is becoming a strong global trend. Swiss asset observe that asset management boutiques are bubbling when their offering is managers should stay in the run if they don’t want to be left behind. meeting client requirements for performing, focused and well-priced strategies.

We are still in a quite early stage phase with respect to the private clients’ state To name a few, Bellevue, Decalia, Holinger, Quaero and Sectoral belong to this of mind. Moreover, ESG and SRI semantics are overused and wrongly look as if group of local actors actively shaping the Swiss competitive landscape in the it was a new standard. As a result, investors are still lost in translation because asset management industry. of the lack of visibility between the concept and the reality. Name: Emmanuel Ferry Company: Banque Pâris Bertrand FUND SELECTORS IN THE NEWS Role: Chief Investment Officer Base: Geneva Each month, InvestmentEurope highlights the views of fund selectors in its magazine section called Fund Selectors in the News. To make sure that you get an opportunity to put forward your views as a buy side professional, please contact the editorial team.

Details are available here: http://www.investmenteurope.net/contacts… What is your stance on the current SNB monetary policy? Latest issues of the magazine can be downloaded here: http://www.investmenteurope.net/archive/ The SNB has no choice but to continue to keep a dovish bias. The Swiss economy is highly exposed to the euro area from an economic point of view (main trading partner) and from a risk point of view (safe haven). A rate driven appreciation of the euro vs the Swiss franc seems very unlikely over the next quarters, as the ECB should also maintain a dovish bias until the end of 2019 at least.

We do not see the SNB moving before the ECB.

An early monetary easing by the Fed would be a major problem for European central banks, as a cheaper dollar would coincide with a US economic slowdown. This scenario is inevitable and sheds light on the unsustainable monetary policy disconnect between the US and Europe. Allocator profile Reyl & Cie’s fixed income bets Pursuit of niche categories adds value

Jonathan Cohen, portfolio manager in charge of traditional long-only fund selection and Cédric Özazman, head of Investments and Portfolio Management, reveal Reyl & Cie’s fixed income bets to Adrien Paredes- Vanheule

It is to just two of Geneva-headquartered private bank Reyl & Cie’s nine or so investment professionals that responsibility for – respectively – long-only fund selection and liquid alternatives fund selection falls. CÉDRIC ÖZAZMAN & JONATHAN COHEN Each brings expertise on a particular asset class Cedric Özazman (left) has been head of Investments and Portfolio Management at Reyl & Cie hence gets involved in fund selection decisions as, since 2010. Prior to that, he was head of Discretionary Portfolio Management at KBL for example, is the case for European equity funds (Switzerland). His team includes Jonathan Cohen (right), portfolio manager responsible for with Reyl’s head of Investments and Portfolio traditional long-only fund selection at Reyl & Cie since 2015. His previous roles were with Merill Management Cédric Özazman - a specialist in the Lynch and KBL (Switzerland). segment. “We have a concentrated buy list of 15 to 20 funds, under management for a minimum fund size. use ETFs for tactical purposes on a limited quite the opposite of a shopping list that Though Cohen pinpoints these rules can be investment horizon - 6-9 months,” he says. encompasses all segments. It is a way to circumvented it the team has a strong enough implement our convictions. Though the model conviction on a manager. SUB DEBT FAVOURED carries some limits, we try to find the adequation In the fixed income bucket, the Geneva bank’s between our human resources – one cannot The use of ETFs? A rarity in Reyl’s allocation grid investment unit avoids European government follow 40 funds at a time – and clients’ needs says Özazman, whose team utilises passive funds bonds, since the European Central Bank’s first which can differ from our convictions,” says when active ones cannot fit the team’s allocation interest rate hike is not expected before mid-2019 Cohen. view – for example, to obtain exposure to a and returns do not look appealing. specific theme. “Fund selection at Reyl is first aimed at matching “Nordic debt forms an interesting alternative. the various client investment profiles and needs Once we are hedged against currency risk, we “Given our model, we can bring we have to fulfill for portfolio construction. It perceive more returns compared to eurozone added value by selecting funds that logically includes allocation to classical funds in debt,” Özazman argues. fall into the niche category and the US or in Europe on the equity side for stand out from the rest of the instance. Cohen adds that subordinated debt has long been market” a favoured play of the unit, especially through a

“Now, given our model, we can bring added value Jonathan Cohen, Reyl & Cie fund from Algebris. by selecting funds that fall into the niche category and stand out from the rest of the market. As an “Subordinated debt suffered a bit last year, but not example, we have conducted funds research on as much as US credit. We are raising the question Nordic credit,” he adds. “We currently hold an ETF focused on US of whether it has become overcrowded or not. We medtech. There are, perhaps, active healthcare are beyond the mid-cycle point and need to be Funds are generally kept in the portfolio for over a equity fund managers maintaining a US medtech more cautious on the asset class at some point,” year. A three-year track record is required for the bias, but it remains hard to find. Sometimes a Cohen assesses. portfolio manager as well as $100m in assets sectorial ETF will do the trick. Obviously, we also Özazman notes: “What we liked is that European diversification. We look at corporate hybrid portfolio duration following the Federal Reserve’s banks took measures long after their US bonds, which carry a less aggressive profile and interest rate hikes. counterparts, but at least they have acted to are even more niche.” resolve structural issues. These issues haven’t “We stay short duration through inflation-linked been resorbed fully yet in some countries like Another strong credit bet over the last couple of funds while some other funds, mainly US credit, . Banks in , are being well years has been emerging market local currency. keep a 6-7 year duration in aggregate. recapitalised. Their balance sheets are robust Cohen says the unit took profits on the asset class enough to avoid systemic risk off sovereign debt.” at the end of last year and that the idea is to “We have no reason now to pursue a pronounced reallocate this bucket to another part of the EM bet on short duration and being underweight US “The asset class has recorded high levels of net debt spectrum, namely increasing the bucket of credit,” Reyl’s investment head highlights. inflows in recent years. As a result, positions taken EM high yield corporate bonds. by subordinated debt funds are quite large. There A longer version of this article is available on is perhaps a need to bring more granularity and Also, Reyl & Cie has decided to lengthen its www.investmenteurope.net. A growing presence InvestmentEurope in Switzerland some 30 fund selectors it featured presentations InvestmentEurope’s presence in Switzerland from Hermes Investment Management, UBS Asset Management, Liontrust and RobecoSAM.

With Switzerland being one of the key fund Featuring over 70 fund selectors and 12 asset Further details on these and other events can be markets in the region, InvestmentEurope has been management groups and topics such as European, found here. present in the market for more than seven years. global and Japanese, US and emerging markets equities; understanding fixed income amid rising Looking ahead, InvestmentEurope will return to Bringing asset managers and fund selectors under inflation and the opportunities in emerging Switzerland and Zurich in the near future for the one roof, InvestmentEurope has hosted events at market debt denominated in hard currency; Pensionskassenforum Zurich 2018, taking place 13 multiple locations: Geneva, Lausanne, Zurich and systematic and value approaches to investing; and November at the . Bern. the use of US preferred securities as well as developments in impact investing. InvestmentEurope welcomes reader engagement. As noted in this publication, this year the To learn more about any of the events mentioned InvestmentEurope Swiss Summit occurred on 7-8 InvestmentEurope’s first ESG Forum took place on above, please use the links below to contact us. June 2018 at the Hotel Bellevue Palace in Bern, 12 April at the Baur au Lac in Zurich. Targeting where delegates heard from eight asset Editorial director: Jonathan Boyd management groups discussing topics such as US DACH Correspondent: Ridhima Sharma mortgage-backed securities, ETFs, artificial Head of sales: Eliot Morton intelligence, Japanese equities, emerging market Head of marketing: Vanessa Forde bonds, eurozone equities, global equities and total Head of video & ezines: Gary Robinson return credit. Head of events: Alex Whiteley Head of delegate relations: Patrik Engström The Pan-European Summit Lausanne 2018 was Business development manager: Mathieu Gaussen held at the Beau Rivage Palace in Lausanne – as it Director: Louise Hanna has been for the past several years. Chair: Nicholas Rapley

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