How can the asset management unit of 212-year-old private bank assert its independence? By seeking outside clients and through an innovation lab for artificial intelligence, Markus Signer tells finews.asia.
Markus Signer, can asset managers differentiate themselves anymore?
It's certainly become tougher, but we're trying to raise our profile through several qualities like performance but also innovation and the ability to take a long-term market view.
What does that mean specifically?
The partners at Pictet can be very patient. We don't need to achieve targets on a monthly or even annual basis like other firms do. Of course there are expectations, but rather on a five-year timeline. This means we deal with clients differently than is typical for Anglo-Saxon asset managers.
How?
I know from industry colleagues who receive a list of names and have to call a certain number of prospective clients every week. We don't do that. I have a ten-minute response rule for my team: that means our most important clients get an answer or at least a reaction within ten minutes of a question.
You mentioned innovation. Is it more than just lip service?
Yes. We were the first bank to launch theme funds. In 2000, we issued a water fund which didn't invest in regions or sectors, but in firms that are involved with water as a resource. The fund was well-received by private clients but institutional ones raised their eyebrows and asked when we would issue an earth and a fire one. The fund bobbed up and down with 200 million to 300 million Swiss francs until the big turnaround came.
What happened?
Investors warmed to the fact that the world needs to use its resources in a more sustainable and economic fashion. Today, there's hardly a pension fund which doesn't pursue a sustainable asset management. The ESG criteria are gaining in importance even in the U.S. Pension funds are insisting on it. Meanwhile, the volume of the water fund has exceeded five billion francs and we recently had to close it to new investors.
Private banking and asset management is under the same roof at Pictet. A source for conflicts of interest?
You might assume so at the outset. But in fact, the opposite is true. Pictet as a financial group isn't a classic private bank and hasn't been for a long time. About half of client assets and profits come from asset management. Only ten percent of revenue in asset management stems directly from private banking. We generate the remaining 90 percent with external clients. Therefore I can safely say that we don't have a conflict of interest.
It may sound heretical, but why do your relationship managers sell so few own funds? Are your products that bad?
No. If a client already is a Pictet client, It often is easier to sell a third-party product to existing clients. We also have no guidelines for the sale of own products to our clients. Or put in another way: our relationship managers are skeptical about in-house products. And that's a healthy attitude. We don't want to rely too strongly on private banking.
Active or passive investing is a question of faith. What's your take on this?
I believe that passive investment strategies are here to stay. Of the 190 billion francs at the asset management unit, only 30 billion are invested passively. Pictet in the 1980s became the first bank to offer Swiss pension funds passive mandates in the form of trusts. I don't see passive investing as a threat. I like to compare today's situation to the one of a fitness coach.
Please explain!
Passive strategies are forcing us to be better in other areas. Which we are, for instance with our theme funds, water, security or robotics. Of course, there are no patents available for financial products. Earlier or later, in any business segment, there will be copies.
Could events in financial markets trigger a move away from passive investments?
In the medium term, over the coming five to six years, passive investments will gain further market share. In particular in extremely efficient markets such as the U.S. equity market. In such markets, active managers face an uphill struggle to beat the market in the long run. Thus, active managers in future will have to specialize even further and work in niches where they are able to create an added value.
«Institutional investors like passive investment products mainly because of the fees»
But you're right, if 80 percent of market participants would put their money into passive investments only, you would have to ask yourself, if pricing is still working efficiently. With a market failure as a consequence because pricing has been rendered impossible and the market no longer is efficient. This in turn would create new opportunities for active managers who have more information about equities than people at large – because they hold discussions with chief financial officers or because they carefully study financial reports. It definitely makes sense to keep an eye on the problem.
In times of big swings in the market, passive investment products are multipliers, accelerating a crash.
Yes. Index products such as exchange-traded funds amplify the trend when share prices undergo strong movement. The correlation is increasing. On the other hand, with higher volatility, fund managers have better chances to succeed.
Institutional investors like passive investment products mainly because of the fees, which are substantially lower compared with active strategies.
Which were the biggest changes in asset management over the past three decades?
Internationalization and a more professional management of client assets. Nowadays, we have American, Asian and European rivals in asset management.
«Pictet's partners are taking technological development very seriously»
The trend began when Credit Suisse in 2000 launched the «Fundlab», the first open architecture allowing customers to buy third-party products. It was a change of paradigm which helped make Swiss asset management better than the average.
What's the influence of technology on Pictet's asset management?
We obviously are looking at big data and artificial intelligence. We found an innovation laboratory 18 months ago, where data and algorithms are used to try and detect market structures, which could be integrated into our investment process. We are testing prototypes in bond trading.
Another field is voice detection which could be used to systematically look at annual reports and central bank statements. Of course, the whole thing still is very much trial-and-error. But Pictet is making investments and the partners are taking it all very seriously.
What about your expansion plans?
We primarily aim to focus even more on our strengths, the themes, and on fixed-income investments and on loans. Geographically, there is a lot of potential in emerging markets, another field where Pictet was a pioneer at the end of the 1980s, first in equity markets, and later, in the 1990s, in bond markets.
Chinese fixed income market is the third-largest already and will probably soon be the number-two thanks to the so-called renminbi bonds. Most pension funds haven't yet invested in those markets. We have had a small team based in Hong Kong for the past three years, developing a track record in this business.
Markus Signer has been with Pictet Asset Management for 17 years. As an equity partner, he is responsible for the distribution network in Switzerland, Austria and Eastern Europe. An economist and lawyer by training, Signer also worked for eight years at Intrag, the former funds management unit at UBS. He also worked for Intrag in Luxemburg and Italy.
Pictet's asset management is a relatively young division, having started out in the 1970s. The company started selling funds at a relatively late stage, at the end of the 1990s. It has since developed rapidly: 20 years ago, assets under management amounted to 14 billion francs, today the bank has 190 billion. Having been No. 14 in asset management in Switzerland, Pictet today is the fourth-largest after UBS, Credit Suisse and Zuercher Kantonalbank/Swisscanto, and bigger than Blackrock, the world's largest asset manager. The unit has 836 members of staff and generates three out of four francs it earns abroad.
