Finding a niche idea
Few European asset managers can boast the pedigree of the Swiss investment manager Pictet Asset Management. Pictet is the affiliate of banking group Pictet & Cie, one of the oldest private banks in Switzerland and currently celebrating 200 years in the money management business.
Age brings wisdom, and one of the things Pictet prides itself on is its ability to detect and manage liquidity risk – in other words, the point at which asset classes become difficult to sell.
Renaud de Planta, the partner in charge and chief executive officer of Pictet Asset Management, says a long memory is useful in asset management. “One of the advantages of having been so long in the business is that we have been able to learn from history, sometimes the hard way. We can remember situations where there was no market in emerging markets, small caps or high yield bonds. And if you had to dump stocks at that time it was awfully painful.”
Pictet’s institutional asset management business was launched in the late 1960s and it won its first pension fund mandate in 1967. It initially built its fortunes on traditional pension fund management, servicing Swiss pension funds in the late 1960s and then US pension funds in the 1980s.
Since then it has evolved into a medium-sized, specialist institutional manager with $55.7bn (e41.4bn) assets under management at the end of 2004. Some 85% of its mandates are now specialist, with most of the balanced mandates in Swiss second-pillar pensions.
Pictet has broadened its activities into two business lines: its traditional pensions business and its newer business as a manufacturer of mutual funds for third party distribution.
It has also widened its theatre of operations. “Today we see the European market, continental Europe, as our home market. It is also the area where we have been most successful over the last three to four years.”
Another important theatre is Japan. “We’ve been working on Japan as a market for many years, and this is now bearing fruit. We have made significant inroads, both with Japanese pension funds and with Japanese financial institutions distributing our mutual funds.”
The current spread of business is indicated by the revenue of institutional clients projected for this year, with Switzerland expected to contribute 30.2%, Japan/Asia 26.2%, continental Europe 21.1%, the Americas 13.5%, the UK 8.8% and the Middle-east 0.3%.
De Planta characterises Pictet as a European player with an international reach: “There are two main thrusts of our strategy. The first is to cover the full range of European products, above all specialist products. The second is to have strong global niche products, which we can then offer globally to US and Asian clients, as well as European clients such as the large pension funds.”
Typical global niche products include international small cap equities, Asia and Japan equities and emerging market equities. Emerging markets equities is a niche product that has grown into a core competency, accounting for 35.5% of equity assets under management.
“This developed from an emerging markets equities fund which we launched in 1989. This then became a business of its own when we offered segregated mandates, first to large US pension funds and then to some large Scandinavian and northern European funds,” says de Planta. “Today we have almost $8bn invested in emerging markets and we are effectively closed to new business.”
Absolute return funds are also another important global niche product. Pictet has been involved in hedge funds since 1989, mainly through funds of hedge funds, and now has over $9bn in client accounts. It launched three proprietary hedge funds last year to add to an early pioneer started in 1995.
Pictet’s mutual funds have also provided an opportunity for sectoral specialisation. Pictet manages telecom and biotech funds and is the only manager, so far as de Planta knows, to offer a water fund.
De Planta suggested the idea of a fund that invested exclusively in the water industry in early 1999 amid doubts that there was a sufficiently large universe to justify such a fund. Today Pictet’s Global Water product, which is distributed separately in Europe and Japan, has attracted around $700m and has outperformed the MSCI World index by almost 30% since January 2000.
There are a number of advantages in having a mutual fund business alongside pension fund business, de Planta points out. “One is that your client base is not captive, it can be quite ruthless. If you don’t perform, you have no business. So it forces you to excel and address weaknesses.”
Another advantage is that gaining mutual fund business is uncorrelated with winning pension fund mandates. Each has different life cycles, de Planta says. “Typically, in the pension fund world we need three to five years of stellar track record, and absolute stability of the team and the process before we can be on the radar screen of some of the consultants.
“The fund selectors of the large financial groups are, quite rightly, a bit more flexible. They may be quicker to fire but they are also quicker to hire. So you don’t have to stay five years in purgatory.”
Diversification of sources of businesses is key, he says. “It all comes down to trying to have a stable book of business. We very much appreciate the pensions business. It is where we started and it is the backbone of our business. We also appreciate the ‘stickiness’ of the pension plans, because they are more loyal. But mutual fund manufacture sometime gives us the speed we need. It allows us to take off more quickly when we have to turn around a product or when we launch a new capability.”
Diversification of types of business is also important. Pictet has focused on specialist products because they produce higher margins. But this strategy does not rule out lower margin business. Almost half (45.1%) of Pictet’s fixed income assets under management are in money markets and cash. “Of course there’s a very low margin in money markets but we like a good mix of business. We have very strong numbers and we think there will always be a need for money market funds and liquidity management. I think the money markets business could become huge,” says de Planta.
Spreading bets is the key to Pictet’s investment style, de Planta says. “We don’t have an investment style in the classic sense of the word, but we do have some broad investment beliefs. One of our beliefs is in a diversified blend of bets in a portfolio, coming ideally from different sources.
“We take a modular approach. Basically, we decompose the bets we take into risk modules. We may allocate some of the risk budget to directional duration bets, some to yield differentials along the yield curve, some to relative value within government issues, some to credit allocation, and some to sector selection within credit.
“We then tend to delegate those decisions as close as possible to the source of the information. In other words, all the credit decisions of the bets will be suggested by the credit analysts.”
Risk budgeting is at the centre of this approach. “We believe in giving risk budgets to managers and to monitor the usage of those risk budgets. Not in the sense that we are risk averse – we like our managers to take enough risk. But at the same time we want to measure how much risk they take because we don’t want them to exceed a certain limit.
“We don’t just measure the risk versus the benchmark, which would be the classical tracking approach, but we look at other dimensions of risk. We look at liquidity risk which is something that many funds don’t consider. They ignore it at their own peril.
“If we’re very bullish on a particular small- or mid-cap we want to be sure that we can exit that position. So we try to forecast how many days it’s going to take once we have built a position to exit it. On occasion this leads us to take some drastic measures, such as closing for new business.”
Pictet has grown exponentially, quadrupling its assets under management over the past eight years. How big does Pictet want to be? “We have a goal of reaching CHF 100bn (e64.5bn) within the next three years,” de Planta says. “That’s assuming a constant gross margin. I think we can probably improve on this margin because we have a lot of exciting products that are growing.”
Growth at Pictet is likely to be organic rather than through acquisition. “We have never made an acquisition – not that we have not been offered opportunities. There are a number of reasons for this. For a start, we can’t pay with paper because we are not publicly listed, so we have to pay in cash. This makes us think twice.
“Generally we don’t believe that growth by acquisition in this industry is conducive to quality, and investment quality is the ultimate driving factor behind success.”
Pictet acquires skills rather than businesses, he says. “Our way of making acquisitions is to acquire talent. We literally go to the ends of the earth to find the best people.”
Although State Street Global Investors poached four of Pictet’s fixed income team last year, most of the movement of talent has been in one direction – away from the large investment firms. Pictet hired Ann Steele from Gartmore as head of equities last year; de Planta himself came to Pictet after 12 years with UBS.
When people move from Pictet, de Planta says, they usually leave to set up their own asset management boutiques. “Pictet is a firm that encourages a certain independence of mind, and that is why some people may decide to set up their own business.” That is, perhaps, one of the occupational hazards of working for an independent asset manager.