Pictet Asset Management: Fighting proliferation
Like other businesses, setting the strategy for an asset management firm means balancing what you could do with what you should do. Product proliferation is a temptation that has become baked into the business model for many, even if it is rarely in the best interest of clients.
As a Swiss player with a strong domestic institutional footprint, Pictet Asset Management (PAM) will always need to have an offering in areas like Swiss equities. But it won’t be on an acquisition spree or even looking to expand its current range of strategies very much. Illiquid credit looks likely to be on the agenda, while smart beta is up in the air.
In fact, PAM has reduced the number of strategies from 86 to “below 70” over recent years, according to Laurent Ramsey, who took over as CEO at the beginning of this year. He succeeded Renaud de Planta, his long-serving predecessor, who remains a partner of the Pictet group and continues to serve as chairman of the asset management business.
Reducing the number of strategies meant winding down a commodity strategy for instance, cutting bespoke single-client mandates and streamlining the institutional balanced business. The process was completed
last year. Other areas for the chop included certain passive capabilities, risk parity, two long-short strategies, a US equity and a global equity
strategy, along with a convertibles fund that was managed externally. Strategies are constantly under review.
“We can spend a long time without launching anything,” says Ramsey. Sometimes not launching strategies is the best decision; PAM has consciously decided against entering the ETF sector, for example. For Ramsey, discipline around the number of strategies means thinking hard about whether new strategies are aligned with the goals of the business, whether there is a strong investment case and whether they add value to end-investors.
PAM has largely remained on the sidelines as other managers have built up capabilities in areas like illiquid credit. But it is currently looking at distressed debt alongside other areas, including an emerging markets long-short strategy, where it is currently building a team.
Overall, the firm’s long-standing specialist areas – greater Europe, emerging markets and thematic strategies – all remain. Emerging market hard currency and local currency debt strategies are PAM’s largest, with over €11bn in assets each, according to eVestment.
Current challenges include bringing certain strategies to scale. These might include global emerging market equity or Asian local currency debt, both of which currently have less than €1bn in assets. PAM is also integrating ESG into its investment process, a project that will run to the end of 2018, by when every strategy will have incorporated ESG into its investment process over six different dimensions. These include investment processes, proxy voting, exclusion, risk management, reporting, and marketing and communication.
“We actually think that the movement we’re seeing in the market away from looking at output or sustainable products into input-orientated ESG integration within that process is actually very healthy,” says Ramsey.
Next year will mark 50 years of Pictet’s institutional business. How does PAM see its future as a mid-size player in an asset management world in transition as it faces up to the pressures of demanding clients and regulators, increasing transparency, beta commoditisation, data proliferation, lower margins and consolidation?
“We think that active is coming back, and we already see clients going this way”
It does not appear to worry about its position as a largely active house, even if Ramsey does warn against over-concentration of passive assets in the hands of a small number of firms. Overall, he takes a nuanced view: “From the client perspective, both active and passive makes sense. Very often when we talk to clients we recommend them to go passive if they want to play a tactical move.”
Ramsey believes active management will be an obvious place to look for returns, given that bonds returns are unlikely to persist, equity valuations are high and beta is unlikely to contribute as much as it has in the past.
“The marginal contribution of the alpha is going to become substantial in terms of reaching the returns you need to face your liabilities. This is why we think that active is coming back, and we already see clients going this way.”
And is big data a threat or an opportunity? “I think opportunity,” says Ramsey. “Actually we have hired a number of data scientists on certain projects, and we’re trying to see how big data can help us to be better investors, how technology can help us to engage better with clients, to better understand client behaviour.
“So there are a number of areas where we look at the digital revolution, and we try to see how that can make us better as investors and better service our clients. A large number of projects within the groups are focusing on that aspect, and we believe that blending of fundamental with more systematic approaches can be very good.”
Indeed, PAM has developed capabilities such as its sizeable global defensive equity strategy, which currently runs about €2bn, blending quant and fundamental approaches with a strong fundamental element. Factor investing is currently a topic of discussion among the senior leadership. “We’re looking at different things in the area of factor investing, but we haven’t come to a conclusion yet,” says Ramsey.
“In quant and systematic capabilities, a more scientific approach to investing can help,” the CEO continues. “It can help in screening investment opportunities, it can help at being better at managing risk, constructing portfolios, it can help at understanding better the factor exposures you have in a portfolio. And then it can help, through big data, to identify investment opportunities from other sources than the fundamental sources we used to look at. So there are many different things that we are looking at. It is, I think, an opportunity. Whatever can make us better investors is an opportunity.”