Checks and balances required
Eric Verleyen, Group CIO at SG Hambros Bank is looking more broadly for
ideas, but says the process he relies on provides some good checks and balances.
Eric Verleyen is involved in making selection decisions on behalf of clients of SG Hambros, the London based business that originated in the 19th Century as Hambros Bank, and which following acquisition in 1998 became
Societe General Private Banking Hambros.
Verleyen relies on a team of analysts and a process structure that, while allowing himself flexibility to consider a wider range of investment options, also gives him the guidance to ensure proper decisions are made.
Currently there is plenty to consider, given challenges such as low yields and the broader macroeconomic factors such as governments of developed markets continuing to deleverage – with all the effects that may have on markets.
Earlier in 2013 there was much talk of a ‘great rotation’ out of fixed income into equities. That has happened somewhat, Verleyen agrees, but adds that investors need to ensure they do not put all their fixed income into equities.
His view is that the rotation as far as fixed income is concerned has been more about shifting to higher yielding products, with investors selling government bonds to buy lower grade instruments.
Then there has been the question of how to find yield without taking on too much duration risk. Yield can be obtained by buying longer dated
bonds, but then there is a risk of interest rates rising faster in future.
Getting round such challenges requires having an open mind and
looking for new solutions, Verleyen says. “At SG Hambros we have invested in loan products.”
“Banks in Europe especially have deleveraged. And compared to the US, where companies borrow directly more from the market, in Europe companies borrow from banks, and banks’ balance sheets have grown a lot. Now they have to reduce it and they are looking to sell some of this off their balance sheets.”
The advantage of investing in this type of asset is the loans are usually offered on a floating basis, so duration risk is avoided.
“We also see some sector bonds that are interesting, for example, banking bonds, and hybrid bonds, including CoCo bonds.”
“If you have a diversified portfolio of CoCo bonds and Hybrids you can have 6-7% yield. There is some risk, because it involves the banking sector, but in mind of the regulation implemented in the past few years, banks have
never been as safe. There is so much emphasis on risk, it can be seen as a lower risk investment.”
However, looking to spread investments across different areas of fixed income means relying on active fund managers who can keep on top of the respective markets. For example, Verleyen looks to closed ended funds –
‘investment trusts’ – as an additional way to manage exposure to loans.
While Verleyen has his views on asset classes, which may steer him towards certain selections, he is reliant on a 10-strong team of analysts, to support both the quantitative and qualitative work.
Understanding people is key, he says. “It is good to look at performance, volatility and other factors. But you need to look at people; there’s a lot of movement in the industry currently.”
The way SG Hambros approaches selection and the question of open
versus guided architecture is to an extent defined by the way it is regulated according to the FCA, the UK regulator. What is important ultimately is that they find names they feel they can trust.
There also has to be a minimum size. “We don’t want to be the only investor in a fund,” Verleyen says. Track record is important, but if teams move, they will often follow the teams – as long as the firm they are moving to is solid enough in terms of custody setup, support and other factors.
“As CIO will have a view, but this is where a process is important, because it helps, for example, with the quants. You need dedicated resources on this, and specialists on this to help. There may be names you want to trust, the
charisma of the manager, but that should not be what you based your decision on.”