Piguet Galland’s fund selection head raises quality bond fund challenge
Banque Piguet Galland & Cie finds its roots in 1856 in Yverdon, in the canton of Vaud. The Cantonal Bank of Vaud (BCV) acquired the entity in the 1990s but it is only in 2011 that the institution found its current organisation after BCV purchased Banque Franck Galland and merged it with Banque Piguet to form Banque Piguet Galland & Cie.
The company’s scope remains mainly focused on Swiss onshore clients – private clients and a few institutional clients.
On the long-only segment, excluding fund selection, Piguet Galland’s unit tallies four analysts covering all asset classes. Two analysts are operating long-only fund selection, which is used to cover asset classes on which the bank has no resources and on which external managers generate outperformance.
Speaking to InvestmentEurope in Piguet Galland’s Geneva offices, Leonard Dorsaz (pictured), head of External Fund Selection, alternative and long-only funds, explains the company is quite satisfied with its current long-only fund selection, some 80 funds being pinned on its recommended list.
Part of the fund recommendation list serves the management of mandates and gathers themes favoured by the fund selection unit – high-conviction fund bets – while the other is more of a follow-up fund list to eventually fit advisory needs.
An asset class on which fund picking for a long-term perspective remains tough, Dorsaz says, is the US equities market, he pinpoints.
“The US stock market stays extremely efficient. By playing styles, we can find interesting fund picks sometimes but picking the one manager that we would hold on a long-term basis without any issue is hard. We try to reach the right balance between styles to get the best possible returns on the segment. We currently hold a US mid-cap growth fund as well as a deep value US equity fund. Another strategy we recommend seeks to deliver S&P + returns. The alpha it generates is somewhat limited but at least it does not deliver S&P – returns,” argues Banque Piguet Galland’s head of External Fund Selection and vice-president.
The private bank does not seed funds with clients assets and if it does not have fixed criteria regarding track records, it expresses a preference for asset managers that are already established.
“In order to be comfortable with our investments, we usually invest in funds whose size stands above €100m in AUM. We had been invested by the past in a couple of funds whose AUM were below the €100m mark, that has not ended badly but when things started to deteriorate, we have been less patient and we did not let much money in. This situation was not good for any of the parties,” Dorsaz tells InvestmentEurope.
“Some outperforming fund managers have the “bad” idea of gathering too much assets. We would have preferred a soft-closing of the blockbuster funds we have invested after our investments to keep control of their size but it unfortunately seems unrealistic,” he adds.
Pragmatism commands the firm’s investments, Dorsaz underlines. He pinpoints that if it is right to say that clients are attached to certain asset management names in their portfolios, there will be no burden if Piguet Galland decides to trim its positions in these managers.
Quality bond curve concerns
The head of External Fund Selection at Piguet Galland says that the low dispersion in the performance of long-only funds observed over last year has led to a rising issue across private clients, namely their limited tolerance to huge temporary underperformance.
“Though you need to be ready to endure bad times if you seek outperformance in the end. A fund manager outperforming his benchmark over 10 years will have at least three or four years during which he will underperform, research shows.
“But two things have reshaped the investment landscape. First is the emergence of ETFs and secondly, in previous years, the client investment mindset was perhaps a bit longer term than today and we had time to see our fund bets achieving the returns we thought they would achieve. Nowadays clients are monitoring more closely their assets and if funds turn wrong at some point, a faster reaction from our side is required,” Dorsaz explains.
Regarding allocation on the fixed income side, he says the firm has gone down the curve in the quality of credit therefore has tapped more into high yield. Nonetheless since last year, it has upped bond quality. Dorsaz specifies it does not mean Piguet Galland has been buying a huge amount of govies but its has had some and it is slowly reducing high yield investments.
“The big issue we will further meet is that to some extent, we will want to ride up the quality bond curve again and I am concerned that the fund offering may be close to nil. That will be a turning point not to be missed and eventually difficult to handle,” notes Dorsaz.
“We rather focus on certain niches like European subordinated banking debt we are playing through an Axiom Investments fund. The segment carries a limited risk and delivers good returns. We were invested since a few years in the subordinated insurance debt segment which performed well. The subordinated banking debt appeared to be a perfect complement. It may be a little more crowded now than two years ago when it was almost an insult to consider the asset class but I assume positive developments are ongoing there and there are still returns to grab.”
“Since last year, we have also been buying emerging market debt in local currency. In addition, we are invested in Swiss real estate funds which deliver fixed income-like returns,” he adds.
Dorsaz says unconstrained fixed income strategies are not much a play for Piguet Galland as the firm only holds one GAM unconstrained fund in its list.
Equity-wise, the firm pushes emerging and European equity funds, in particular small-mid caps strategies, at the moment. Within the EM bucket, Piguet Galland recommends one global emerging fund, a LatAm equity fund and an internal Asian equity fund.
And Switzerland? “Swiss small cap funds are pretty much all closed. We are invested in BlackRock’s Swiss small cap fund and another from Fidelity. Additionally, our Piguet Galland Swiss equity fund behaves pretty well,” answers Dorsaz.
“The Swiss Market Index is a difficult one. When you acknowledge that three of its stocks form 50% of the index, it is complicated to manage a fund within that universe. This represents a real issue for the Swiss stock market. I believe Finma is more conscious of the matter than the European regulator could be. That said the Swiss stock market has globally outperformed over the last three years,” Piguet Galland’s head of External Fund Selection highlights.
Risk premia avoided
Working for the Swiss bank since 2003, Dorsaz says alternative fund selection at Piguet Galland serves two goals. On the one hand, fund picking for the firm’s internal fund of alternative funds running since 20 years with monthly liquidity and on the other hand, the selection of liquid alt Ucits investment solutions for clients for whom monthly liquidity remains hard to consider.
“Long/short equity and global macro strategies are two of our calls within the hedge fund universe. We have a small CTA bucket which forms a good portfolio diversifier,” Dorsaz sums up.
He has stressed very low dispersion in the performance of alternative funds during the last five years, adding however that since 2017, “we bounced from one extreme to another.”
“We see some normalisation currently as the dispersion is less important than a few months ago. Further flows dynamics between passive and active should be balanced hence enabling this dispersion to linger, helping a continuation of the good performance of alternative funds,” he says.
Dorsaz feels very surprised that not more offshore alternative asset managers are tempted to launch Ucits versions of their strategies with daily liquidity. According to him, it would be rather easy for them to comply to the Ucits V regulation and costs would be lower.
“In the alt Ucits space, there are a number of funds whose inflows do not take off. When clients see long/short equity funds with a long bias and if they keep a positive stance on equities, they rather choose a traditional equity fund. We will perhaps need a bear market setting up a fertile ground for the performance of alternative funds in order to arouse strong interest from investors again. Moreover it shall be underlined a number of elements cannot be integrated in the Ucits version of an offshore alternative fund,” Dorsaz argues.
Piguet Galland’s external fund selection head says all sources of outperformance are welcome in the alternative space when being asked whether he considers steps around big data, artificial intelligence and machine learning in the alternative area. However, there is one asset class the selector avoids: risk premia.
“These funds exploit risk premiums that were performing because they were not exploited. Overexploiting them could lead to a compression of their performance over a short period and In the end, you are left with no juice to extract. In addition, buying a factor is less comprehensible for the client than buying a stock or a bond,” Dorsaz concludes.