Disappointing active management

Pictet’s head of Fund Selection Mussie Kidane suggests active fund management is at a crossroads and has to prove its relevance to investors.

In the aftermath of the financial crisis, passive investment strategies have been popular with investors.

Describing the global economic landscape that financial markets currently face, Mussie Kidane (pictured), head of Fund Selection at Banque Pictet & Cie, observes that active managers are right to consider passive strategies as a serious challenge.

“Active fund management results have been disappointing in recent years. This global lack of performance reshuffles the deck as the performance of active managers does not reflect the associated costs and temptation remains high for end investors to move their assets from active to passive strategies,” Kidane underlines.

“At Pictet, we believe that active and passive strategies can co-exist within a client portfolio. The structure of asset classes seen, the type of decisions – strategic/tactical – and the investment horizon usually determine whether an active or a passive strategy would be more suitable.

“Generally speaking, investing in a passive US equity strategy has proved a safe option over the last few years whereas investing into active strategies in emerging markets formed a better deal,” he explains.

UNDER CONSTRAINTS

According to Pictet’s head of Fund Selection, who runs a list of around 80 funds at Pictet & Cie, the work of fund selectors has shifted since the 2008 financial crisis.

“Until the crisis, selectors were primarily focused on the intrinsic value of a fund and how it was suitable for their clients. Nowadays a number of regulations have constrained the search for funds. To be selected, a fund has to not only provide outperformance, but it has also to conform to the regulatory requirements in different jurisdictions.”

Kidane says Pictet Wealth Management’s investment committee currently favours riskier assets, with a focus on equities.

Fewer assets are allocated to the fixed income and cash segments. But he says the latter asset classes act as portfolio “stabilisers”.

“For instance, we keep an important position in long dated US Treasury bonds because when risk off periods happen, a flight to quality occurs in financial markets and, in such situations, long dated US Treasury bonds tend to perform well,” Kidane says.

Pictet’s head of Fund Selection favours high conviction managers who take measured risk and anticipate strategies for different scenarios.

“At some point, the managers that we select have to do something different in order to stand out from their competitors. Consequently, we should accept their results will be different as well,” he points out.

SNB’S CORRECT MOVE

Since the Swiss National Bank unexpectedly discontinued the minimum exchange rate of CHF1.20 per euro last January, Switzerland has faced tough times.

The cost of imported goods has fallen and the franc’s soaring value has impacted Swiss exporters, forcing them to trim prices. But the country avoided recession, recording 0.2% GDP growth in Q2 2015.

But if Swiss industries have yet to fully recover from the removal of the peg, Kidane suggests that the SNB’s move was “inevitable”.

“Even though the decision of the SNB was somehow abrupt, it was clear that the cap of CHF1.20 per euro was unsustainable for the country in the long term. The SNB did what it had to do,” he says.

Kidane reckons that the franc’s strength remains a burden for some sectors, but he also highlights the positive aspect of the peg removal: “Industries have no other choice but to be efficient and innovative. They
will have to make substantial productivity gains. In a way, the SNB’s move will have pushed the country into excellence to strive,” he stresses.

“Switzerland is a pragmatic country and that is why it will adapt itself to the current context,” Kidane adds.

Regarding the financial sector in Switzerland, Kidane confides times are hard for the Swiss wealth management industry due to “inflation in regulation”.

However, he says the abolition of banking secrecy will not signal the end of the Swiss private banking industry. The opposite is likely to happen, he adds.

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