Despite operating within one of the largest private banks in the world, Sebastien Gentizon, Pictet Wealth Management’s head of fund and manager research, says his team is encouraged to find new ideas and be early investors in promising fund strategies.
“Pictet is really entrepreneurial; we are part of a partnership and are all aligned, and if you want to be rewarded, you have to take risk,” Gentizon (main picture) told FSA in an interview.
“For example, we knew an Indian equity manager from a previous firm and decided to take the risk of seeding the strategy from day one, which allowed us to negotiate better terms.”
“We have been in a long-term partnership with this manager since then and it has worked really well, performance has been there, they’ve grown their assets, they have expanded the team and the market has supported it.”
But taking risks doesn’t always pan out, which is why liquidity and worst-case scenarios are top of mind for the fund selection team.
A few years ago they had to part ways with an underperforming emerging market small cap strategy that they liked because it became too small after a market downturn and a series of outflows.
“We are paid to take risk,” Gentizon said. “But in a worst-case scenario, we don’t want to be overexposed to a fund that is too small and is not liquid enough.”
“We want to make sure that the manager we select will survive or in the worst-case scenario, if we have to sell our position, we can sell within the time we want without being impacted.”
Taking contrarian views
While it makes sense to take a risk on a fund manager that has outperformed and is starting their own shop, it’s a harder pitch to onboard a new fund manager on a losing streak.
But Gentizon said this is where his manager research team can add a lot of value during the due diligence process.
He said the fund analysts often look for promising entry points into strategies that may have underperformed recently but have a longer track record of outperformance.
In a similar vein, the manager research team has been working on small-cap strategies recently, precisely because the asset class has been underperforming for several years.
“We tend to be contrarian,” Gentizon said. “We always tend to focus on the part of the shelf that isn’t the most looked at. We think that there are a lot of great opportunities within small-cap, because it has been out of favour for quite a while.”
The fund manager research team has been working with a group of European small-cap equity managers who were with a larger investment platform but have since launched their own smaller firm and strategy.
Despite the fact that their distribution might be a bit challenged, Gentizon likes the fact that the managers are truly aligned and that they “they live and die by their performance”.
Since Pictet has some exposure to small caps within the firm’s strategic asset allocation, Gentizon wants to make sure that “if clients want to further increase their allocation to small-cap, we have the right manager there,” he explained.
With roughly 250 actively managed funds and over 500 passive ETFs on Pictet’s product shelf, the manager research team needs to ensure it is fully aligned with the strategic asset allocation and tactical asset allocation of the private bank.
“It means that we have to make sure that we have our highest conviction funds for each bucket that are in the strategic asset allocation and tactical asset allocation,” Gentizon said.
“When our CIO wants to increase exposure to Chinese equities for example, we have the funds and have identified one we have the highest conviction on.”
Attributes Pictet likes in fund managers
As investors are drawn to private equity, private credit and other illiquid alternatives that require a long-term investment horizon, investors in traditional asset classes are becoming more and more short-term and risk averse, according to Gentizon.
He said: “We used to reset performance every month or even every quarter, now we reset performance every day. You’re able to look through all the holdings we have and scrutinise performance.”
In this environment, he says fund managers with a long term approach and with the right structure in the way they reward people will have a key edge over their competitors.
He said: “Despite investor base pressure and market pressure to outperform in the shorter term, if a fund manager can go through those cycles and stick to their process and conviction, fully aligned with the interests of investors, I think that’s where they can be the most successful.”
“Based on Pictet’s approach and values, we tend to like the entrepreneurial spirit, so sometimes we like smaller boutiques where you have a true alignment of interests within the structure with partners that are key shareholders and invested in the strategy, with a longer-term investment horizon. That gives a lot of stability.”
What fund managers shouldn’t do is be afraid of communicating less with their clients, Gentizon said.
“It’s a bit of a paradox because on our side we ask for more information and more transparency, but sometimes we see strategies with lockups where investors cannot sell, they tend to do better.”
