Lombard Odier backs active strategies

Many market watchers believe Asian stock markets are set for a fourth-quarter consolidation, with a certain amount of foreign money withdrawing. One of them is Lombard Odier, which is avoiding equities it feels are likely to suffer from redemptions from exchange-traded funds (ETFs).

The Swiss private bank takes the view that from now to the end of the year, money will be pulled out of Asian ETFs by foreign investors, so it took a more cautious investment stance in August.

 "We changed our [Asia] model portfolio in early August last year -- we made it more aggressively driven," says Sandro Antonucci, Geneva-based vice- president of open architecture at the Swiss private bank, on a trip to Hong Kong last week. "The idea was that China would drive the market, and we needed to be overweight that market. Then in August [this year], we decided it was time to pull back a little bit to allow the market to digest initial efforts and weed out some excesses."

Stock-picking is key to exploiting the current market conditions, adds Antonucci. "We clearly want to work with stock-picking funds now [rather than top-down type fund managers]," he says. "We think it will be much harder to make money than it was in March -- but you have to really understand the market, the stocks you are investing in."

In terms of types of company, Lombard Odier is buying more mid- and large-caps (they represent 22.85% and 41.44% of its Asia model portfolio, respectively, as of August 31) than small and mega-caps (11.32% and 19.15%, respectively). This is because the mega-caps are largely the financials and cyclical, economically sensitive stocks, and they are more likely to be included in ETFs. "We are comfortable with our picks, because they are less likely to be affected by ETF flows," says Antonucci.

"We have a lot of stocks that nobody wants to have because they're outside the benchmark," he adds. About 40% of the model portfolio picks are outside the benchmark. 

This conviction also comes down to the question of ETFs versus active management in general, says Laurent Auchlin, Geneva-based head of open architecture at Lombard Odier. "We strongly believe that active managers are far better positioned to beat the index than passive investments such as ETFs," he adds. "A lot of people are investing in ETFs, and they appear cheap, but you need to look at the real cost."

A typical total expense ratio for an Asia Pacific ETF might be around 0.75%, says Auchlin. "If you double that cost, you can have an active manager," he says. "And an active manager will be able to avoid the big drops and still participate in the best stocks."

As for how a fund performs against a benchmark, adds Auchlin, it is not whether it under- or outperforms, but why it does so. Of course, over a long period of time -- say, three to five years -- they should not underperform. But over shorter periods, certain funds -- such as the relatively cautious Manulife China Value Fund, currently in Lombard Odier's Asia model portfolio -- are not designed to outperform, he says. For example, the Manulife China Value Fund is up just 36.76% year to date to August 31, compared to the Shanghai Composite Index, up 42% over the same period.  

"We have no problem in saying to our clients: We missed part of a rally, for certain reasons, but you will get an advantage from missing this part of the rally in 12 months' time," says Auchlin.