UBP CIO tips pivot away from yield hunt

Norman Villamin joined Union Bancaire Privee in November 2015 as head of investment services and treasury and trading in Zurich and was appointed global chief investment officer for the private banking business in May 2016. 

With 20 years experience of managing wealth, Zurich-based Villamin frequently travels to speak to the bank’s investment teams and high-net-worth clients.

Prior to joining UBP, he was CIO at Coutts International, the international wealth management business of Royal Bank of Scotland that the Swiss firm acquired in October 2015. The integration of Coutts was completed in April.

Villamin previously worked in Hong Kong and Singapore as head of investment analysis and advice at Citi Private Bank, head of Asia-Pacific research at HSBC and head of Asia-Pacific strategy at Morgan Stanley.

Q What key trends are you seeing in your industry?

A  A couple of trends are capturing the minds and attention of investors. Unsurprisingly, one is politics. Everywhere in the world there are political developments, whether it is here in Hong Kong, with what is happening with the Legislative Council, or in Europe, where we had the Brexit referendum, or the presidential election in the US.

The other area that is a primary focus of many investors is the search for yield, which I feel should really be more about focusing on opportunities. Things like politics, while important and having the ability to cause near-term dislocation, are themes that tend to distract investors from what is important, which is focusing on the underlying trends in the global economy, the underlying trends in industries and sectors, or even individual company developments.

Those are really more important to identifying opportunities and, for many clients, managing risk.

Q  What are the key economic trends?

A  For the first time in a number of years we’re seeing constructive data from the three largest economic blocs around the world, which, while not tremendously strong, indicates the first time that Europe, the US and China are synchronised in a modest recovery phase as we move into 2017.

It is an underlying trend that we want to be focused on, and this has very important implications for investors, especially vis à vis the search for yield. While the search for yield has been a successful strategy in 2016, we think it is time to be pivoting away from that and instead preparing for recovery, in particular in inflation as we enter 2017.

Q  Where and how do you recommend clients begin to invest?

A  We begin all our investment strategies with managing risk, and the first is how to manage the risk that inflation is starting to rise. It’s time to manage risk in bond portfolios instead of reaching further for ever-higher yield. Investors should start looking more towards inflation-linked bonds and floating-rate strategies and being very selective in traditional bonds to make sure they can adequately manage interest rate risk going forward.

In the equity market, over the last year we spent a lot of time managing risk exposure because of volatility. However, we are increasingly seeing a lot of opportunity here, which we would characterise as a pivot to the east, towards Asia. 

In terms of asset class opportunities, the valuations in equity and bonds are relatively elevated. It is an important strategy for client portfolio to look at alternatives, coming back to look at hedge funds strategy, looking at risk premia strategies – essentially strategies that help dampen risk in portfolios overall.

Q  How much would you recommend to allocate to alternatives?

A  It really depends on the risk profile of a client, but for the traditional balanced client, the alternative investment allocation has been increasing, and they sit at 9% to 10% now. It might increase further over the next few months as we find opportunities and try to balance off the risk we see in more traditional asset classes.

Q  More investors are investing into private equity and real estate too.

A  Real estate, as an asset class, has done very well globally in the past few years and it has been an attractive, what I would call “carry” strategy for a lot of clients. One driver of [property demand] has been ever falling bond yields and interest rates. As that starts bottoming out, that will likely have implications for the types of return generated in real estate. Investors should be proactive in managing risk there and be more selective in the types of exposure they are taking.

Q  What changes are you seeing in the advisory versus discretionary management space?

A  Europe has historically been more of a discretionary market, whereas Asia has been a very big advisory market. But a trend we have been seeing is a greater convergence between the two.

There are a couple of factors driving this. One of the attractions of discretionary is the idea that others are investing on your behalf; and this resonates with investors now, as the strong home bias in investment is starting to change. Because of the search for yield, investors started moving out of their home markets and looking at emerging markets, and they sought expertise from banks.

On the flip side, from the advisory perspective we see clients themselves, as they move to new areas, wanting to be involved. So we’re seeing convergence of advisory and discretionary, as clients have to exploit a much larger opportunity set in terms of asset classes around the world.

Q  What’s your view on the growing popularity of passive investment strategies?

A  Sometimes the best way to execute an identified opportunity is via passive vehicles. In the last two years the volatility dispersion has been quite low, so a lot [of assets] changed to passive solutions.

[However,] at the end of quantitative easing, volatility will start to pick up and dispersion will be pronounced, whether at sector or stock level, which will allow active managers to add value. The end of quantitative easing should allow some trends towards passive to shift and reverse. Active managers will have the upper hand.