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Building on trust: Lombard Odier's Auchlin reveals his blueprint

Building on trust: Lombard Odier's Auchlin reveals his blueprint

Since Laurent Auchlin took sole responsibility for Lombard Odier’s fund selection team in 2008, the assets under his control have increased from €1.83 billion to €7 billion.

Much of this growth, the group’s head of open architecture says, rests on a single word: trust.

‘Private clients have faith in us because we are proactive and we tend to question everything. We never push products but provide information. We have no sales people in our team – the €7 billion is a result of pure trust.’

Born and now working in Geneva, Auchlin is one of the pioneers of the open architecture model in Europe, a move that he says was something of a political challenge.

‘It wasn’t easy to embrace this new style at the beginning. I’ve always tried to explain that open architecture means abandoning a narrow investment universe. Our job is to think broadly and find the best products in the market.’

His main clients are high-net-worth individuals who can benefit from both Lombard Odier’s internal fund managers as well as its external selection team.

‘There’s no link or hierarchy between what we do and the asset management branch of the company. Clients talk to both of us, getting the best that each side has to offer,’ he says.

The independence advocated by Auchlin becomes clear when he talks about prospective fund choices.

‘We’d have a Russian fund on the list if some of our clients wanted some exposure there. This would be an option even if Lombard Odier strategists for private banking might recommend steering clear of the country.’

An inquisitive team

Auchlin believes much of his success stems from the diversity of his 15-strong team, which combines 10 investment analysts, a legal specialist, and an operational expert with two in support. ‘They are not a copy-paste of the boss. Living and working in this environment is enriching,’ he says.

The investment analysts are responsible for long-only selection, funds of hedge funds and real estate strategies, while the legal expert looks at which asset class is the most appropriate for the team’s clients.

She was hired last year as legal issues have become increasingly important in Europe under the new regulatory framework.

‘My team is a blend of specialists. I tend to hire curious people who have a close link with the country and the asset class they are working on.

‘My US equity specialist is a good example: he is a US citizen who grew up in Hong Kong and started his career in Jakarta. Not exactly the traditional red-neck type.’

The fund radar

After studying economics at the University of Geneva, Auchlin began his career as a graduate trainee at Credit Suisse. Between 1996 and 1998, he became responsible for the company’s European equity portfolio management.

He then joined Geneva-based boutique Ferrier Lullin as a portfolio manager in charge of third-party fund research and selection, and developed a tool he uses to this day.

‘At that time, we built a fund selector mechanism called Fund Radar. It was our trademark, and one of the first fund selection tools based on a quantitative and qualitative approach.’

His move to Lombard Odier came in 2000, where he initially worked as a co-manager on its Global Dynamic and Global Conservative funds. ‘My speciality is European equity and I’m still a European equity analyst. I keep my hands dirty.’

With this in mind Auchlin keeps his analysts on their toes. ‘I ask them the classic questions: Would you invest your money in this fund? Would you invest your grandparents’ money? At this point their attitude may change significantly.’

He believes being a fund selector is not that dissimilar from working as a portfolio manager, although he prefers his current role to his previous one. ‘I have the opportunity to meet the good people, while as a portfolio manager you need to convince the others you’re the smart one.’

Following the manager

Auchlin’s quantitative and qualitative selection process scrutinizes a manager’s style and scores each fund on six metrics: two on performance, two on risk and two on risk-adjusted performance. ‘We rate funds on a five to six-year timeframe and follow calendar periods. We tend to stick to our guns.’

On the qualitative side, the team starts with an internal study followed by a meeting with the fund manager. It conducts about 1,000 meetings a year, half of which are with its current managers, while the other half are dedicated to newcomers. ‘We travel in pairs and we alternate so that nobody falls in love with a manager,’ he says.

Auchlin has a 5% to 10% annual turnover of funds in his list. Currently, he has 88 funds from more than 65 investment houses. ‘We focus on managers and less on funds: if a manager moves, we tend to follow him.’

A good example of this trend is Citywire + rated manager Richard Pease, who will be leaving Henderson soon to start his own firm, Crux Asset Management. Auchlin followed Pease when he moved from New Star to Henderson, and he will invest in him again at his new venture.

‘I’ve been invested in Richard’s funds for a long time, not when he was at Jupiter though. I like his consistency, style and the fact that he thinks out of the box.’

Auchlin selected the Henderson European Special Situations fund, where Pease invested his own money. ‘It’s an opportunistic product, not benchmark-driven. Liquidity could be an issue, Richard was hammered by this when he was at New Star. He suffered severe outflows when the crisis came, which destroyed the fund’s performance.’

According to Auchlin, Pease is now more cautious, especially with his own money. ‘I still like the fund because it’s concentrated, not too diversified and has a lot of industries as well as local names.’

Auchlin is strong believer in alignment of interests and isn’t afraid to put his money where his mouth is. ‘I have personally been invested in Richard’s fund, and my analysts have put their money in some of the funds they select.’

Long-term picks

Auchlin says he doesn’t like big surprises when he’s monitoring his funds but he never fires a manager simply because he underperforms. Rob Burnett, manager of the Neptune European Opportunity fund, is a case in point. ‘He hasn’t been an extraordinary performer so far, but we remain confident as we think he has a skill.’

Another manager he favours is Citywire AA-rated Paul Wild, who runs the JO Hambro Continental European fund. Auchlin applauds Wild’s strong conviction for returning to banks last year and believes the manager has a common-sense approach that combines top-down and bottom-up views.

‘Several managers say: We are purely bottom-up pickers. This is not true. Everyone has an opinion on what’s going on in the market, which influences the way they invest. Ultimately, the macro situation affects the portfolio construction,’ Auchlin says.

An advocate of the European recovery, Auchlin believes both the eurozone and the UK are strong investment themes. In this vein he selected the AXA Framlington UK Select Opportunity fund, run by the Citywire + rated manager Nigel Thomas, as he says it has the freedom to play the whole spectrum of the market, from the big multinationals to SMEs.

His main concerns around the eurozone are related to the situation in Russia and the impact of the oil price fall in the country. Apart from this, he thinks the ECB will do everything to keep the region’s economy afloat, a view endorsed recently by Mario Draghi’s €1 trillion QE pledge.

He also believes the Continent’s businesses are more optimistic than the market suspects. ‘European CIOs are more positive than investors think, as they were able to reduce costs and make their business more profitable.’

But where does he stand on that other big investment call, emerging markets? Auchlin says he has become more selective on the area. ‘We want to have more exposure to China and North Asia because of the consumption trends. We are less invested in Eastern Europe due to the situation in Russia, and have a low exposure to Latin America. Our goal is to find more regional products.’

Alternatives: expectations too high

When it comes to general asset class positioning for private clients, Lombard Odier is overweight equities, neutral on bonds (less sovereigns and more corporates), slightly underweight cash and heavily underweight commodities.

The bank has an exposure to alternative investments and is trying to have more pure plays, such as global macro and absolute return, although Auchlin thinks often hopes are too high.

‘Hedge fund investors expect the same type of returns they were having 10 years ago, when these products were non Ucits-complaint. Now returns are lower and can’t be compared with past performances.’

He thinks these strategies pay a cost for their illiquidity and non-transparency. ‘You can’t be transparent if you’re playing an arbitrage. People’s expectations may be too high. The latest returns from hedge fund-like strategies cannot be considered anything more than decent.’

But Auchlin’s all-important curiosity is still active on this point and his team holds a couple of these strategies via Permal, a global investment management firm focused on funds of hedge funds and private equity funds of funds.

HITTING THE RIGHT NOTES

Auchlin’s biggest passion outside of work is music. ‘I play the euphonium in a brass band. We rehearse once a week and we play live from time to time. I started 30 years ago. ‘I like this music as my family used to play in this type of band. It’s very good for my life balance, when you practice an instrument, you cannot think about anything else.’ Away from the band, Auchlin spends time with his family and enjoys several winter activities. ‘I have a place on the Swiss Alps where we go every weekend over winter to ski and walk.’ He also likes rugby, which he describes as part of his French heritage. ‘I used to play it. Now I tend to watch it live or on TV.’

TAPPING INTO CHINA

In June, Lombard Odier launched a renminbi debt Sicav fund in collaboration with the Hong Kong-based asset manager Income Partners. The PrivilEdge - Income Partners RMB Debt fund is a single long-only product investing in credit and high yield bonds denominated in renminbi and was launched mainly for Lombard Odier’s private clients. ‘It was the first step for our clientele into a renminbi-denominated product. It is a deeply Chinese story of companies issuing in the local currency. We have already attracted €116 million in the fund,’ Auchlin says. He adds they struck up with Income Partners because of the group’s expertise in the sector, supported by 18 credit analysts based in Hong Kong.

This article originally appeared in the February issue of Citywire Global magazine.

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