Spectacular stock bets may set pulses racing, but slow and steady wins the race for Alexei Jourovski.
The Citywire A-rated manager, who picked up Citywire’s Swiss award for Swiss equities, says diversification of holdings has been a winning strategy for his Unigestion Swiss Equities fund.
Working at the Geneva boutique since 2001, Jourovski manages his CHF118.9 million fund with a firmly defensive stance and a double dose of risk management.
Over the three years to the end of September, the Unigestion Swiss equities fund has returned 30.44%, compared with the Swiss Market Index TR benchmark’s 11.77% over the same period.
There are two paths to outperforming the benchmark, Jourovski says. One is spotting the rising stars, and the other is a smart approach to diversification. Jourovski clearly subscribes to the latter option, with his fund comprising 51 holdings at present.
Having a widely diversified portfolio is not the same as tracking a benchmark, he emphasises. ‘When the benchmark has a big concentration on one sector, chances are we’ll be underweight.’
The secret formula
He likens the two approaches to the tortoise and the hare: while some managers look for a speedy shortcut, risk avoidance can be the secret formula to being the first to the finish line.
‘The second path is to avoid the worst surprises and worst performers of the index, which is much less glamorous, because you are not trying to pick the future winners, but you are trying to think about the torpedoes that would hurt your portfolio.’
The downside of this approach is that potentially high-flying stocks are often excluded from investment as they present a higher risk profile.
‘Sometimes we are a bit provocative with investors, saying that if we outperform in a year when the market is very euphoric and the riskiest stocks are outperforming, we didn’t do our job correctly in terms of risk analysis.’
The geographical exposure of a stock can have a huge impact on performance, something Jourovski always keeps in mind when investing.
For many equity investors China presents an uncontrollable risk, with any downturn having a massive knock-on effect on developed markets throughout the world.
In fact, the risks associated with China potentially threaten the performance of many Swiss equities, including family-owned elevator company Schindler. Representing 1.40% of the portfolio’s total allocation, Schindler is particularly exposed to construction activity in China.
Even so, Jourovski sees an opportunity in the company, with many investors put off by its communication failings. ‘Quite a few investors don’t like Schindler because the investor communication is pretty bad and the company is not very vocal with investors about forward-looking guidelines.
‘An opportunity for us as a smaller boutique manager is we can dive down into the data.’
Banking on financials
In terms of exposure to international risk, the financials sector as a whole is particularly sensitive to currency and systemic risk.
Nonetheless, financials is the largest weighting within the portfolio at 23.4%. However, because of external concerns, Jourovski’s allocation to the sector mostly goes to small banks and insurances.
‘Big banks suffer because they have exposure to every bit of bad news out there, which is quite problematic when you want to invest in a robust business model.
‘Having a local presence with small banks, they are much less affected by a slowdown in China, a problem linked with Brexit or any other external risks.’
In diversifying his exposure to financials, cantonal banks have been a top bet for the Citywire A-rated manager.
Cantonal banks suffer less from geographical and trans-border risk created by macroeconomic events, such as the presidential elections in the US, which threatened additional negative risk for the big banks, Jourovski says.
Evidence of this can be seen in how cantonal banks withstood the uncertainty caused by Brexit, while big banks faced additional levels of turbulence.
The cantonal banks also serve another useful defensive function, Jourovski says. ‘The cantonal banks are hurt by the low yield environment, but this is acting as a sort of natural hedge which would protect the portfolio if the yields start to progressively creep up.’
This is also the case for insurance companies, he explains, as they function as a hedge in case of an interest rate increase.
The fund has a total exposure of 4% to cantonal banks, as liquidity risks associated with them place a limit on the scope of investment. It holds Berner Kantonalbank, Luzerner Kantonalbank, St Galler Kantonalbank and Banque Cantonale Vaudoise.
Switzerland’s reputation as a stable country helps these banks compete internationally, attracting additional money flows.
Cantonal banks offer attractive levels of transparency and stability, Jourovski says, as they do not run investment banking activities.
Another draw is that they pose less legal risk and boast better governance than their bigger peers.
‘We believe that overall these are much more stable risk profiles, more transparent for us to analyse and the valuation in the current environment seems acceptable to us.’
When it comes to big banks, the fund is heavily underweight, including in its exposure to UBS, which it holds at 2.5%.
‘If you look at the index, the SMI is concentrated with big banks, representing a bulk of exposure, and we avoid the big stocks.’
In terms of capitalisation, the overall breakdown for the fund shows a concentration of 52.9% of allocation in mega caps, defined as companies with a capitalisation above CHF15 billion, 25.5% in large caps and 20.7% in small and mid caps.
Many of Switzerland’s largest players are highly specialised and demonstrate expertise in a particular field, which makes them very attractive investment cases, Jourovski says.
‘When investing in the Swiss market, you have to invest in areas with a very niche expertise because the cost of production is very high.’
The technology sector in particular is home to many niche companies and industry leaders, and it represents 1.77% of the portfolio.
Comet holdings is an example. It produces X-ray systems used to detect cracks in aircraft parts.
Another niche technology stock in the portfolio is Kudelski, a producer of encrypted systems for online content and television.
Although Jourovski sees opportunity in these small, specialist stocks, there are significant liquidity concerns to consider. Even so, the capital goods sector is one of the largest in the portfolio at 15.81% of the total allocation, most of which goes to niche players.
Two main risks emerge from the pharmaceutical sector, according to Jourovski, the first of which is valuation.
As one of the best-performing sectors, many well-established pharma stocks are now expensive. Novartis, for instance, currently trades at around 28 times earnings.
The second risk stems from the US election result, which could still spell trouble for healthcare companies, creating significant volatility.
It’s with this in mind that Jourovski is underweight the benchmark for both Novartis and Roche. ‘It’s about the lack of visibility, we prefer to invest in a company that doesn’t have too much external interference.’
Even so, the pharma titans remain a must-have in Swiss equity portfolios for liquidity reasons, he says. ‘We would feel just as uncomfortable not holding pharma at all as we would holding 40%, like the index.’
Overall, the healthcare sector represents 21.4% of his portfolio. While still underweight the benchmark, Roche and Novartis together account for a hefty 17% of the fund.
Prove your worth
Overvaluation is not only an issue in the pharma sector, but is an equity-wide phenomenon at the moment, Jourovski says, and it is a driving force for many of his recent portfolio changes.
‘We brought down exposure progressively on some stocks we like because they got more expensive, and ultimately we believe that when a stock is more expensive, you are getting more risk.’
This issue of increasingly stretched valuations is a key global risk to avoid, he says, and arose following several consecutive years of strong performance since 2009. As it stands, an investor will generally have to pay a lot more today for an average non-cyclical company.
‘People are looking for stable companies more than before due to macroeconomic factors, as people are hunting for fixed income substitutes that pay a dividend but are also very stable businesses.’
Despite its high valuation, food company Emmi is still a holding within the portfolio as it has a strong business model and provides good visibility, Jourovski says.
He views the dairy company as essentially non-cyclical, reasoning that if you produce yoghurt, there is only so much that can go wrong.
Even so, the position has been scaled down for valuation reasons since the beginning of the year, when it stood at 1% of exposure, to 0.14% as of the end of September.
Across the finish line
With a keen eye for risk management and a contrarian approach to diversification, Jourovski has built a wall of insulation around his portfolio that allows it to hold firm in times of volatility.
‘We do not put all our eggs in one basket in order to keep our portfolio resistant in turbulent times, to capitalise on market volatility and to have a more robust behaviour on the downside.’
This article originally appeared in the November 2016 edition of Citywire Switzerland magazine.