In a remote corner of Scotland there’s a fishing village with an age-old saying: ‘In order to fly you have to let go of the world you are hanging on to.’
As an experienced fly fisherman, Swisspartners CIO Peter Ahluwalia is very familiar with this saying and it offers an apt description of the approach needed to cope with the new regulations that are bombarding the Swiss independent asset management world.
Sitting in a bright meeting room in the firm’s Zurich headquarters on an unusually scorching summer’s day, Ahluwalia and the company’s head of fund selection, Hakan Semiz, are clearly excited to be talking about what they do and how they are embracing change.
‘We love what we do. I couldn’t think of anything else in the world I would rather do,’ Ahluwalia says.
Having already done plenty of homework ahead of the changes in the sector, Ahluwalia and Semiz, who run a team of six managing a portfolio of CHF5 billion, feel relaxed.
Ahead of the pack on Mifid II
‘We have already started our preparations for Mifid II while other people haven’t even begun to think about it. If anything, we can afford to slow down. As a company we’ve been rather visionary and we are far ahead of the curve.’
Ahluwalia and Semiz accept that the new set of rules are onerous to implement and they believe the increased paperwork will be hard for smaller firms to adapt to.
Comparing the new compliance regulations to a pendulum, where the far left side represents ‘light regulation’ and the far right represents ‘very heavy regulation’, Ahluwalia says they are currently past the middle and headed towards the right. ‘When the momentum passes, we will swing back to the middle, and then maybe left again.’
Switzerland might be experiencing a period of ‘overzealousness,’ as Ahluwalia describes it, but he also believes that some independent asset managers burying their heads in the sand, ‘like ostriches.’
‘Many people aged around 60 who own small firms are ignoring the legislation, hoping that in a couple of years somebody will buy them out and they can close shop.’
The CIO, who relocated to Switzerland in 2008 from the UK, remembers that back then the country lagged heavily behind other jurisdictions. ‘I think there has been a huge catch-up very recently and it’s been rather painful.’
But having had forward vision, and already faced down some big challenges, the company can take in the new legislation at its leisure.
The signing marathon
Being a forerunner, however, can have some drawbacks, especially if the documents you are presenting to clients have suddenly increased and the whole process becomes much more time consuming.
‘The amount of paperwork has grown tremendously. Nowadays it’s wise to sign all the documents from the start, to avoid running behind the client,’ Semiz says.
‘With the new rules, if they don’t sign, you can’t implement the model portfolio including the currency hedging, so I always check that all the necessary documents (internal and the custody) are signed.
Sometimes the clients complain we are the only company asking them to sign all those documents, but that’s the penalty for being ahead of the curve and all other asset managers will have to deal with the same documents sooner or later.’
Semiz, a Swiss native, is currently based at the company’s Liechtenstein headquarters. He worked for a big investment bank, where everything was pre-packaged, before joining Swisspartners in 2011. ‘Now I look after everything myself. It’s like managing your own money – you are responsible for it and you become accountable.’
Tailor made offering
That’s why risk management for independent asset managers has come increasingly to the foreground.
‘I think it’s a validation. Risk management has always been important, but we don’t have enough educated people in this business. It’s not a closed profession: anyone can do it overnight and that’s the problem.
‘Firms are under cost pressure, more and more people are hired because they are cheaper than other candidates with proof of added value, so I’m not sure the overall quality of services will improve.’
Serving clients’ best interests is what the team has at heart and it is key to understanding Swisspartners’ asset management and fund selection style.
That’s why Ahluwalia avoids small talk when meeting new clients and gets straight to the point.
‘In our first conversation, I ask them how much money they would like to make. They usually say 10% per annum and when you dig further, you realise they want to make that money net of fees, volatility and risk.
‘When I explain what the portfolio would look like to generate that kind of return and show them what the volatility would be in the short term, 99% of clients say “I want to make 7%”.’
It’s like a negotiation between business partners, according to Ahluwalia, and it doesn’t necessarily have to be a complex task.
‘It doesn’t have to be complex, it has to be knowing what the pain threshold is, and if you know it for each client you are off to a very good starting point.’
The firm’s clients are mainly wealthy individuals with entrepreneurial backgrounds seeking to diversify risks and investments.
‘Perhaps they want to diversify away from the company, put CHF10 million into a trust for the family. Or maybe they come from a geographical region that is not very stable politically and economically. They know Switzerland is and there is also a lot of financial expertise here.’
‘A balanced portfolio is one of the most popular strategies chosen by clients, but 'balanced' does not mean that risks among asset classes are balanced, obviously the risks don’t come from every asset class in the same way.’
‘The asset allocation varies very much on a geographical and nationality basis, a typical Swiss portfolio would likely be ranged between 40-60% equities, 30-50% bonds and 0-20% alternatives. This makes a comparison with competitors extremely difficult.'
Semiz, who studies balanced nutrition principles as a hobby, has made harmony a mantra, and in fund selection this means knowing how to mix and complement investments.
‘It’s like a football team: if you have 11 strikers, it’s very difficult to win, just as it is with 11 defenders. The key is balance.
‘I am not stressed because I am confident about my selection process. For every region the ETF is our anchor, and for government bonds we only have ETFs plus we have active managers we stick with.’
Sticking to the outperformers
Semiz isn’t exaggerating: though some clients find it hard to believe, he has been holding a few of the same funds in his portfolios for a decade.
‘There are too many events we can’t control and we can’t just take guesses, or it would be like going to Monaco and playing at the casino and we are not into gambling,’ Ahluwalia adds.
The team remained confident about its fund selection process even during the most recent Greek debt crisis.
Greek crisis: 'the slowest car crash in history'
‘We were prepared. It was the slowest-moving car crash in history, two cars, 100 miles apart, telling the other to turn or slow down, warning they would have an accident,’ Ahluwalia says.
‘And then after the accident one has the fire extinguisher, the other car is on fire and they are negotiating the price to borrow the fire extinguisher, crazy in some regards.
‘However, we didn’t change our asset allocation strategy even though we could foresee this was coming, it involves an element of market timing, it means you have to get out before it happens but you also have to get back in at the very bottom. Normally you are lucky if you get one of those decisions right,’ Semiz explains.
‘In the medium term, if it’s going to turn out okay, like we believe, then it’s better to hang on. We also pick individual stocks ourselves. We spread the risk because it’s part of the art of managing money, which is still very much an art than a science.’
Swisspartners was also one of the first Switzerland-based asset managers to obtain an SEC accreditation, as early as 2008, when Swisspartners Investment Network created a registered investment adviser called Swisspartners Advisors, with the sole purpose of servicing US clients. The firm then undertook a voluntary disclosure procedure with the US Department of Justice (DoJ) in 2014.
This came after the US tax evasion probe that many Swiss wealth managers found so problematic. The Swisspartners group faced challenges too, but Ahluwalia believes the outcome has also brought positives.
‘I think the agreement with the US DoJ has come out very positively for us as a company, it means that we can say that we have no legacy issues, we have a clean bill of health from all the relevant authorities.'
In fact Swisspartners was the first among financial institutions in Switzerland to achieve a non-prosecution agreement with the US Department of Justice.’
According to the CIO, aside from having cleared the position with relevant authorities and even without the rather stigmatised banking secrecy, Swisspartners Advisors is attractive to US clients for many reasons.
‘Besides the geographical and currency diversification, as well as the litigious environment in the US, demanding Americans appreciate the high quality and reliable services it offers. They also like to rely on the Swiss’s long tradition and sound understanding of private wealth matters.’
‘And Swiss firms tend to be more conservative in the way they look after their clients’ capital preservation than the average US asset manager,’ Semiz adds.
Clients' interests first
Preserving clients’ wealth can also mean sacrificing the firm’s economic interests. For example, the team recently withdrew assets from the in-house emerging markets equities fund Semiz runs, over concerns that a US interest rate rise would negatively impact those regions.
‘We punished ourselves because we knew it was in our clients’ best interest,’ Ahluwalia says.
‘At the same time if you can prove that you’re running a fund that outperforms the peer group, like Hakan’s, and it’s in your clients’ best interest to be invested in it, you should not close that door off to them for the sake of being independent.’
A case for independence
Selling in-house funds versus third-party funds is a hotly debated issue and being able to choose whichever is best for clients’ portfolios is one of the characteristics independent firms take the most pride in.
‘I don’t want to sell products that I don’t feel comfortable with or I am being pushed to sell. Clients’ interests should always come first and that’s one of the major differences between us and banks.
‘Everyone calls themselves independent, but then you are pushed to consider a product range where some funds are great, while I would need a lot of explanation for investing in others,’ Semiz says.
‘We will be the first to admit we are wrong, we never think we have it right and the rest of the world doesn’t,’ Ahluwalia says. ‘It’s like this: when one person tells you to see a psychiatrist you ignore it, but if three or four people tell you, then you should go check.’
For the time being, the team are confident they’re headed in the right direction and some of those smaller firms will be keeping an eye out for Swisspartners hoping they’ll cross paths.
‘There isn’t anything on the table but I do see it possible that we buy smaller firms,’ Ahluwalia admits. ‘We talk to a lot of people and we are always open for business, except on Saturdays and Sundays.’
Apparently, when the business is run well, even busy managers can afford to take weekends off and dedicate time to their hobbies, whether it’s fly fishing or nutrition.
‘We can go to sleep at night knowing we have done our best for the client, and if the client is happy, we are happy.’
This article originally appeared on Citywire Switzerland Magazine