Financials is one of the areas that the wide-reaching Pictet thematic range is underweight and where the team doesn’t have a dedicated fund.
Speaking to Citywire Selector, Hans Peter Portner said that one big regret he has looking back at his career as a thematic fund manager and product developer is the decision to scrap a fund focused on financial innovation.
Portner, who is head of thematic equity at the Swiss firm, said the product was visionary at the time of its launch in 2004, but the market wasn’t ready yet and it was probably introduced seven years too early.
Portner said the universe is broad enough to run a dedicated strategy and added it could be something his team could be look at in the future. However, questions remain over if they should enter the space now.
While dropping the fintech fund may have been a mistake, Portner said the decision to drop a generic drugs fund proved the right call. His team looked at the theme in 2015 and sky-high valuations and a challenging outlook alarmed them.
‘We had the right reflexes because the sector has collapsed and if still had that fund in our pipeline that would be quite a hit for our reputation,’ Portner said.
He said you need to have an appropriate risk/return profile, enough pure and liquid stocks in the universe, if you want to run €5bn not €100m in assets. The equity pool also needs to be different enough from existing sectors in the indexes such as MSCI.
‘You need to have one value chain different from a sector, then it can be a theme. But if a product that is targeting aging populations theme is full of pharma stocks then it is just a sector fund with a fancy name,’ Portner said.
Standing up to competition
With the rise in thematic investing, Portner said competition is intensifying. It has been less than two years ago since several former Pictet fund managers set up their own thematics-oriented firms, Thematic Asset Management, while rivals like Lombard Odier IM are starting to beef up their offerings.
However, Portner is not worried about this pressure as you need to operate in a stable environment and benefit from experience built over many years, which new entrants might not have.
‘You need to build and maintain resources long term. We don’t consider to dismiss people in our thematic team. We have no concerns, which gives us a peace of mind regarding our strategic goals. It is also a numbers game, we have now 44 investment specialists helped by 34 advisors and I don’t see any other organisation that can match this scale.’
Portner said one of the team’s latest initiatives was to offer clients a bespoke sub-universes of their themes that spans 1,300 stocks. It would mean institutional clients can request a bit of security exposure, supplemented by digital and biotech allocation, all within the same portfolio.
He said this ‘lego blocks’ approach also gives them an edge over competitors, as it helps deliver clients exactly what they need. Discussing competition, Portner is more concerned about boutiques than larger players due to their interesting governance and focus. They do, however, have their own weakness.
‘Boutiques have the right incentive structures but sometimes lack resources in distribution and IT to stay ahead of the game. Meanwhile big organizations are too dispersed, as they are trying to do everything at once around the globe,’ he added.
With strong confidence in Pictet’s resources, Portner is not planning to overhaul the team’s processes in any significant way. The only big change he foresees is the rise of ‘quantamental’ in the next five years.
‘A lot of fundamental managers still use Excel today and as they integrate some risk factors, they build one row in an Excel sheet excluding volatility factor for example, then you have other rows for other affected variables, plus Bloomberg data, and the spreadsheet is quickly becoming hard to manage.’
The need to focus on long-term ideas, Pictet can tie in with its quant team, which sit on the same floor of the company’s Geneva officers just 50 meters away. ‘We need to get better at this,’ he said.
‘This is an ongoing project where we are building a platform that improves what we do in Excel, so that the investment manager can focus on generating investment ideas, while remaining in control of the algorithm that will eliminate factor risks.’
When it comes to expansion plans for the team, Portner said there are several growth areas, even though the team normally strengthens its ranks with graduate trainees. Firstly, one product specialist just changed roles switching into thematic research, and this is the role they are currently recruiting for.
Secondly, the asset manager is currently in the first stages of the development of a new product, which Portner said he is not ready to elaborate on yet. That strategy, which is set to be launched next year, might involve an outside investment manager.
Portner is also keen to develop more formal engagement reporting, which could help investors see the impact their allocation is making on the wider society. While many challenges have emerged, Portner is confident they can continue to be a pioneer in their field.