Pictet’s challenge: “Offer retail clients the returns of the private markets”
“It’s not always possible to expect double-digit returns from equity markets. If the return is single digit one year, I don’t think that should give us cause for concern.” Renaud de Planta has not been disheartened by the volatility surge gripping the markets in recent weeks. The Pictet Group, of which he is the Senior Managing Partner, saw its operating profit increase by 13% in 2021 relative to the previous year. More impressively, its assets under management or custody rose by 15% to a record-high CHF 698 billion. Driving these gains was first and foremost market performance, which boosted asset values. But much can also be ascribed to two of the Swiss bank’s major distinctives: product range and customer service.
Why are you upbeat on equity markets?
A contraction in valuation multiples such as price/earnings triggered by rising interest rates needs to be priced in, and that’s already happening in fact. But economies are still robust. We believe that corporate earnings could rise by 10–12% and thereby offset the rate impact. Of course we’re not ruling out volatility increasing in response to monetary policy, geopolitical threats or a renewed flare-up in the pandemic. But if we meet again in 12 months’ time, I expect the global equity market will have gained slightly – probably a single-digit return, marginally either side of 5%.
What about fixed income?
In the next two or three years, conventional products could suffer from higher interest rates. But if a manager can offer duration-neutral bond funds that tactically take advantage of swings in capital markets, spreads and currencies, they would be well placed to generate yield and attract new money.
Are you referring to anything in particular?
Absolute return products neutralise the impact of duration. But short-term bond or money-market funds might also come back into fashion. I think that rising interest rates may trigger some stress in the corporate bond market. In such conditions, investing long/short in corporate bonds could be a winning move. At Pictet we also have a team specialising in market stress and distressed assets in the European segment – a fixed-income niche with potential for strong returns over the next three years.
Don’t you think that small investors are worried about the new paradigm and, as a result, are less inclined to take risks?
Investors will be less willing to switch to a high-risk equity fund compared with the past two years. My experience, from my daily conversations with clients, is that many of them know that last year’s stellar performance is hard to repeat and they’ve become more investment savvy. For this category, we have attractive, uncorrelated solutions for accessing private markets, in which we’ve been investing for 35 years, at all times selecting the best real estate and private equity funds. More recently we set up an in-house team that invests directly in these two illiquid markets across Europe.
Do you think this type of investment is suitable for retail clients?
Private assets are riskier, less liquid and require a higher level of financial literacy. That’s why we believe high-net-worth individuals and institutions will continue to represent the lion's share of investors placing funds in private equity and real estate. Retail investors are not always as educated about what it means to hold a less liquid asset. But given the poor bond yields, it’s only natural that they’re also on the lookout for better returns, which draws them in due course to private markets. The real challenge is therefore giving retail clients the chance to gain exposure to growing non-liquid markets and secure the same return-generating opportunities as those available to institutional investors. Quite counter-intuitively, these assets – not quoted assets – are what facilitate access to today’s high-potential companies.
The unstoppable rise of private markets is seen in some quarters as a threat to listed investments. What’s your view on this?
When we talk to business owners, managers or shareholders of companies, it’s clear to them that public listings are not always plain sailing because of the extra red tape, remuneration and incentive policies, and the need to accommodate outside shareholders and the investor community at large. Ultimately, many decide not to seek a flotation. It’s the job of regulators to find ways to keep markets attractive for business owners and companies. But that’s not the issue at stake here.
The fact that so many companies prefer to remain in private hands makes it more difficult for retail customers to access many potentially worthwhile firms. Specifically tailored solutions are therefore needed so that this client category can also invest in deserving companies away from listed markets.
©2022, Maximilian Cellino, Il Sole24ore