Credit Suisse bids farewell to old school

For Credit Suisse’s SFr411bn (E280bn) asset management department, once the toast of pension schemes and insurance companies all over the world, the new clients of choice are becoming the private banks and family offices. The Swiss funds house has seen so many changes of direction that it is difficult to keep track, with institutional clients reluctant to allocate to an organisation in a state of flux. But one constant presence in the group’s history has been vice-chairman Bob Parker, founder of the funds house and a key proponent of the asset allocation philosophy now central to the product offering. The latest rejig has seen a swap of SFr70bn worth of long-only equity and bond assets with Aberdeen Asset Management, in return for up to 25 per cent in shares of the colourful Scottish group. Having offloaded this loss-making Global Investors division, Mr Parker has helped engineer the restructure to boost his two relatively healthy remaining units. These are the SFr146bn Alternative Investments department, which manages strategies including hedge funds, private equity, real estate and niche, high-alpha bond investments; and the recently boosted SFr265bn Multi Asset Class Solutions (Macs) business, fast becoming the group’s key unit. Macs is driven by the Credit Suisse investment committee, which makes top-down calls and translates them into multi-asset class products. The biggest user of Macs is Credit Suisse’s Swiss-based private banking arm. It has been Mr Parker’s role for the last 4 years – since the Zurich-led ‘One Bank’ review - to pool resources between private banking and asset management, to drive investment decisions for private clients and to make sure internal investment capabilities get as much of the private banking cake as is fair and possible. “This is the biggest challenge which the private bank is facing. It is critical for them to determine: what is the client allocation to alternatives, equity and fixed income? This is a far bigger decision than stock selection,” he says. While current balanced portfolios are equally allocated between equities and bonds, much of the fixed income portion has moved from government to corporate bonds, with some positions in leveraged loans. The balance of the portfolio is in high-dividend paying defensive equity, with the exception of several themes. These include emerging market equities – namely investments in Brazil and China, plus thematic plays on infrastructure and energy companies. Credit Suisse has been a long-term advocate of the home or foreign bias in portfolio structuring and core-satellite allocation systems, which other competitors are beginning to adopt. Yet Mr Parker is keen to move on into new territory. “These are rather tired – they belong to yesterday’s approach,” he says. “Today’s approach is the risk approach.” Several large asset management groups, including Schroders and Invesco, have blamed private banks, for poor allocation skills and have taken their own industry to task for not taking a lead in multi-asset class solutions. This is a view partly shared by Mr Parker. “Over the last few years, a lot of the industry has been driven by marketing guys, not asset management people. Clients want good asset allocation advice, then a good product consistent with that advice. What they don’t want is some guy saying: ‘OK, this is Monday, I’ve got this great new product and you should buy it.’” Industry not in crisis Despite these problems, Mr Parker refuses to admit asset management is in crisis. “The industry is under threat, but not in crisis. The winners in asset management and also in private banking, will be those who are successful in providing advice and multi-asset products that can fit in with that advice. The industry was stressed last year, and one of the reasons was that it was too marketing led.” Rather than admitting, like many competitors, that mass affluent Continental European customers have lost trust in their fund providers – Credit Suisse’s funds arm lost SFr100bn of assets in the last 3 months of 2009 due to market movements and customers withdrawing savings – Mr Parker blames the financial crisis and the actions of Europe’s banking networks. “I think mutual fund flows will come back,” he believes. “Client disillusionment is due to their experience in the markets, not dissatisfaction with the asset management industry. In addition, banks are scavenging for cash in Europe, encouraging clients into deposits rather than mutual funds. Now that deposit rates are so low, the argument for clients to be on deposit in a bank is very weak. Progressively, we will see a switch back into mutual funds investing in corporate bonds, defensive equity and some movement to good emerging markets, like China.” But persuading clients to invest in Credit Suisse mutual funds is only part of Mr Parker’s task. His official role also involves helping Martin Gilbert, CEO of Aberdeen, convince his newly acquired clients to stay invested in what were once funds managed by the Swiss bank. The final number of shares which Credit Suisse will acquire depends on how many clients will agree to move across to the new owner. “As the major shareholder in Aberdeen, Credit Suisse has to make Aberdeen more of a success than now,” reveals Mr Parker. “We want that share price to go up and we will do everything to help Aberdeen to develop their business.” This means he needs to act as a bridge between the two fund groups, and pacify staff when major lay-offs are eventually announced in equities, where Aberdeen is already a strong player. Mr Parker is no stranger to such challenges, having steered his group through a similar programme when 400 staff were made redundant after the poor performing US active equity programme was replaced by a less labour intensive quantitative process, eventually absorbed into the Alternative Investments division. He must also help forge links between Aberdeen and Credit Suisse’s private banking division. “One of my jobs will be to smooth the way, so that Aberdeen gets access to Private Banking and Private Banking gets access to Aberdeen products, which has not been the case in the past.” But he warns about possible complacency. “Credit Suisse Private Banking operates on open architecture, so it is not just a question of me turning up with Martin Gilbert and saying ‘Aberdeen are jolly good,’ They will only buy the best products for their clients.” Parker predicts In the first part of every year, Mr Parker traditionally draws up an 8 or 10 page internal document, detailing his predictions for the asset management industry. Many of his thoughts have a habit of becoming reality, although to be fair, the timescale is often much longer than he initially envisages. Here is a selection of the themes seen by PWM. Money market funds: Given zero interest rates in the US and Japan and historically low rates in the UK and Europe, investors have no incentive to place cash in money market funds. In US dollars and Yen, money market funds will struggle to produce positive returns, while managers’ poor experience of par guaranteed funds in 2007 and 2008 will result in many fund closures. 130/30 funds: This fashion has disappeared, given poor absolute returns. Future client demand will focus on long-only, with a barbell into full long-short rather than hybrid products. Structured products: Confidence in credit rating agencies is minimal and client demand for structured products supported by credit ratings is probably broken for at least the medium term. Investors will be intolerant of any products where the investment process is not transparent and where there are not the highest standards of risk management. Emerging market debt funds: These will attract client flows given low default rates amongst the under-leveraged emerging economies. The under-valuation of Asian and Latin American currencies should attract flows into emerging FX funds. Wealth management: Private banking and family offices will continue to grow strongly with a longer-term focus on low-risk absolute return strategies and at the other end of the risk spectrum, longer-term thematic products and private equity and its derivatives.