Finding the right match all important for Pictet

Pictet & Cie, the Swiss banking group that has $285bn (E205bn) in assets under management and custody, is further increasing the number of its sub-advisory mandates, reveals Mussie Kidane, head of fund selection at Pictet Wealth Management. “We have recently awarded a US large cap value mandate to a US-based management firm, and we are now just assessing when it is the best time to launch the product,” says Mr Kidane. Moreover, Pictet is now at the final stage of its manager selection process for a US high yield bond mandate, he says.

“Pictet Asset Management does manage European high yield products in-house,” he explains, “but 80 per cent of the high yield market globally is in the US and we don’t have internal capacity in the US high yield bond area.

“All these new products will fill a gap in Pictet’s offering,” says Mr Kidane, adding that they are looking into awarding a new mandate in the convertibles space.

The search for third-party managers often starts when Pictet Funds – the bank’s fund distribution arm and “Pictet’s ears and eyes” – identifies client demand in an area in which Pictet Asset Management, the institutional investment management arm of the group, does not have in-house expertise. “Sub-advisory mandates are demand driven.”

Pictet already employs two managers: Waddell & Reed, a large US firm, which has been running a US large cap growth mandate, today worth $1bn, since 2006, and Sectoral AM, which manages a biotech fund that has grown to $2bn.

A few years ago, the Swiss bank put in place a rigorous due diligence process to screen sub-advisers. “We look for specialised teams that have low turnover, clearly defined investment process and philosophy and that have generated consistent risk-adjusted performance over time,” states Mr Kidane. “Also importantly, there has to be cultural fit with the sub-adviser,” he says. The external manager has to share the same values that Pictet has. The Swiss institution is owned by seven partners, and their interests are really aligned with clients’ interests, he adds.

Exclusivity of distribution is also important. For example, for the US mandates, Pictet’s preference has gone to those managers who have no distribution channels in Europe.

Although sub-advised products are in Pictet’s name, the sub-adviser’ brand is often a strong selling point, says Mr Kidane. “In the US value space where we are going to launch a new fund, Pictet has no track record, but our new manager does,” he says, explaining he cannot disclose the firm’s name at this stage. Hence, they are very keen reveal to its clients who their strategic partners are, their skills and capabilities; product marketing is often done together. “We are very transparent about who our external managers are.”

The bear market has no impact on the decision to sub-advise, when sub-advisory means contracting out assets to third-party managers to complement a firm’s core expertise, as in Pictet’s case, says Mr Kidane. But this may be different for those banks that have created a multi-manager product range for the sake of gathering assets; probably the crisis will lead them, or has already led them, to cancel some of their sub-advisory agreements. They will have to focus on their core offering and delegate the remaining assets to third-party specialists, believes Mr Kidane.

The financial crisis has caused a big reshuffle in the top fund managers’ league table. “The credit crunch has severely challenged the premises of many thriving fund managers and brought to light inconsistencies within their investment approach,” says Mr Kidane. “Thus, if you started a search for sub-advisers today, applying the same selection criteria, you would probably end up with a slightly different managers’ list than you would have two years ago.

“The last 18 months have been a make or break of fund managers’ track record” he adds. The managers who have navigated the crisis well are those that today are in a better position to generate good performance. And because their investment efficiency has remained intact, as they have not suffered severe fund outflows, they will have a higher chance to emerge as the winners in the sub-advisory arena, he says.