‘Old-fashioned’ asset allocation suits Sarasin

Burkhard Varnholt, head of investments at Switzerland’s Bank Sarasin, cuts a striking if slightly eccentric figure, tall, resplendent in a checked suit, freewheeling down Zurich’s Bahnhoffstrasse on an old-fashioned bicycle.

But there is nothing eccentric about Mr Varnholt’s asset allocations, although like his mode of transport, they may err towards the traditional end of the investment spectrum. Recently, he has renewed the focus of his investment team on quality stocks, many of them found on his Swiss doorstep, with names such as Nestlé, Roche, Schindler, Novartis and Zurich FS featuring increasingly prominently in clients’ portfolios.

“Home bias is one of the never-ending constants of our business,” says Mr Varnholt, between sips of Earl Grey tea in the coffee house on Paradeplatz owned by the Sprungli chocolate-producing family. “There is a flight to safety, people are more concerned about quality of their investments. They are looking for immunity from systemic risks, against a background of poor bond valuations and returns on cash. They are looking for real assets and high quality shares, which give you peace of mind. That is the distinctive feature of our times.”

But Swiss companies are also favoured because of their international outlook. “Novartis, Nestlé and Swatch give you access to the whole world, including Asia and emerging markets,” says Mr Varnholt. “But they also give you a trusted brand name and a trusted government.”

One particular segment of equities which Sarasin is currently shining a spotlight on is the Asian healthcare sector. Some companies in this area also exhibit strong socially responsible investing credentials, as has Bank Sarasin in winning the Best Private Bank for Socially Responsible Investing award from PWM for the second consecutive year.

“The healthcare segment in Asia was chosen because we are looking for attractive growth rates in emerging markets,” he says. “That one stood out due to broad demographic themes.”

Rising wealth in India is not always a positive factor, says Mr Varnholt, with increasing occurrences of diabetes due to a diet becoming full of fat and sugar as incomes increase. “As a result, we are seeing vastly growing healthcare markets in Asia,” he says, with these sectors growing at faster rates than general stocks. “Governments will always treat these markets differently to consumer goods markets. They are more vigilant about efficiency, effectiveness and corporate governance.”

While he was well known at former employer Credit Suisse for a love of structured products and other more exotic investments, the asset allocation at Sarasin remains faithful to the old-style ‘modern’ portfolio theory on which he lectures occasionally to university students. “We don’t do alternatives and don’t invest in illiquid assets,” he says.

“We are very old-fashioned in our belief that you can create any required portfolio using cash, bonds and stocks. If you use these three skilfully, there is no requirement for a manager that just uses alternatives.”

The asset allocation decision, is he believes, always the key one for the client, eclipsing other albeit important processes such as investment selection. Open architecture selections of hundreds of funds, which he helped to introduce at Credit Suisse during the 1990s, while still valid, can be overrated, he now thinks.

“I still believe in this model,” says Mr Varnholt. “But 10 years ago, it was a novel concept and very difficult to introduce in banks in the first place. Now that everybody has it, there are more funds than single stocks, which in itself should be food for thought. You can pick any stock or fund you like, but it is more important to spend time talking about how much risk you are prepared to take in your portfolio.”

Mr Varnholt is in no rush to recommend customers should return to risky assets in search of higher returns. Chief investment officers at banks, he believes, should “continue to resist the temptation of being over-active in every single quarter. There will always be new political and economic surprises.”

Currently, the uncertain environment among private clients is very similar to 2008, he thinks, with a competitive banking environment in which customers are searching for safe banks, often the smaller or mid-size institutions. “In this climate, we would typically see a natural increase in enquiries,” smiles Mr Varnholt, with technically-minded portfolio managers rising in prominence in banking structures at the expense of the wining-and-dining style relationship managers.

He looks back fondly as his market call three years ago, when after a tour of Asia, he described Far Eastern stocks as offering the best buying opportunity in a generation, but the market has changed today in some key respects. “We are now in capital protection mode and have been de-risking our portfolios,” says Mr Varnholt. “Cash is our most overweight position.”

Burkhard Varnholt