Talk to two members of the Swiss group's management committee to find out more about their investment philosophy
Zurich's Bahnhofstrasse really is a strange mixture. Running from the station down to the lake, it's a bizarre combination of chic shops, tourist traps and banks, banks, banks.
Nestling among the various offices of UBS, Credit Suisse and the like are those of the Julius Baer Group. It may be more discreet than its larger brethren, but it's built quite a reputation for fund management activities with some SFr70bn ($50 bn) in its investment coffers.
Julius Baer really is a bit of a strange mixture too. It exhibits many of the characteristics of Geneva's large private banks - traditions, family, private client base - yet it's in Zurich and it's not a private partnership. Okay, the bulk of its registered shares are owned by the Baer family but, as a listed company, it has tried to be more open in its disclosure and beaten other quoted Swiss banks at the investor relations game. Restating its accounts according to International Accounting Standards is just one of its recent moves in this field; detailed profiles of the bank's business and directors are another.
A traditional Swiss bank embracing new customs in its approach to its own investors is one thing, changing its tack in its own investment operations is something quite different. It just isn't going to happen in the near future. Talk of the need for continental European investors to switch their focus from bonds to equity falls on deaf ears in the higher echelons of Bank Julius Baer.
Raymond Baer, head of private banking, and Peter Widmer, head of non-domestic institutional business, don't seem to have too much appetite for increased exposure to equity investment. At the end of last year, half of the bank's assets were invested in bonds, just over a quarter in equities, with the remainder split between money market and third party funds.
The investment philosophy is said to be based on 'proven conservative principles', which the bank defines as 'a balanced mix of safety, risk and return'. Long-term preservation of capital takes priority. An independent observer might judge it as erring on the side of safety but, if that's the case, you get the feeling that Baer and Widmer would not be too upset. Better safe than sorry is the thrust of their argument.
To stress the bank's commitment to its principles, Widmer points out that he and his colleagues have turned down mandates in the past. In both private and institutional business you have to be able to say no.'
Baer adds that on the private client side it's sometimes necessary to turn business away when expectations of performance are running too high. 'When we turn down a mandate it's usually when the client talks about a lot of return and is not aware of the risks that we need to take to generate those returns. If a client comes to us and says that he wants a return of 20 percent per annum in a low interest environment we basically tell him that he's come to the wrong shop. We're not a hedge fund, although we do recommend some of them to our clients.'
Private Majority
Private client business still dominates the assets which the bank manages or advises upon, growing slightly last year to represent 71 percent of all portfolios. Roughly three-fifths of the remaining 29 percent emanates from Swiss institutional clients and the rest is from non-domestic institutions. Domestic institutional mandates are managed from Zurich and the international institutional client portfolios are managed from London.
Widmer says that the group is happy with the current private:institutional ratio; and certainly both sides have grown in recent years from good performance and new mandates. Institutional assets grew by 8 percent from Switzerland last year and by 15 percent from the US.
However, you get the feeling Julius Baer couldn't shake off its private client hat even if it wanted to. Substantial growth of institutional asset mandates are beaten back by the private client operation. Widmer hopes that the newest operation - Julius Baer Kapitalanlage AG in Frankfurt - established to poach the expected outsourcing of pension fund in Germany will help reverse this trend. Although, as he notes: 'We are probably a little early there.'
All this talk of where the assets come from is important if investor relations professionals are to get a handle on the way Julius Baer manages and advises on assets. And where it is likely to invest them in the future. The sheer weight of private client business means that the investment philosophies which work well on that side of the operation seem to permeate the business. That's where the bank's expertise lies: bonds and low-risk equity investment.
Don't despair if you are searching for equity investment from the group, though. It may account for only a quarter of assets but it still amounts to some $11 bn - a sizeable chunk compared to many fund managers. Low-risk equity investment for the group tends to mean a concentration on large cap companies outside of the Swiss and German markets. In Switzerland and Germany, small and mid-cap companies come into the frame because the bank has the research power to evaluate the risk.
'We have primary research posts in Germany and Switzerland where we have large research teams on the ground that can go and visit companies,' says Baer, who views the two markets as the group's niche. 'We obviously cover large caps in these markets as well but that's not where the real added value comes from. It's close to impossible for an analyst to have the edge on anyone else on large cap companies. The niche in these markets comes from having an edge on recommendations on small and mid-cap companies.'
The client mix also has an impact on where funds are invested. Roughly one-fifth of private client assets stem from Switzerland with the remainder spread across Europe and the Americas. As Baer points out, the majority of private clients still use their own local market as a benchmark and that impacts on the way funds are invested. On the institutional side, there is less of a direct link between source and choice of investment but it is still a factor. Again, domestic Swiss institutional assets form the bulk of funds but there has recently been significant growth in pension fund mandates from the US and, as mentioned above, Widmer expects the new German operation to bear significant fruit in the future.
Overall, this means that the currency mix for investments splits down into about 30 percent in Swiss francs, one third in US dollars and 14 percent in Deutschemarks at the end of 1996. The bulk of the remainder goes into other European currencies.
Open to Interpretation
The decision-making process at the bank is fairly decentralized. Widmer says that there is a Julius Baer view on the world at large but it doesn't get forced down into the various client groups. Rather, much of the interpretation of the group framework is left up to the independent managers and their clients. The private banking investment committee, which meets once a month in Zurich, includes the head of research, the chief investment officer and one representative from the Swiss institutional investment committee to ensure there is an exchange of views between both sides of the operation. The head of research also has quarterly meetings with the macro economists in London, New York, Frankfurt and Switzerland to look at long term trends.
'The investment committee gives very clearly defined tactical asset allocations for the month,' says Baer. 'Then the investment team working under the guidance of the chief investment officer will work with every regional group. Our clients are linked to the regional offices and portfolios are built according to the view of the investment committee and the local tactical group which will decide on percentages of bonds, stock and so on.'
Widmer concurs that on the institutional side, it's always necessary to take decisions at various stages and levels - it's really no good having one central philosophy and tactical asset allocation which is completely set in stone. That's simply not a good way of holding on to mandates as you can't react quickly to changing circumstances or use local knowledge to good effect.
Baer adds that the decentralized approach to building portfolios requires a disciplined risk control mechanism. 'Once a month we have an independent body within the bank going into every team to see whether they are translating their portfolios within the given parameters.'
Once allocations are in place the various teams can get down to the nitty-gritty of selecting bonds and stocks. On the equity side, the group uses a sectoral view across the whole of Europe rather than splitting the universe down into separate countries. Widmer believes that such an approach works well in what he views as an increasingly single market.
'We look at the guidelines we have produced and they may say we should be 25 percent in financial stocks with a European weighting of 'x' amount. It may come out that all of the suitable financial stocks are in Switzerland or all of them are in the UK. That doesn't bother us. We may take another look and ask ourselves whether it is really what we want but we try not to be diverted by such influences.' Anyway, he notes,'As a practice, we find it very rare to get into such extreme situations.'
Widmer acknowledges that this approach does, in effect, tend to over-emphasize the UK but that has not been a problem to date. 'It doesn't produce major risks with everything going into one market.'
So does this 'one Europe' approach mean that they welcome further currency and accounting harmonization across the region in the future? Both Baer and Widmer believe that such pressures are somewhat inevitable but that doesn't mean it will make their lives any easier. Sure, companies will become more easily comparable across national boundaries but that applies equally to all fund management institutions. The current situation of currency and accounting diversification in Europe allows what Widmer describes as the 'smart' fund manager to find good investments which others have not spotted. 'It throws up opportunities because people misinterpret information. Change is always advantageous but I hope it never switches to one level like in the US.'
Local Concerns
As noted earlier, the research strengths of the group lie within the German and Swiss markets. Widmer, Baer and others stress that Julius Baer has absolutely no intention of becoming a true global player. They know exactly where their strength lies.
'We have dedicated resources which are very dear to those two markets and which makes sense because it's our home universe,' says Baer, adding that one-on-one meetings with management are the focus where the group has an in-depth knowledge of the company. 'We may down the road have a similar approach in the vicinity in Europe as we develop a multi-local presence. But we clearly have limited resources and don't see much added value in having many more researchers going out to meet managements. That's clearly a valuable approach but we can do our own secondary research.'
The group buys in research from leading investment banks and then adds its own interpretation according to in-house analysis. Baer says that this works well for the group outside of the key markets since it tends to concentrate on larger cap stocks. If, say, clients want greater exposure in France outside of the Cac-40 then the group may well buy into a French stock fund. The same theory applies to other markets.
Swiss fund managers may not be so demanding of direct meetings with management as many other institutional investors but that does throw up some advantages if they maintain a holding in your stock. The money is there but there's little chance of them taking an activist approach - even behind closed doors. When questioned whether the group votes on its holdings, Widmer and Baer initially exhibit some confusion as to the nature of the inquiry. Once the point has been clarified, the response is straightforward.
'Do we take a stance against managements? The answer is no,' says Baer. 'We usually go along with management and wouldn't use our voice in a critical manner. You can argue whether something is a good or bad approach but we abstain from that. We are a service provider and have enough to do managing our own company. We like to appear as neutral.'
Baer goes on to say that if he and his colleagues don't like a management strategy they make it quite clear: 'We sell the stock. We don't want to be seen as a nasty shareholder. It hasn't been our style. If you don't like a management's style then it's very unlikely you will succeed [by voicing complaint]. If you don't like stock A, then there is always stock B. Maybe you'll like the management of stock B a lot better.'