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Wealth Management - March 17, 2007

Interview with Yves Bonzon

In this month's interview we speak to Yves Bonzon, Group Managing Investor and Chief Investment Officer with Pictet & Cie about EDHEC's recent study on applying the asset-liability management approach to wealth management and the changing nature of the private banking business.

Yves Bonzon

Why did Pictet choose to support EDHEC’s initiative in the area of Asset-Liability Management applied to Private Banking?

Yves Bonzon: When EDHEC presented the project to us, we were immediately enthusiastic about sponsoring a research undertaking in an area which is at the very heart of our activity. One of the central aspects in our value chain is defining a strategic asset allocation with the client which takes his or her personal goals and parameters into account in as much detail as possible. One of my mentors in the profession once told me, “Yves, our profession is actually all about teaching.” This is particularly true in my opinion in the area of strategic asset allocation. The client has to be very closely involved in the process. In particular, he or she has to understand the importance, the logic, the necessity and the limitations of the exercise. In practice, we are confronted with a variety of behavioural biases amongst our clientele. The practical consequences of these biases can turn out to be quite substantial over a number of years. Being able to avail of objective advisory tools that allow us to accompany our clients and enable them to overcome their biases is essential and that is why we are very keen to encourage research initiatives in this area.

In its new study supported by Pictet, Asset-Liability Management Decisions in Private Banking, EDHEC develops an innovative approach by applying the state-of-the-art in asset-liability management to private banking. What do you think are the advantages of this approach?

Yves Bonzon: Above all, to have taken an essential step in the area of asset allocation by taking account of the client’s objective constraints, i.e. by taking both sides of his or her personal balance sheet into account. The ideal result of this should be portfolio construction that is guided by optimal rational criteria and not by prior judgments that are often based on a short experience, positive or negative, of investing in the financial markets.

Do you think that modelling the client’s constraints and “liabilities” can lead to practical problems, and, if so, what would those problems be?

Yves Bonzon: I do, for several reasons. First of all, the private client’s context or personal preferences are liable to change. One may decide to buy a second home without necessarily having planned it several years in advance. Moreover, even in an ideal case where the client’s parameters can be very explicitly modelled and are stable, the very delicate problem of constructing the portfolio that matches these “liabilities” remains. Specifically, the manager’s limited universe of investable assets restricts his or her capacity to construct this liability matching portfolio. There is definitely a market to be explored for structuring assets that meet this kind of objective, for example by producing returns that are indexed on the inflation rate for luxury goods and services rather than the consumer price index. Finally, the mortality factor is thankfully an unknown for everybody.

Pictet & Cie has enjoyed over 200 years of experience in private banking. How has the private banker/private client relationship evolved in recent years?

Yves Bonzon: Like in numerous other professions, the last ten years have seen an exceptional acceleration in the rate of change. The economic environment has been extremely favourable for us, with unprecedented wealth creation in such a short space of time. The nature of man is to resist change. In this rapidly changing world, an institution that remains faithful to its values while constantly innovating represents an island of stability for a private wealth clientele, a sort of reference which contributes to the serenity of the client. On the technical level, the emergence and dominance of investment through funds and ETFs, and the alternative asset classes and strategies, have been the most fundamental development. This evolution has occurred against a backdrop of the significant comeback of asset allocation, which had been relegated to a secondary position in the 90s. Paradoxically, in a world that is becoming more and more global, the arrival of the euro has strengthened the “home bias” in Europe, while American investors have a record appetite for international diversification, which used to be marginal. We have a very strong conviction that alpha diversification is at least as important today as the classic beta diversification.

What is your strategy for the next few years and what do you think will be the major challenges to be met?

Yves Bonzon: Our strategy revolves around two key areas: focusing on our single profession of wealth and asset management, and growing organically. Our first challenge is the war for talent, a battle which will become more intense with the declining demographics of our continent. Our second challenge is access to the best external talent, maintaining our network, which is at the heart of our value proposition.

What reservations do you have about TIPS as an asset class?

Yves Bonzon: Intrinsically, the availability of assets that are free of credit risk and produce inflation-linked returns is obviously very beneficial. My reservation relates to the fact that the issuer of the paper controls the agency that manages the price indices that are used to calculate the nominal return of the issues. The investor is therefore a hostage to any eventual arbitrary readjustments to the basket that is used for the calculation. We experienced this last year in Japan for example. There is an obvious conflict of interest there that is potentially prejudicial for the investor.

About Yves Bonzon

Yves Bonzon is Group Managing Investor and Chief Investment Officer with Pictet & Cie Banquiers in Switzerland. He received a Bachelors degree in Economics from the University of Lausanne HEC in 1986. Between 1986 and 1989 Mr Bonzon was employed within the UBS Private Banking division, before joining Pictet in 1989.

Since 1989 he has been senior investment manager for HNWI, since 1991 a member of Pictet's investment committee, and from 1998 to date chief investment officer for the Private Banking divison of the group. Mr Bonzon is currently a member of the Private Banking executive committee, Chairman of the Private Banking investment committee, Head of Private Banking investment managers and manager of several key accounts.