“One of the most important lessons I have learnt is that there is no fixed recipe that works across financial cycles or decades.”Yves Bonzon, Head Investment Management, Chief Investment Officer
Yves, you joined Julius Baer after a 26-year career at Pictet. What in particular drew you to Julius Baer?
Its singular focus on wealth management – that it does just one thing. We live in a very competitive world, we are in the information age, and to be good at what you do, you need focus to remain at the forefront.
That pure focus on one industry is one of Julius Baer’s key advantages over competitors, whose attention can be distracted by various issues.
What are the key lessons that you have learnt in the course of your investment career?
One of the most important lessons learnt – luckily early in my career – is that there is no fixed recipe that works across financial cycles or decades. The investment environment changes and market structures evolve. Market drivers therefore tend to differ from one cycle to another.
It is essential that investors realise the necessity of adapting their investment approach to the changing circumstances. But more importantly, you need to be able to identify the structural forces and trends of the financial markets, and to be fully updated on a regular basis.
And how have those key lessons shaped your investment philosophy?
It is important to realise that although there are so many unknown quantities, investors spend far too much time preparing for the next crisis. Instead, they should be focusing on the fundamental structure of their portfolios.
Our job as investment professionals is to structure our clients’ portfolios in a way that makes them resilient to shocks, and also in such a way that they can take advantage of them. Our aim is to build portfolios that enable our clients to sleep well, whatever happens in the outside world, and no matter the magnitude of the shocks they encounter.
The foundation of financial returns is to collect risk premiums. Additionally, you can aim at enhancing returns by exploiting opportunities to add value.
We know that these are rare and difficult to capture in very competitive markets, and it’s therefore very important to collect these risk premiums. I believe it pays to be invested most of the time.
Rather than trying to foresee the next crisis, how do you recommend that investors go about looking at financial markets?
It strikes me that investors are still very concerned about the causes of the financial crisis of 2008. I witness it daily: people are preparing for a new 2008. The good news is that a crisis of this magnitude is a rare event and does not happen every decade. The cost of protecting yourself against a potential crisis is far more expensive than most people would believe. Instead, investors should take a constructive view of the world: returns are low, with interest rates virtually zero if not negative, but there are still opportunities out there. Patient investors will be rewarded.
Did the 2008 crisis affect your investment style?
Not really, because going into 2008 we had identified the pitfalls of structured credits while I was at Pictet. What struck us was that the manufacturers of these structured products had retained so many on their own balance sheets. This had a tremendous impact on the entire banking sector.
One of the lessons learnt from this crisis is that one should be very aware of the perverse incentives in the system. If you understand them, you can potentially protect yourself from their unintended consequences.
Can you give an example of one of those incentives?
A good example was the credit-rating system that existed prior to the financial crisis of 2008. It allowed triple A-rated financial institutions to hold structured credit instruments on their balance sheet with almost no equity requirements. That is what is called a perverse incentive.
What, in your view, are the most common mistakes that investors make?
Generally, investors are too risk-averse. They should be aware of their own behavioural biases and identify them. Every human is different and reacts differently, but we do have some common traits.
Our brains were programmed many millennia ago to live in a world without financial markets and information technology. Our intuitive intelligence can therefore lead to very poor investment decisions. Everyone has behavioural biases. Investors should therefore always concentrate on second-level rather than first-level thinking.
I would recommend that investors read Daniel Kahneman’s book, “Thinking, Fast and Slow”, for which he was awarded the Nobel Prize in Economic Science in 2002. It explains how our brains function.
What other things can investors do to understand their behavioural biases?
There are very practical things they can do. For instance, jot down your key thoughts about investments and the financial markets in a notebook on a weekly basis: your thoughts about the dollar, equities, and anything you are currently thinking about markets in general. Then, at regular intervals, refer back to those notes. You will realise that you have an amazing ability to forget what you were really thinking at the time. That is a typical behavioural bias. When you’ve identified your biases, you can work on them and mitigate them.
So it’s not advisable to follow your intuition in the investment world?
I would argue strongly against it. Investing lies at the frontier between art and science. It takes a lot of rational intelligence, but also some emotional intelligence. In some cases, my intuition led me to make investments that turned out well in retrospect; however, you actually need quite a bit of experience to be helped by your intuition. It’s a delicate balance.
How can investors learn to avoid pitfalls?
They need a good relationship manager who has learnt to avoid these pitfalls. Good relationship managers are able to coach their clients to make better decisions. People often think they don’t need a relationship manager, and instead buy an index product in order to capture the market’s performance. That is true in theory, but it doesn’t work in practice, because they will inevitably be influenced by external events and probably buy at the wrong moment. They are therefore unlikely to capture the best market returns. Good relationship managers can help their clients to come as close as possible to the market average. Everyone will, of course, aim at beating the market, but very few achieve this.
What are your thoughts on fintech? Can it get around the emotional side of investing you’ve mentioned?
Technology, including some fintech solutions, can probably help mitigate undesirable behavioural biases. However, the benefits are probably overestimated, because at the end of the day, it’s all about human behaviour. In theory, people should follow what the robo-advisor recommends, but I’m convinced that they will ultimately follow their instinct instead.
Human intelligence will be hard to replace. There is no rule that you can systematically apply that works under all circumstances. I don’t think fintech solutions are a game changer, but merely a further step in the evolution of the financial industry.