A conversation with our Chief Investment Officer

He wouldn’t define himself as a ‘crisis junkie’. But Julius Baer’s Chief Investment Officer Yves Bonzon definitely feels more energised when the going gets tough. “If the markets were always good, there would be no need for a CIO. It’s in difficult times that our clients need reliable, experienced advice to navigate them.”

How would you describe your role?
Yves Bonzon:
The role of a CIO is multifaceted. First of all, he is the guardian of the investment process, because we need to be able to explain how we make decisions and how performance was achieved. Performance, ultimately, is always the outcome of a well-structured process, so performance is a consequence as much as the objective. To structure an investment process, you need to foster an investment culture, you need to articulate investment beliefs. We have a very comprehensive set of investment beliefs, which I developed over more than three decades. And this is really the basis of everything we do when we make investment decisions on behalf of our clients.

Where can a CIO add value to clients?
A CIO can potentially add value by making a few opportunistic investment decisions, but that’s not the only aspect. Where a CIO potentially adds the most value – and you will never see that in any reporting – is by preventing people and various stakeholders in this activity from making mistakes and thereby destroying value. I would argue that, in my career, I probably added at least as much value by preventing people from making mistakes than I did by making good decisions that turned into a profit, relative or absolute.

Where a CIO potentially adds the most value is by preventing people from making mistakes.

Could you give us an example of how you prevented bad decisions?
Two examples come to mind immediately. One was during the financial crisis, when some clients were tempted to make big bets on the share price of collapsing financial institutions that were systemically important. By engaging them and by explaining to them the dynamics at work in the system and the likely scenario of recapitalisation and therefore massive dilution, I helped prevent them from making such a concentrated bet at the time. Another example was avoiding the pitfalls of the now notorious Madoff Ponzi schemes, which affected a large number of investors, by understanding that the pay-off of that strategy was simply unrealistic. Month after month, year after year, I advised investors, clients and other partners not to consider investing in any of the venues that gave access to that manager.

Let’s look at your daily job. Is there a typical daily routine?
There are some constants in what I do every day. Typically I’m keeping up with the information flow in markets, the economy and politics. Mindful of the fact that 98 percent of the news flow is fundamentally irrelevant to the investment decision-making purpose, a critical part of this process is to distinguish the noise from the information, especially in today’s media-intensive digital age. The rest of the day is extremely varied. There are meetings with colleagues, there’s managing the business – you know, making decisions to improve the business and move it forward. I might meet with investment specialists and I also meet clients, which is a very important part of the job. Or I meet other industry executives or I represent the Bank.

When did you discover your interest in financial markets?
It was a gradual process. I studied maths and physics up to the bachelor, and I met a professor of economics at the University of Lausanne who intrigued me. At the last minute, I decided not to go to the polytechnic, an institute of technology, but study economics. That was the first step. During my studies, I was more interested in social and economic matters than financial markets per se, and at the time – this goes way back, I’m afraid – the teaching of financial theory was not as developed and advanced as it is today in top Swiss schools. I then joined a bank in 1986, where I really discovered the financial markets. Shortly afterwards I was replacing a senior client manager who was on sick leave – and the crash of 1987 happened. So I was literally thrown into the deep end at a very early stage, and that certainly sharpened my taste for markets and investing.

The crash of 1987 triggered my interest in better understanding how the market works.

How did you experience that crash?
The crash of 1987 was a very humbling experience for me. Humbling because, during our training course with that bank, we had sessions with experts, and one of them discussed the crash of 1929. And I remember clearly speaking up and saying: “Yeah, but this was 1929; it could not happen in today’s world.” And guess what, six months later the market was literally falling apart overnight in a crash that was reminiscent of what happened in the 1930s in the United States. So that was a lesson – it showed that you can be very naïve, that you can have preconceived ideas that may prove completely wrong. It also showed that the financial system is, in a weird way, very robust and at the same time very fragile. This triggered my interest in better understanding how the market works.

Do you have any other interests beside the financial markets?
I certainly do, even if I don’t always have enough spare time. Obviously, my family is at the centre of my interest, and any activity that is family-related. Lots of skiing in the winter, water sports in the summer. I like literature. Not complex literature, because I already read a lot in my job. Entertaining literature. I also like the cinema a lot. I’m quite a big fan of classic movies. Generally, spending quality time with friends and relatives is very important to me.

Talking about cinema: have you seen ‘The Wolf of Wall Street’?
Yes, I did. But generally, I do not have a great appetite for finance movies, because when you live in the system yourself, you’re always worried that the film may be unrealistic or misleading. I’ve heard good things about the movie on the subprime mortgage bubble and the ensuing 2008 financial crisis, but because I was involved in that crisis as an investor, protecting clients against what happened at the time, with an in-depth understanding of the mechanism at work, I’d be annoyed if the film misrepresented the situation. I did however see Wall Street, but that was in my early years.

How did you experience the financial crisis of 2008?
I can hardly say it out loud, but it was one of the most interesting periods of my career. Because you really had to work hard to understand the mechanism behind it. And to guess what policy response would be appropriate and comprehensive enough to stop the bleeding, that mechanical destruction of equity value in the financial system. These policy decisions were sometimes quite complex, and you didn’t have much time to read and understand them.

Another example is 1998, the Asian crisis. And in particular the Long Term Capital Management hedge fund bankruptcy at the time, because the contamination effect on the financial system was absolutely huge. And it took weeks to understand what was going on. We actually understood what was going on – by the time it was revealed that LTCM was basically bankrupt and that the central banks had to organise a bail-out.

It’s in crises that you make a lot of money, that you buy cheap, and that’s why I think crises are extremely exciting.

So can we say that you rather prefer critical times than normal times?
Yes, of course. If the markets were always good, there would be no need for a CIO … It’s when markets are difficult that you need reliable, experienced advice to navigate them. But critically, it’s in crises that you make a lot of money, that you buy cheap, and that’s why I think crises are extremely exciting.

What about the current time? Exciting or boring?
I’d say it’s neither boring nor very exciting at the moment. The most striking part is observing the maturity of players and stakeholders. Again, it is human nature to fight the battle of the previous war. The other interesting part is that I believe we have a situation of very, very low interest rates that will likely last for much longer than anyone would expect. And people have not yet fully adjusted to that new paradigm.

Talking about unfinished adjustments or mistakes, where do you see the most common mistakes of investors in general?
In general, investors time the market too much. I believe we have transitioned from inflation targeting to asset price targeting, and even in the previous regime of inflation targeting – and the associated volatility in financial assets – one could hardly see any merit in aggressive market timing. I think this is even more true in a world where central banks target asset prices. You are unlikely to add much value by aggressively timing the market.

You cannot change your philosophy every six months.

In the beginning, you talked about the comprehensive set of beliefs that you have developed. What are these?
We have about 20 of them, summarised on one page, and the first one I actually borrowed from the Nordic sovereign fund. It says: There are few absolute investment truths. This is a very, very important starting point. What do I mean by that? There are different ways to invest. They all have their relative merits and weaknesses. What you cannot do is change your philosophy every six months. You have to have a set of beliefs, you have to have a methodology, you have to have a philosophy and stick to it. Unfortunately, you cannot rigidly stick to it because the market opportunity sets a rollover time. So it’s a subtle mix of discipline but also evolution. You have to adapt the process over time. Because what drives the market at a certain time no longer drives it at another time.

The second aspect is, I do not believe that the world is mean reverting [mean reversion is a financial theory suggesting that asset prices and returns eventually return to the long-run mean]. I believe the world is exponential. So, mean reverting strategies will struggle, structurally speaking. Especially at a time when so many of the business models in which we invest are disrupted by new technology, big data, artificial – I like to call it ‘superficial’ – intelligence. Betting on mean reversion is unlikely to work well, in my opinion. It might work over brief periods, but structurally it won’t work.

What are the most dominant mega trends that investors should look for?
Well, in the last 40 years or so we have had a very clear alternation of technology-driven growth and growth driven by developing countries – a leadership alternating between technology, NASDAQ, semiconductor-driven businesses, on the one hand, and emerging countries rising out of poverty and significantly increasing prosperity, on the other. These two engines of global growth are actually converging. And that’s one of the reasons why we have a strategic focus on China in our emerging equity allocation portfolio, because China is a unique combination of new sector, new technology, life science, a very vibrant knowledge-based economy, with the characteristics and the growth potential of the world’s biggest, most populated country, and significant potential for growth going forward, but with capital markets that are actually underdeveloped relative to the cash flow of this economy.

China is a unique combination of a very vibrant knowledge-based economy with the growth potential of the world’s most populated country.

You said you have regular meetings with clients. What are the most frequent questions you hear from them?
Well, the typical ones. Incidentally, I’m writing the CIO Flash this week on the topic ‘Should we sell?’ My philosophy is, let the profits run; it’s only in extreme situations that you want to decide to take the profits and cut your losses. The human tendency is to keep losing trades and to harvest profitable ones. So my recommendation to everyone is: force yourself to do the exact opposite.

Did you ever consider a change of career?
You know, the market has no mercy. You can look spectacularly wrong in the short term and turn out to be spectacularly right in the medium term. So this is an extremely demanding job, psychologically speaking, especially as the CIO of a large company. So, yes, you have moments of counter-performance, underperformance. And in those moments I tend to think about what I like: the snow, the mountains. And I wish that I had chosen the career of mountain guide or ski instructor, to be honest. A completely different life. However, it’s going to be hard to change because I’m afraid the hardware is no longer fit for such activities ... although I hope the software still works well.

How do you maintain the fascination for your job?
One of the aspects of my job I like the most is the people I meet. So it’s always a new adventure, it’s always discovering something new. It’s never boring. One of the privileges of a CIO’s job is the people it gives you access to. So, in that respect, every day is a new day.

Video production: Scott McNamara / Fabio Kobel

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