PICTET REVEALS CROSS-BORDER FUNDS BLUEPRINT

This is a slightly special year for Pictet & Cie, marking 200 years since the private bank’s formation in 1805. But the Swiss institution is not just celebrating tradition for tradition’s sake, insists Rémy Best, the bank’s suave managing partner, responsible for the Pictet Funds franchise, which runs E24bn for both external and internal clients. An extra E41bn is handled in institutional mandates by the Pictet Asset Management division.

“Over all these years, we have always cared for the interests of our clients. We are not here for quick wins or bonuses, but to resist the test of time,” affirms Mr Best. “The average tenure of a partner at Pictet is 22 years, whereas your average CEO occupies his post for just six years. It is a difficult proposition standing in front of a client for 22 years. After you have launched a fund, you have to be there 10 years later explaining if it has worked or not.”

HUMAN TOUCH

Explaining away problems is clearly Mr Best’s forte. Just before our interview, he has the good grace to apologise for the Swiss weather, this being one of the coldest days in recent memory, with the biting wind swirling up from Lake Geneva and howling past the windows of his sixth floor boardroom.

This personal touch is evidence that Pictet, with its private client ethos, is not part of the mass market funds arena.

The Pictet Funds focus is on a smaller, select group of distributors, typically other private banks and their fund of funds divisions. Key customers include UBS, Credit Suisse, BNP Paribas and Deutsche Bank. “We cannot develop long-term relationships with 2000 distributors in this world, as our clients are often huge organisations, for whom we need to create the correct product in order to match their needs,” says Mr Best.

“We talk with our biggest clients – the private bank of Pictet and the private banking divisions of other groups. We tell them we are thinking of launching a product, and we ask them for feedback,” says Mr Best, describing the product creation procedure. “We ask them if there is the chance to obtain SFr100m (E65m) in a year. This is always our objective, otherwise we do not proceed with a launch.”

The last product to be put through this external validation process was the Generic Fund, launched in anticipation of strong growth for generic drugs and specialty pharma, due to patent expirations.

DISCOVERING STRUCTURE

There is also some detective work to be done, with Mr Best’s team keen to explore the structures of the key distribution houses it targets. “Private banks have set up their fund selection centres typically in Zurich, Geneva, Guernsey, London and Paris,” explains Mr Best.

“Our task is to determine how these groups are organised. Sometimes the big groups are very much centralised, with fund selection in one hub, and they don’t want you bothering their teams in Belgium or Singapore. At other times, every centre has its own selection needs, and very little centralisation.”

Currently, the most accepted and effective model, confides Mr Best, is based around a central unit, which constructs a masterlist of funds, but gives some autonomy to local markets about which specific products to buy in.

There is little doubt that products manufactured for external clients are now the key focus of Pictet Funds. Accounting for E13bn in assets, this is what Mr Best describes as “our real business”. For it is not just the bank’s bicentenary that is being celebrated during 2005. This is also the first year in which assets managed by Pictet Funds for external clients have exceeded those managed for Pictet’s own private clients.

“This is very important for a business line only created in 1996,” mentions Mr Best with typical understatement.

DIFFERENT CULTURE

Pictet is still perceived as a secretive institution by observers in the private banking world. The institutional division, believed to manage money for clients including New York Police and Compaq, also maintains some of this closed door mentality. But at the only recently created mutual funds division, there is a different culture, contends Mr Best.

“Pictet Funds was always looking outward. Our mission was never to sell funds internally. There are too many institutions where efforts are concentrated on internal sales. We want to create success through relationships with external distributors, not just by making easy, summer-time money.”

These external relationships helped Mr Best’s team sell SFr3.5bn of funds externally in 2004. These were distributed in five core markets in Europe – Switzerland, France, Italy, Germany and Spain, plus through strategic outlets in Asia, and taking into account specific Latin American opportunities in Chile and Mexico.

Net positive inflows have been recorded by Mr Best in all of these markets, and according to statistics from cross-border funds consultancy Feri (FMI), Pictet Funds secured fourth berth in terms of European net sales out of 26 investment groups in 2004. “We are not just top quartile, but top of the range where distributors are concerned,” beams Mr Best.

BACK AT HOME

In its Swiss home market, Pictet Funds has just nudged ahead of Swissca, to secure a 7 per cent market share behind the asset management arms of UBS and Credit Suisse.

“To the contrary of other markets, guided architecture in Italy works quite well,” says Mr Best, commenting on the selection of Pictet alongside CSAM, Crédit Agricole and JPMorgan for SanPaolo Investor’s multi-manager funds model designed together with consultants McKinsey.

In Spain, another growth market, where Pictet opened an office in 2003, distribution is dominated by two banks, BBVA and Banco Santander. “It’s impossible in Spain not to achieve the level of sales we have without working with these major players,” confides Mr Best.

Distributors in both of these markets have achieved the majority of recent sales through pushing structured products to both high net worth and mass affluent clients. “In Spain, we have structured some quite interesting deals for distributors where we are alone as underlying fund providers, or where we have teamed up with other players to present a ‘best of’ funds, asset allocation concept,” adds Mr Best.

He stresses that it is very important for all participants to look at the mechanics of such structured deals, to make sure that they are of real benefit to clients.

“Being a private banker ourselves, we know these deals can be very profitable for the bank involved,” says Mr Best. “But we want to make sure they are also profitable for the client at the end of the day.”

SPECIALIST HOUSE

Out of necessity, a smaller house such as Pictet must develop niche specialisms in fund manufacturing. This is a point conceded by Mr Best. “We are not competing with the big global houses, but are seen as a specialist house with a high level of professionalism delivering performance in every asset class where we are present,” with at least 30 per cent of funds posting top quartile returns over one and three years, he adds. Pictet’s Eastern European fund, for example, is well ahead of the S&P/Citi BMI European Emerging index over one and three years, but lagging over five.

The core products are disciplines that would be considered “niche” elsewhere, embracing emerging markets, Eurobonds, Asian equities and biotechnology. All of these are managed internally. Only some specialist sector funds are sub-advised by Sectoral Asset Management in Montreal, which had been established by ex-Pictet staff in 2000.

TOUGH JOB

Surprisingly, however, Pictet Funds does not follow the current fashion in the European funds world to offer its own strategies on a white-labelled or sub-advised basis in the same way as Goldman Sachs or Merrill Lynch. The reason for this, says Mr Best, is that it is already a tough job to manufacture enough top-performing specialist products to satisfy existing distribution clients.

“In some asset classes, such as emerging markets or Eastern Europe, we have trouble providing capacity for third-party distribution,” says Mr Best, echoing his own wish to restrict Pictet’s finite capacity fund of hedge fund products to its “very best” clients only. “We are not developing white labelling, not because we are not interested, but because the fund business is developing so well.”