Flexibility of ETFs helps keep Credit Suisse nimble

The role of private bankers has changed almost unrecognisably during the last five years, believes Lars Kalbreier of Credit Suisse, who has already seen several re-inventions in his own relatively short career.

In terms of investment behaviour, macro-economic and geo-political factors are increasingly taking centre-stage, believes the youthful, Zurich-based banker, who has already switched from capital markets, to heading up equity research to his latest role at the helm of the mutual fund and exchange traded fund (ETF) product hub of Credit Suisse Private Banking.

“Previously, fundamental factors such as earnings data and dividend yields ruled the show,” says Mr Kalbreier. But the new order has also changed the mentality and behaviour of private clients and the type of relationship and discussion they have with their relationship manager.

“Before, discussions focused on specific stocks and sectors. Now private clients are expecting us to be more reactive to changes in macro-economic policy and politics.”

This change plays into the hands of the Swiss banks such as Credit Suisse and fierce rival UBS. The strategy of these global giants is increasingly focused on selling products, with UBS the first of the majors to introduce a mass migration of clients to ETFs at the core of managed discretionary portfolios.

Credit Suisse amongst others, is also deploying them for rapid-fire changes in the satellite regions of client holdings.

When deciding whether to use traditional mutual funds or ETFs to implement directives from the investment research department, where Mr Kalbreier was previously a leading light, the guidelines he lays down for relationship managers are relatively simple. ETFs are considered for decisions in large, relatively efficient markets, such as the US, whereas mutual funds are typically preferred for smaller, less efficient markets where alpha-generation is possible.

In the US market, rather than choosing funds which manage equities close to the benchmark, but charging active fees, Mr Kalbreier recommends clients opt for a “purer passive” solution to reduce the costs and accelerate speed of implementation. This approach in private banking reflects the group decision to exit US active management in proprietary strategies, sell the bulk of long-only funds to Aberdeen and now concentrate more on beta-grabbing and high-alpha seeking products.

FINDING A MATCH

However, Mr Kalbreier is keen to point out that while ETFs are viewed as a commodity, assessing their suitability for client portfolios is increasingly becoming a full-time job.

“Many people think there is only one ETF per index and that they are all the same, but that is not necessarily true,” he says. It is now his job to wade through this fast-expanding product space and weed out the best tools for his clients, choosing from both Credit Suisse and external menus.

“What is much more important today is how ETFs are constituted,” he says. “We look at the structure of ETFs, whether they are asset-backed or swap-based. If we have to choose, most preferences for our clients are for asset-backed products.”

Typically, he would also rather choose funds covered by Ucits legislation for marketing of cross-border investment funds, as clients are given greater protection in the case of any unusual circumstances. Total expense ratios as an expression of costs and tracking error relative to indices are also key selection considerations.

“The more you dig deeper into ETFs, the more you see structural, legal and quantitative considerations which are important,” says Mr Kalbreier. “Gone are the days when you could just give passive advice on ETFs.”

Lars Kalbreier