Société Générale helps entrepreneurs realise risks of exposure

Eric Verleyen, recently promoted to chief investment officer of the Société Générale Private Banking group, advising clients with assets totalling €116.5bn, is facing a number of challenges. One of these is calming the investment expectations of over-exuberant entrepreneurial families, used to generating annual returns of 25 per cent in fast growing business ventures.

“They think they can replicate that with an investment portfolio,” reflects a normally besuited Mr Verleyen, down to summer shirt-sleeves on a balmy July afternoon at the bank’s offices in London’s St James’s Square. “But this is not reasonable, as they would be taking too much risk.”

Recent risks have included the latest instalment to the Greek crisis, Chinese uncertainty and the ongoing saga of US monetary policy. One of his jobs has been to assure clients that despite its moving on and off the agenda, the Greek crisis is by no means solved and will remain an ongoing issue, just “one of the facts” which may affect future asset allocation decisions.

“The Greek issue is here to stay,” he says, referring to a “potential much larger problem than markets were anticipating.” While fears of a Grexit have receded for now, with markets reassured in the short-term by an €85bn bailout, Mr Verleyen warns a Greek debt to GDP ratio of 177 per cent, now catapulted to 280 per cent with the new package, is unsustainable for the longer term.

“The good thing is that there won’t be a non-organised, chaotic exit from the euro. But we will be talking about Greece for a long time yet,” smiles Mr Verleyen knowingly. Another risk factor he thinks about is China, subject to much recent volatility. 

Because there are so many macro and geopolitical issues to currently contend with, particularly relating to the US Federal Reserve’s interest rate policy, expected to play out in September, Mr Verleyen wasted no time in creating a new Global Investment Committee for the bank, consisting of portfolio strategists Alexandre Cegarra in Luxembourg and John Birdwood in London, and fund managers Gilles Guesdon in Monaco and Valéry Nkaké in Paris.

“I wanted to introduce change as a new manager, bringing in people from different backgrounds to investment decision making,” says Mr Verleyen. “We wanted each member to have at least 15 years of experience and to come with their own views. The worst case scenario is to have people without their own conviction, who just follow what their CIO is saying.”

Current uncertainties have led this working group to recommend an increase in cash to investors’ portfolios from 2 per cent to 8 per cent, with the money withdrawn from European equities.

“We remain positive on European equities, but want to take some profit,” says Mr Verleyen, explaining why exposure to continental stocks has been trimmed back from 56 per cent to 50 per cent.

A parallel move sees money removed from troubled fixed income tranches and siphoned into alternatives, particularly hedge funds. A swathe of up 10 per cent of client portfolios will be invested in “less correlated assets”, including market neutral strategies, commodity trading advisers (CTAs) and discretionary global macro funds, available on the platform of sister company Lyxor Asset Management.

Structured products might also have a renewed role to play for private clients, as they can capture volatility. In the context of eventual normalisation of US monetary policy, active mutual funds will once more become attractive, rather than passive ETFs, believes Mr Verleyen, with the biggest fund groups more likely to control incoming allocations.

“Larger brands tend to have more strategies available,” he says. “We cannot invest in newly formed funds, as we don’t want to suffer from liquidity problems or over-exposure.”

With a good economic situation in Europe and many transactions taking place, especially in London, “a lot of new money is coming into the private banking system,” he says, most of it from entrepreneurs previously only invested in their businesses.

“Our role is very precious for these companies. They run successful businesses, but they do not have the market knowledge of how to invest their assets. They are now generating a lot of new cash from corporate transactions,” says Mr Verleyen, whose team also increasingly takes behavioural biases into account. 

“We are explaining to clients the potential risks and returns of investing in markets. It is just as important to know what to avoid as well as what to invest in.”