“In active asset management, you live and die by your relevance,” states Unigestion CEO Fiona Frick (pictured). “That involves, as a business, understanding every day – are we relevant or not? And that relevance starts with the eye of the client. By definition, then, an asset manager has to be very client-centric because if it is not, it will eventually lose its raison d’être – clients will not be interested in what it delivers anymore.
“Unigestion is a good example here because, through our history, we have shown we can reinvent ourselves on a regular basis as the needs of our clients have changed.”
Founded in 1971 and taken over five years later by the founder’s son – current chairman Bernard Sabrier – the Geneva-based asset manager originally ran bond funds, before expanding into hedge fund and private equity investments and then equity and multi-asset.
This has more than an echo of Frick’s own career – having initially joined Unigestion in 1990 as a manager of high yield and convertible bond funds, she went on to develop and lead the firm’s equity activities before being appointed CEO in 2011. “The capacity to evolve is so important for asset managers,” she continues, “because the needs of our clients evolve – as do markets, asset classes, regulations and our duty to society.”
To Frick’s mind, there are a couple of reasons why this perpetual state of flux is now set to swing in active managers’ favour. “Over the past 20 years, the power of passive and beta and replication has meant asset managers – and especially active asset managers – have lost some influence over intermediaries and end investors,” she says. “Now, however, I think we will see the reverse.
“For one thing, since 2008, central bank expansion and quantitative easing have created a buyers’ market with a lot of liquidity. This has meant that, if you just set out to replicate the index, you have performed really well. And if you can make 15% a year from tracking the S&P 500, say, why do you need somebody else to manage your money?
“That is going to change now, I think, and stockpicking, top-down allocation, market timing, diversification, risk management – all these ideas that have not meant anything for the past 10 years or so will start to hold some significance again. Beta or matching the market will no longer be seen as good enough – which means there will be a price to be paid for good active management.
“The other important change lately is regarding ESG, sustainable development goals, climate – whatever you want to call it. There is a necessary expertise – in the way you construct and manage portfolios, in the way you allocate to stocks and in the way you engage with companies – that is totally new and we are seeing that investors can get a bit lost here.
“You have to collect and analyse so much new data, be familiar with new kinds of reporting, deal with very different asset classes, stress-test your portfolios for climate risk, define the greenhouse gas emissions of your holdings as Scope 1, 2 or 3 – these are all areas where active asset managers have had to learn very quickly and now investors are counting on us to help them allocate their capital effectively in this regard.”
Beyond 60/40
We will return to Frick’s thoughts on sustainable investing in a moment but, given her view on the evolving nature of clients’ needs, do end-investors – and, by association, asset managers and intermediaries – need to be thinking beyond equity and bond investments. And if so, in what direction? “The 60/40 equity/bond portfolio, which has been the investment model for the last 40 years, will not work as it has in the past,” she replies.
“Obviously, over the past decade, we have seen equities going up and interest rates going down at the same moment, which is not a scenario that will happen in the next 10 years. I have to say the 60/40 portfolio, which was so simple, did make the role of the asset manager very boring in a way because you could just get that ‘perfect’ mix through two indices – but you would certainly have had a great performance in these last 10 years.
“The situation is reversing completely now, however, and you will have to find other sources of protection and growth. For one thing, bonds are not necessarily the asset class of protection they used to be when yields were at 5%, 6%, 7% or whatever. When yields are at 0%, 1% or 2%, they are not very protective because you start from a very low base – so how do you protect your portfolio?
“You have to consider more complex strategies, with options and so on, in order to replicate what bonds were supposed to do in the past but will perhaps not be doing in the future. As for growth, it is important to remember public equity markets only represent one part of the economy of the planet – investors need exposure to private equity, too. That is why the asset class now plays such an important part in our business.”
Recognising the potential of private assets is one thing but are they not still tricky for private investors to access? “More and more solutions are being designed for retail clients,” Frick asserts.
“At Unigestion, for example, we have started in Canada with an open-ended fund for some distributors. Also, what has perhaps been a bit forgotten these last few years, but will make sense going forwards, is the multi-asset fund.
“Ultimately, if it is not sufficient to run 60/40 portfolios of equities and bonds, then asset allocation must become more complex. At that point, there will be a need for multi-asset funds managed by professionals, who will be able to invest in a more diversified range of asset classes, to which they can dynamically allocate, depending on macroeconomic news.”
Risk and return
When Frick was setting up the equity arm of the business in the mid-1990s, she led what Unigestion hails as a “pioneering” research project into investing in the asset class – what did that involve? “The research was around the idea that active risk management is not necessarily costly to performance – in fact, to the contrary, it can be an engine of performance,” she replies.
“In the end, asset management is about assessing the level of risk you are prepared to take. I began my career as a high yield bond manager and one lesson you learn very quickly is there are some risks you feel comfortable taking with some companies and some risks you do not. And when we looked at investing in equities, we realised you do not need to have all the volatility of the asset class to see the return.
“That is because there is a lot of volatility equity investors do not need to take on – and then we did the same work with multi-asset and private equity. The idea is that risk management is not just a compliance tool to ensure your process is good enough or robust enough – it is really an engine of performance because, depending on where you put your risk, you will see very different performance.”
Achieving the appropriate balance of risk and performance for a client should then translate into value for money, Frick argues, adding: “If you can construct a road for your client that takes them to the same destination but with fewer big twists and turns, then that will be a much more comfortable journey. That requires the ability to understand and tailor the needs of your clients, depending on their age, time in life and so on.”
“Goal-oriented asset management is an important area in this discussion, therefore, although I also think we will see a new idea of value for money emerge in the context of ‘social alpha’ – that is to say, going forward, clients will be happy to pay not only for the performance asset managers deliver to them personally but also for the impact the money they run will have on society at large.”
To be clear, Frick is not revisiting the old argument that those who wish to invest their money responsibly must be willing to sacrifice an element of performance. “No I am not,” she says forcefully. “I am saying that now, thanks to continuing improvements in data-gathering and analysis and so on, the impact of investments will become more measurable.
“Alongside its 17 ‘sustainable development goals’, the United Nations has developed KPIs to measure the progress being made towards each one – that is one way for asset managers to quantify the impact their climate fund or education fund or whatever is having. Yes, real life is never as easy as theory but, really, we are not far off being able to measure the impact of a portfolio like we measure the performance of a portfolio.
“If a company offers a fund to manage for climate transition, then, down the road you will be able to analyse what it has contributed by measuring diminishing greenhouse gas emissions or whatever. Increasingly, then, investors will be prepared to say, OK, I will give five basis points or 10 basis points to make sure my money is generally invested in a way that has a positive impact on society.”
Pillars of ownership
Unigestion seeks to have its own positive impact through the first of what Frick describes as the three ‘pillars’ of its ownership structure – this being the Famsa Foundation. A backer of a wide range of charitable, cultural, educational and medical projects, Famsa has been Unigestion’s controlling shareholder since the foundation was established by Bernard Sabrier in 2011.
“The important thing about Famsa is it encourages a very long-term view,” says Frick. “It is a philanthropic foundation with a long-term plan and it also gives a goal for what is done with the money the company earns. We have found it very inspiring for the people we hire that they know the net profit of the business will, to a certain extent, go towards financing philanthropic projects.
“The second ‘pillar’ is the ‘Unipartners’ – around 20 of us who own shares in the business through a private company. Unipartners are not given shares – we have to buy them and, if we leave the business, we have to sell them – so it is a real financial commitment. In addition to aligning the interests of the management team, I would say this encourages an entrepreneurial kind of spirit, which is important for the people we hire.
“So the first pillar is the long-term philanthropic vision; the second pillar is this entrepreneurial mindset of the management team; and the third pillar is a selection of institutional investors and external partners, which adds an element of client-centricity to our shareholder base. In this way, I would say, we have more or less all of our stakeholders represented as shareholders.”
Looking ahead to the future, how does Frick see the business and wider industry emerging from the cloud of the pandemic?
“Stronger, I would think,” she begins. “We had to reinvent ourselves once again – in the way we communicate with our colleagues – and now we are happy we are back at work after experiencing a crisis together. We can have real conversations with no masks and so it is a nice spirit.
“Then there is the evolution of the home-working environment, which is still ongoing. It will be interesting to see how it evolves but it will undoubtedly change the way we organise ourselves in terms of interaction and meetings. Asset management was lucky as an industry in that – unlike many others – we could continue to work, more or less, during the crisis so we should not complain too much.
“But it was still a difficult period, having everybody working from home and speaking only on Zoom. It is also interesting to see that, when there was the first confinement, people quite enjoyed working from home but, after a certain point, we could especially see young people were wanting to go back into to the office. The past few years have demonstrated the value of human interaction.”
Taking a longer-term view, Frick expects two disrupting forces will have a major bearing on how asset management evolves. “One is technology – and specifically how a machine can replicate what an asset manager has been doing at a much lesser cost,” she begins. “If you are an active manager, you need to think very hard about how you remain relevant – how can you avoid being replicated by a machine or an algorithm?
“The other is ESG, social revolution, climate transition … how do we adapt portfolios to this major economic and societal shock that brings both physical risk and transition risk? How do we understand which companies will be able to survive or thrive in this kind of environment and which ones will be unable to make the cut? Those two disruptors are going to make asset managers work very hard to evolve and to show our relevance.”
QUICKFIRE Q&A
What is the best piece of advice you have been given?
Always disrupt yourself.
What is your ‘top tip’ for professional investors to help them run a better business?
Dig into the detail.
What single issue should most concern professional investors at present?
How to adapt their asset allocation to a more complex world where 60/40 will not be as relevant as in the past. Does anything about your job keep you awake at night? How to remain relevant as an active manager.
And what most excites you about your job?
Two things – the social impact we can have on society and the fact we are constantly learning and discovering new topics.
If you were in charge of financial regulation, what would be your priority?
Value for money and making sure people have the maximum chance to build up a decent savings pot for their retirement.
And what advice would you give to someone starting out in investment today?
Be curious.
SENSE OF COMMUNITY
Given her status as a grande dame of asset management and her thoughts on the evolution of the sector, does Fiona Frick believe it is improving as both an environment and a potential career for women? “As someone who is naturally very curious, I have always liked the fact that every day I learn something new,” she replies. “The market is constantly evolving and that is intellectually very stimulating.
“Now, however, the growing importance of ESG and impact has added a certain aspect to the financial sector that is much more human and, I would say, useful to society than what was seen 20 years ago. Obviously, how finance has been portrayed in the movies over the years was not necessarily an example of what you wanted your daughter to work in.
“My son, who is 17, recently watched The Wolf of Wall Street and I had to explain to him it really does not work like that! So, of course, these sorts of movies do not make finance look so attractive for woman. Yet I think finance as work is changing in the sense there is a role to play in allocating capital for a better world and this is a motivation that is quite important for young women today.
“That makes them want to work in finance more than they used to 20 or 30 years ago, say, when the financial industry was seen as an alpha-male industry and it was all about who outperforms who. That is one positive, a second is the change since I started my career, when there were not enough women in asset management or finance to really create any sense of community. Today, this has changed completely.
“Today, there are plenty of bright woman – of all ages – who work in finance and can get together and exchange thoughts and advice on how to navigate this industry. And the skill-set of this group of women will be different to that of a group of men. This is so motivating because we can be a group within a group, with our own distinctive factors in terms of leadership management and all these things that did not exist when I started out.”
ESG 2.0
Continuing with her theme of continual change in asset management, Fiona Frick points to the evolution of environmental, social and governance-oriented investing over the past 20 years.
“Clearly, ESG considerations have become mainstream but I think we can now go one step further,” she says. “When Unigestion launched its first responsible equity fund in 2004, ESG was more or less all about exclusion.
“Investors did not want to invest in certain companies that were exposed to environmental, social and/or governance risk – either because of their beliefs or because they thought they represented a downside risk to their portfolios. Then the sector focused more on integration – where managers started tilting portfolios towards having positive environmental, social and governance effects.
“Even so, ESG investing has remained very autocentric – that is to say, it is focused in upon itself. It is still concerned with how an individual company is organised and behaves, compared with its peers – for example, is Nestlé organised better than, say, Danone in the same sector and doing better on the different ESG issues? As I say, that is very autocentric.
“I think the focus for asset managers and their clients has to be impact because, in the end, it is not just about investing in companies that have nice ESG characteristics – it is about working out how to invest in a portfolio that will move, from now to 2050, to be net-zero in terms of carbon emissions. That is more outward-focused – judging a business not by how it is organised internally but by its real impact on society.
“That would be my definition of ‘social alpha’. It is where investors are less concerned with whether a company is better organised than its peers and more with what individual companies – and what their portfolios and the money they are putting to work – are really doing for society? How does our allocation of capital influence society? Does it have a positive or a negative impact?
This article first appeared in the March edition of Portfolio Adviser magazine
