Claude SUTER Geneva 23.03.2012 An Introduction to Private Banking and Portfolio Management Bruellan...

Claude SUTER Geneva 23.03.2012

An Introduction to Private Bankingand Portfolio ManagementAn Introduction to Private Bankingand Portfolio Management

Bruellan Wealth Management

2bruellan wealth management

www.bruellan.com

Geneva 2012

Table of content

Private Banking and the Family office

Wealth Management, understanding the client

Risk and return adequacy

Portfolio creation and investment strategies

Choosing the right investment vehicle

Private Banking & Swiss Bank Secrecy

Evolution of the financial markets

Concept of noise and echo in finance

Practical cases


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Geneva 2012

Private banking and the Family Office

Financial House

Traditional Swiss Banks

Private Banking


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Geneva 2012


Definiton of Private banking:

Traditionally, Private banking means to provide banking services to wealthy people and families. It is differentiated from retail, investment and corporate banking

Characteristics :

The client is an individual or a Family

He knows his banker and has a close relationship with him, based on trust

The banker provides services and “tailor made” investment solutions, answering the specific needs of the client

Today, private banking has to combine the one on one features of a traditional approach with on-line access to information on a “24/7” basis


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Geneva 2012


Who are the most important actors ?

Private Banks

Private Banking

• Since XVIIIth century

•Single business entity

• Wealthy client

• Taylor made portfolio

• Traditional

• Family Office

International Banks

Private Banking

• Since 1970

• High and Middle class

client

• Segmented client service

• Product oriented

• Family Office

Investment Banking

Corporate Banking

Retail Banking

Independant Wealth Manager

Private Banking

• Since XXth century

•Independance

• High and Middle class

client

• Taylor made portfolio

• Dynamic

• Family Office

Retail Banks

Retail Banking

Corporate Banking

Investment Banking

Private Banking

• Since 2000

• Middle class client

• Mainly fund managed


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Geneva 2012


Definiton of the Family Office :

A Family Office manage the whole wealth of a person or a family. It provides a variety of services including tax and estate planning, risk management, objective financial counsel, trusteeship, lifestyle management, coordination of professional services, investment advice, and foundation management.

Key components:

The client is an individual and often a Family

Portfolio management

An awareness of the family’s interests in less standard and arguably non-financial areas, which nonetheless need to be supported by financial planning within coherent overall wealth management strategy

Risk management

Property finance and legal assistance facilities


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Geneva 2012


• Identity

• Objectives (risk / return)

• Fiscal / Financial planning

Client Profile

• Brief

• Strategic asset allocation

• Restriction

• Benchmark

Investment Profile

+• Tactical allocation

• Portfolio optimization

• Risk management

• Stock picking

• …

Asset Management

• Volatility

• Tracking error

• Dispersion

Performance analysis

ReportingFeedback


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Geneva 2012


A fruitful, long-lasting relationship depends on our knowledge of the client, his objectives and his financial situation

Personal details

(nationality, domicile, age,

profession, health…)

Family situation

(marital status, children,

heirs…)

Asset and Income

(amount and origin,

real-estate income,

pension planning…)

Client

Do you have a specific objective in mind?

(e.g. buying a house, retiring, starting a business)

What currency do you use for most of your spending?

Objectives

Constraints

Do you have any

legal constrains?

Needs

Do you have any

particular needs?

Preferences

Do you have any

special preferences?

Financialplanning


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Geneva 2012


Account characteristics

• Description :

• Base Currency

• Date of inception

• Initial size, future potential

• Objectives :

• Required annual income

• Expected return, benchmark

• Risk tolerance :

• Time horizon

• Liquidity needs

“ If you think education is expensive, try ignorance !”

Derek Bok, Harvard University


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Geneva 2012


Account characteristics

• Guidelines :

• Investment universe : asset classes, countries,

currencies…

• Risk management : hedging policy, derivative

instruments

• Restrictions :

• Legal

• Tax related

• Maximum exposure to asset classes, countries, sectors,

…

• Qualitative restrictions : no alcohol or tobacco stocks, …

• Management of the account :

• Mandate of portfolio management

• Personal implication of the client

• Advisory

“ You’re wrong when the price drops below your purchase price”


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Geneva 2012


Definition of risk

For most private investors :

• Risk = likelihood of loosing money (shortfall risk)

• The absolute amount of loss (e.g. CHF 50’000.-) is often more

relevant (and more painful!) than the a percentage of total

wealth (2%)

• A paper loss is not considered as a real loss

• The risk / return perception is not static but is constantly

fluctuating between greed and fear

“ Finance is the art of passing money from hand to hand until it finally disappear”

Robert W. Sarnoff, Former Chairman of RCA


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Geneva 2012


Definition of riskFor the asset manager:

• Risk is expressed in terms of volatility, measured as the standard deviation of returns : the higher the variability of monthly returns, the larger the risk

• Risk can be managed and to some extend reduced through

diversification

• Risk is closely associated with return

• Risk is considered in absolute but also in relative terms, i.e. the

risk to underperform a benchmark or the competitors

“ Most investors should prefer losing small amounts of money infrequently

to losing large amount often”


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Geneva 2012


What does risk mean ?

“ An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.

Operation not meeting these requirements are speculative”

Risk measures the volatility versus the mean performance of a portfolio’s total return over a given period of time

0

10

20

30

40

50

60

70

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Tota

l Ret

urn

in %

Low-Risk Portfolio

0

10

20

30

40

50

60

70

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Tota

l Ret

urn

in %

High-Risk Portfolio


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Geneva 2012


Determination of the risk / return profile

“ Don’t attempt to buy at the bottom nor sell at the top”

Objetcive Rigth Wrong

1Achieving, in the long run, a total return higher than the inflation rate is one of my priorities 1 2 3 4 5

2I don't need frequent and steady income from my investments 1 2 3 4 5

3 I have a long term time horizon 1 2 3 4 5

4I am ready to tolerate a large volatility on my investments 1 2 3 4 5

5I am ready to bear a negative performance in the short run in order to achieve a higher long term return 1 2 3 4 5

6 I am ready to accept a low level of liquidity of my investments 1 2 3 4 5


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Geneva 2012


Life cycle : risk aversion and age

Equities Cash

Investment

Early career

Income<

Expenses

Rent

Retirement

InvestmentIncome

Legacy, donation

End of lifeSaving

Mid career

Income>

Expenses

Generally speaking, risk aversion increases with age as you can no longer count on income from working to offset any losses on your investments.


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Geneva 2012


Risk profile : characteristics of our investment profile

Income Low risk Balanced Growth Pure equities

Main objectivesCapital preservation

Capital preservation in real terms

Capital growthCapital growth in real terms

High return

Source of return Regular income Mainly incomeIncome and capital gains

Mainly capital gains

Capital gains

Low volatility Low volatility Average volatility

High volatility High volatility

No negative return

No negative return

-5% downside -10% downside -20% downside

Time horizon 1-3-years 2-4 years 3-6 years 5-10 years > 10 years

Risk


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Geneva 2012


The client’s objectives in terms of risk / return are central to our investment process

+ Personal details, family situation, assets and income

+ Reference currency

+ Definition of a client’s objectives and assessment of risk tolerance

+ Clarification of constraints and preferences

• The investment strategy

• The benchmark

• The tactical bands

Definition

of

“ It is better to have permanent income than to be fascinating”

Oscar Wilde


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Geneva 2012


Investment Strategy : an ongoing process

• Main macroeconomic parameters must be constantly monitored and forecasts are updated regularly

• A global financial scenario is designed and translated into concrete asset allocation decisions

• Out of the box and unconventional thinking is required (“What is obvious is obviously wrong !”)

“ If you cannot afford to loose, you cannot afford to win”


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Geneva 2012


The investment universe is divided in asset classes

Cash Risk adjusting asset class

BondsMajor contributor to portfolio income and risk immunization instrument through cash-flow and duration matching

EquitiesParticipation to economic growth through long term capital appreciation

CurrenciesConsidered as a separate asset class with integrated hedging strategies (currency overlay)

Derivatives / Futures Used in hedging and/or in return-enhancing strategies

Realt Estate Decorrelated investment from the financial markets

Alternative investments Hedge funds, structured products etc

Commodities Gold, Copper, mining equities, soft commodities etc


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Geneva 2012


Investment Strategy for the three main risk profilesType of investment Conservative Balanced Growth

Historical return

Historical Volatility

Expected Return

Benchmark

Cash and Short Term 10.0 5.0 2.0Monetary Index CHF Citigroup 3 mth 10.0 5.0 2.0 1.6 0.3 3.4

Domestic Bonds 26.0 15.0 5.0Merrill Lynch Broad CHF 1+Citigroup CHF Gov Bond 1-3 41.0 25.0 0.0 4.5 5.4 7.2

International Bonds 15.0 10.0 5.0

Domestic Equities 20.0 20.0 15.0MSCI Switzerland ND 20.0 20.0 12.0 3.0 15.1 8.8

International Equities 7.0 24.0 45.0MSCI Europe ND 3.0 8.0 10.0 2.6 18.6 12.1MSCI USD ND 3.0 8.5 20.0 2.2 15.7 10.3MSCI Emerging Market ND 1.0 7.5 15.0 11.7 26.1 14.9MSCI Pacific ND 3.6 20.2 12.8

Alternative Investments 15.0 20.0 20.0HFRI Fund of fund index 15.0 20.0 20.0 5.0 5.3 6.9

Commodities 2.0 1.0 5.0Dow Jones AIG commodity index 2.0 1.0 5.0 6.7 15.7 6.0

Real Estate 5.0 5.0 3.0GPR 250 World Total Return 5.0 5.0 3.0 8.5 14.5 10.7

Total 100 100.0 100


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Geneva 2012


Risk and return characteristics for these strategies

Allocation Decision Conservative Balanced Growth

Return / Volatility ProfileHistorical Return 3.8 4.2 4.3Volatility 3.6 6.5 8.4Expected Retun 5.9 7.5 8.2

"Shortfall Ratio"Loss probability over 1 year 5.3 12.8 16.6Loss probability over 3 years 0.3 2.4 4.7Loss probability over 5 years 0.0 0.5 4.7

ExposureExposure to reference currency 76.0 65.0 45.0Exposure to foreign currencies 24.0 35.0 55.0Exposure to bonds 41.0 25.0 10.0Exposure to equities 27.0 44.0 60.0


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Geneva 2012


Our style combines active management with regular risk control

Active management

We deviate from thebenchmark• Tactical asset allocation• Bottom-up stock selection

We favor internationaldiversification• Reduces portfolio risk• Broadens investment universe

Risk monitoring

Comprehensive monitoringprocess• Continuous monitoring• Quarterly review

User of quantitative models


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Geneva 2012


Fundamental analysis (top-down approach)

Macro-economicforecasts

Quantitativeanalysis

Technicalanalysis

Companyanalysis

Asset classweightings

Strategyscenario

Stock selection(bottom-up approach)

Geographicrecommendations

Sectorrecommendations


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Geneva 2012


Company analysis

Financial andNon-financial Press Firm’s Clients

Firm’s Competitors

Sell-Side Analysts

Internet

Organizations

Firm’s Reports

Company Visits Accounting Projections

Valuation Methods RatingBroker Reports

Recommendations

Organisation of multipleInformation sources

Full independenceof the stock selectionprocess


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Geneva 2012


The analyst’s toolbox

Is the Price Right?

Relative Valuation“Absolute” Valuation

Return ValueAbsolute Value Return Value Return Value

Book Value

Net Asset Value

Break-up Value

Option Pricing

Discounted Dividend

DiscountedFree Cash Flows

Equity(Free Cash Flow to Equity)

Enterprise(Free Cash Flow to the Firm)

Discounted EconomicValue Added (EVA)

P/EP/E growth

P/BV

P/Sales

DividendYield

EV/EBIT

EV/EBITDA

EV/Sales


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Geneva 2012


Understanding the business : key to proper forecasts

Understand the Business- What are your products/services?- What is your sales growth?- What are your margins?- Who are your clients?- In what countries, what regions?- Who are your competitors?- What is your market share?

Clarify the Accounting Principles- What accounting principles are used?- What consolidation method do you use?- How do you value securities, receivables inventories, tangible or intangible assets?- What is your depreciation policy?- How do you book foreign currency?- Etc.

Determine the Company’s Strategy- What are your competitive advantages?- How are you going to strengthen them?- What are your weak points?- How are you going to deal with them?- What is your aquisition policy?- How will you finance expansion?- Etc.

Asses the Potential- What is the potential of your products?- What ne products wil you launch?- How much will sales volumes increase?- How will selling prices change?- How much will acquisitions contribute?- What non-operating charge is expected?- Etc.

Ensure Consistency

“There are no good stocks, they are all bad, unless they go up”


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Geneva 2012


Definiton of Bank Secrecy:

Obligation by the bank employees not to reveal any information about the customers to a third party, unless it is compulsory by law.

Characteristics :

Concerns the people working for a bank

All banks in all countries of the world have an obligation to protect the private sphere of their clients

The secrecy is never complete, as a judge can overrule the bank secrecy should a crime be involved

The level of transparency depends of the law of the country in which the account is held


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Geneva 2012


What has changed:

Sovereignty vs Extraterritoriality

Progressive disappearance of offshore clients

The client will be looking at other criteria (i.e. performance, service, security)

Some advantages of the Swiss Private Banking :

Multidisiplinarity

Quality of the service

Banking knowhow

Political and Economical stability in the middle of Europe

Performance


www.bruellan.com

Geneva 2012

Jan 11 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2012 Feb Mar Apr May

-30

-25

-20

-15

-10

-5

0

5

10

15CHF in % TREND IN %

In CHF

Range 31.12.2010 - 19.03.2012

MS USA GDL 12.54%MS WORLD $ 1.22%MS SWITZERLAND $ -2.44%MS EUROPE-UK $ -7.46%MS PAC FR-JP $ -8.62%MS JAPAN $ -9.18%MS EMF EMERGING MKT FR $ -9.91%


World stock markets returns since 31.12.2010

Fears on Greece andon the viability of the Euro

Japaneese Tsunami

The data on the US economy are getting better

Fears of housing crash in China“The trend is your friend”


www.bruellan.com

Geneva 2012


-35

-30

-25

-20

-15

-10

-5

0

5

10

15CHF in % TREND IN %

In CHF

Range 31.12.2010 - 19.03.2012

MS WLD 1INFORM TECHN $ 12.46%MS WLD 1HEALTH CARE $ 10.54%MS WLD 1CONSUM STAPL $ 8.68%MS WLD 1CONSUM DISCR $ 7.39%MS WLD 1ENERGY $ 3.30%MS WORLD $ 1.22%MS WLD 1INDUSTRIALS $ -0.34%MS WLD 1TELECOM SERV $ -5.75%MS WLD 1FINANCIALS $ -6.89%MS WLD 1UTILIT IES $ -8.12%MS WLD 1MATERIALS $ -13.76%


World sectors returns since 31.12.2010

“If you buy a stock right, you’ve solved half of your selling problem”

Arab spring

Fears on Greece andon the viability of the Euro

Buzz on Apple


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Geneva 2012


-20

-17.5

-15

-12.5

-10

-7.5

-5

-2.5

0

2.5

5

7.5

CHF in % TREND IN %

In CHF

Range 31.12.2010 - 19.03.2012

Pound sterl ing -0.79%United States dol lar -2.26%Euro -3.52%Japanese yen -4.84%


Currencies against CHF since 31.12.2010

Run to safe heavencurrencies

BNS puts a floor on the EUR

Inflation fear from the BOJ


www.bruellan.com

Geneva 2012


-5

-2.5

0

2.5

5

7.5

10

12.5

15

17.5

20

22.5

25

27.5

USD in % TREND IN %

In USD

Range 31.12.2010 - 19.03.2012

Swiss franc 2.32%Pound sterl ing 1.51%Euro -1.29%Japanese yen -2.63%


Currencies against USD since 31.12.2010

Japaneese Tsunami

Run to safe heavencurrencies

Inflation fear from the BOJ


www.bruellan.com

Geneva 2012


-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

CHF in % TREND IN %

In CHF

Range 31.12.2010 - 19.03.2012

ICOM BRENT BLEND 32.49%OR (ONCE) 14.13%ARGENT (ONCE) 4.15%ICOM CRB FUTURES -6.19%


Commodities over since 31.12.2010 (in CHF)

“If you are not sure, don’t trade”

Arab spring

Fear over Iran

Chinese slowdown


www.bruellan.com

Geneva 2012


-2

0

2

4

6

8

10

12

14

16

18- in % TREND IN %

Quotation currency

Range 31.12.2010 - 19.03.2012

IO CIT GBP GOV 1+ £ 13.33%IO CIT AUD GOV 1+ L 12.04%IO CIT USD GOV 1+ $ 7.38%IO CIT EGBI 1+ € 6.83%IO CIT CHF GOV 1+ L 6.34%IO CIT JPY GOV 1+ ¥ 2.18%


Bond markets over since 31.12.2010 in local currencies

Fears that the PIIGS countrieswill default

Bailout program ispositively received

US Economy improving


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Geneva 2012


Bond markets over since 31.12.2010 in CHF

“Cut your losses and let your profits run”


-15

-12.5

-10

-7.5

-5

-2.5

0

2.5

5

7.5

10

12.5

15

17.5

CHF in % TREND IN %

In CHF

Range 31.12.2010 - 19.03.2012

IO CIT AUD GOV 1+ L 13.33%IO CIT GBP GOV 1+ £ 12.44%IO CIT CHF GOV 1+ L 6.34%IO CIT USD GOV 1+ $ 4.95%IO CIT EGBI 1+ € 3.07%IO CIT JPY GOV 1+ ¥ -2.76%


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Geneva 2012


Apr 09 Jul Oct 2010 Apr Jul Oct 2011 Apr Jul Oct 2012 Apr Jul

3.25

3.5

3.75

4

4.25

4.5

4.75

5

5.25

5.5

5.75

6

6.25

6.5

GBPBP

Moving average 50 daysMoving average 200 days

In GBP

0008441830 BP.Royaume-UniEnergy

Last price 4.9125 GBP

On 19.03.2012

Fundam entalsEPS LODH 0.656 GBP

PER LODH 7.49 x

Dividend 0.178 GBP

Gross yield 3.61 %


www.bruellan.com

Geneva 2012


14

16

18

20

22

24

26

28

30

GBPCARNIVAL PLC


In GBP

0015771090 CCLRoyaume-UniHotels Restaurants & Leisure

Last price 20.4700 GBP

On 19.03.2012

Fundam entalsEPS LODH N/A

PER LODH NC

Dividend N/A

Gross yield N/A



www.bruellan.com

Geneva 2012


15

20

25

30

35

40

45

50

55

60

65

70

75

80

85USDRESEARCH IN MOTION


In USD

0007256060 RIMMCanadaTechnology Hardw are & Equipment

Last price 14.4700 USD

On 19.03.2012

Fundam entalsEPS IBES 6.45 USD

PER IBES 2.24 x

Dividend N/A

Gross yield N/A



www.bruellan.com

Geneva 2012

Practical cases 1

- Jean Dupont, gérant de fortune, reçoit la visite de Mme Anémone Berger (54 ans), et de son fils Maxime (27 ans), qui lui annoncent le décès de M. Berger. Ils sont ses uniques héritiers.

- Le patrimoine après impôt est de CHF 3’000’000.-, Anémone en aura l’usufruit et Maxime la nue-propriété.

- De ce capital, Anémone compte extraire CHF 50’000.- p.a. de revenus pour vivre. Maxime, pour sa part, souhaite que le patrimoine grandisse à hauteur de CHF 5’000’000.- d’ici 10 ans afin de pouvoir racheter l’agence de son patron pour CHF 2’000’000.- sans entamer le capital.

- Aider Jean à lui préparer une proposition d’investissement.


www.bruellan.com

Geneva 2012

Practical cases 2

- Jean Dupont, gérant de fortune, reçoit la visite de Gilbert Pouls, qui vient d’hériter d’un portefeuille de CHF 6’000’000.- de sa tante Amélie.

- Le compte est composé uniquement de trois titres à parts égales : Roche, Novartis et Kudelski et n’a connu aucune transaction pendant les 15 dernières années. Sa valeur a doublé pendant la période.

- Sachant qu’il n’aura pas besoin de ce capital au cours des dix ans à venir, Gilbert vous demande s’il doit laisser le compte inchangé ou s’il peut faire mieux par une gestion professionnelle qu’il pourrait vous confier.

- Quels sont vos arguments?


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Geneva 2012

Practical cases 2

Evolution des titres de feu tante Amélie

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

1.25

32.5

95

220

470

970

1970

2970

3970

4970

59706970797089709970109701197012970CHF in % TREND IN %

In CHF

Range 23.09.1996 - 19.03.2012

KUDELSKI (PORT) 221.12%ROCHE (BON) 83.28%NOVARTIS (NOM) 51.60%

Crans-Montana – Geneva – GstaadLausanne – Verbier

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