Investment beliefs that reflect the concerns of multi-generational families.
According to recent analysis by a US consultancy firm, the median tenure of chief executive officers at large-cap companies in the US has fallen from 7.5 years to five in the space of just four years. The increasing turnover can be seen as both a cause and an effect of short-termism: CEOs of firms with outside shareholders are often under pressure to deliver results every quarter, which can lead to excessive risk-taking, including taking on too much leverage.
With less pressure from external shareholders, the heads of private family firms are able to think more long term. Such companies are often self-funded. And while we might look sometimes with a jaundiced eye at buy-outs, we certainly like buy-ins, where the owners of family companies express confidence by upping their stake in a business just as bigger corporate investors withdraw. And over the generations, well-established family businesses will have built up a wealth of knowledge, experience and values that each generation absorbs and passes on to the next.
With 215 years of existence, and with an average partner tenure of 21 years, Pictet itself has a lot in common with such multi-generational firms. Consistent with this longevity, the Pictet group has drawn up a series of long-term, multi-asset investment beliefs, which act as guidelines for the investment services we deliver to our family clients.
Among these is the belief that strategic asset allocation is the most important driver of returns over the long run. This, we believe, means standing ready to take a range of diverse and uncorrelated investment decisions rather than concentrating on a small number—in other words, managing portfolios actively. In turn, success in active management means trying to eliminate the noise that comes with information overload and looking at the real thematic drivers of long-term returns. Family owned businesses fit well into many of these themes, whether it be innovation, stability and sustainable finances. Active management also involves ensuring prices reflect long-term fundamentals—something the owners of family wealth should value as it is often a hallmark of their own business success.
One of our core investment beliefs is that active management best serves the interests of our clients, including our family clients. Today, active management also means exploiting the dislocation that has resulted from the coronavirus crisis. Since the financial crisis in 2008, aggressive central bank stimulus has led to tighter correlation within and between asset classes, meaning passive investing has had the wind in its sails. We do not think this will last, given the price distortions and misallocation of capital often associated with enduringly tight correlations. We believe proper price disclosure will come in the wake of the economic uncertainty engendered by the coronavirus. Who pays the bill for the huge debts incurred by covid-19? Will it be bond holders or equity holders? Taxpayers in poor countries or in rich ones? In the huge monetary and fiscal stimulus we are currently seeing lies the roots of widening correlations that active managers will exploit, separating the winners from the losers as volatility and dislocation come to the fore again.
Finally, as stewards of client savings, we want to act responsibly, interacting positively with the investments we select. The families who count among our clients well understand our intent to invest with purpose, which is not the least important of the investment guidelines we follow.