Senior Partner, Pictet Group (Banque Pictet & Cie SA)
Atel Winter Conference 2022 - Pictet presentation
So we are dividing in in four different uh businesses uh the first the two big ones are Asset Management so this is the one we are ...
About Marc Pictet
Marc Pictet, Senior Partner at Pictet Banque Pictet Cie Sa, spoke at the Atel Winter Conference in December 2022, where he discussed the bank's structure and views on financial reforms. He described Pictet as a Swiss bank established in 1805, with over 600 billion euros in assets under management, more than 5,000 employees, and 30 offices across 19 countries. Pictet stated that the bank is "against the reform" because he believes there are risks of "over consultation of players" if the Elven nav is removed, suggesting this could push investors toward other products and create additional buffers or gateways that might increase costs for corporates. In a separate appearance from November 2021, Pictet discussed the alternative investment management arm of the bank, Pictet Alternative Advisors. He stated that the firm attracts talent through competitive compensation, strong client contacts, and a collaborative culture. Pictet noted that he joined Pictet over 10 years ago to launch the Agora fund, attracted by the long-term approach to building a business and the firm's infrastructure. He emphasized that the firm operates a multi-boutique model with decentralized decision-making, allowing fund managers to flourish, and that the culture is oriented toward operational and investment excellence for clients.
Transcript (32 segments)
M
Moderator0:18
So we will talk about the results of the survey I've mentioned, where we had different questions about the reform and the trends in investment. So please, let's go through first Pictet's products, but also the results of the survey.
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Marc Pictet0:39
Absolutely, thank you Francois. Well, first of all, thank you very much for giving us the opportunity to be here at the hotel. As always, it's a pleasure to be here. Before we start, I wanted to maybe speak a little bit about Pictet, just to make sure — I'm not sure if everybody knows well who Pictet is here. So maybe we have a quick introduction on the company. Pictet is a very well-established Swiss bank which was created in 1805, so more than 200 years ago. In Switzerland, we have more than 600 billion euros of assets under management, more than 5,000 employees, and present in 30 offices in 19 countries. The headquarters is in Geneva, but of course London is quite important as well. And Luxembourg as well — by the way, very close to here, we have quite a big office here as well. We are quite proud about our credit rating because we are Aa2 with Moody's and AA- with Fitch, which is I think one of the best-rated banks in the world.
So we are divided into four different businesses. The first, the two big ones, are Asset Management — so this is the one we are part of with Philippe and myself. We have more than 200 billion euros under management, including more than 40 billion in money market funds, and the money market funds section has grown a lot this year. We have also Wealth Management, obviously, with also more than 200 billion of assets under management. And the two other parts are Alternative Investments and Asset Services.
So now let's talk about the treasury survey. There was a questionnaire sent to all the corporate treasurers in Luxembourg, and so thanks very much to the ones who answered. We have analyzed the results and produced two slides to discuss about this survey. First of all, we noticed that obviously the main currencies in Luxembourg are Euro first and then Dollars — these are the two biggest currencies that corporates have in Luxembourg. In terms of the products they use, the top three are short-term bank deposits less than three months, money market funds, and also cash left on the account. This one is a little bit more surprising to me. I think it's probably related to the fact that the rates were negative not so long ago, so I guess at that time it was good to have cash on the account. Maybe now it's time to potentially move this into products which have higher yields. We're going to probably see this change soon, especially with the rate hikes, including today 50 basis points with the ECB.
In terms of the criteria for cash investments, what the questionnaire shows — and here I speak about cash investments in general, not just money market funds — is that the top three criteria are not very surprising: the size and quality of the counterparty, access to liquidity, and risk diversification. So this comes on top of the maximization of the yield, which is the fourth criteria. I think it makes sense, because when we speak about short-term cash for corporates, it's not surprising that the key criteria is really capital preservation and access to liquidity.
So now I'm going to ask Philippe — maybe you should present yourself as well, I didn't give you the time to do it.
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Philippe Vasserot5:17
Good evening. I'm Philippe, Head of Money Market at Pictet Asset Management, and I'm going to present you the results of the survey that are regarding the money market funds. There was a whole section of questions regarding the use and the criteria for selecting money market funds. The first question that was asked was: which criteria do you use to select a money market fund? The first criteria is the existence of an external fund rating, so typically we have ratings from Moody's, Fitch, or S&P. The second one was the settlement cycle — so T0, T+1, T+2. Third one, the fund size. Then the fourth one, sponsor rating. And the fifth one was fund manager's experience. Actually, those criteria for us and the answers are not surprising. It's quite professional, I must say, and if we consider the consultants that we work with, they would consider exactly the same type of criteria when selecting a money market fund.
There is something that is more surprising, and related to the previous presentation — there was a question about ESG: do you use ESG criteria for selecting money market funds? And the answer was yes for half of the panel and no for half of the panel. So here for ESG there is no clear consensus, and at least it's not one of the main criteria used for selecting money market funds.
Then the second topic that we reviewed was the regulation. So as you know, money market funds are highly regulated. They have been regulated since 2011 by ESMA, and there's been a strong regulation put in place in 2019. But most of the funds were already compliant before that date. And this regulation is aimed at really making money market funds a very safe product for investors, and it covers all aspects of fund management. I think there are more than 100 pages of regulation, very very detailed, even to the criteria that we have to use to assess credit quality of the assets we invest in. So very strong regulation. And then there's been a COVID crisis, and regulators have been a little bit worried about liquidity. In the questionnaire we asked: were you worried about liquidity? And one-third of the treasurers confirmed that they were concerned about the liquidity during the COVID crisis. And as a consequence, the regulators are reviewing the regulation with a view of strengthening the liquidity patterns of money market funds.
So the question I asked was: are you aware of this review? And 50% said no. The risk which is embedded in this review is not very positive if we look at it, because treasurers think that as a consequence there might be an over-concentration of sponsors, maybe lower yield of products, and at the end less choice for investors. And unsurprisingly, the majority of treasurers think that there is no need for a reform. At the end, there is not a clear preference either for LVNAV or VNAV — the two categories of money market funds. So I think that with this result, there is a need for education from the regulator for the investors on what they want to do actually.
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Marc Pictet9:37
Okay, so now let's go back to the cash solutions and let's analyze them a little bit more in detail. First of all, I wanted to clarify that with corporates, usually there are three types of cash. There is the operating cash, which is really the short-term cash that needs to stay available all the time — so of course it needs to be invested in short-term solutions, potentially like money market funds, deposits, maybe repos, but stay very short. Then there is a second part which is the stable cash — this one can potentially be invested a bit longer, usually we can see up to 12 months. Well, of course it depends on how stable the corporate knows the cash is. And then the third part is the strategic cash, which is the cash meant for long term, and then you can go for more longer-term solutions potentially with a higher yield. So I just wanted to clarify this because today we only speak about operating cash solutions, really short term.
And so we did a small table to try to make it a bit easier to understand what are the pros and cons of the products. Maybe Philippe, you can go through them.
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Philippe Vasserot10:54
Yes. We selected the three products that have been identified as the main investment vehicles for treasurers for cash: direct investment — so in this we include treasury bills, commercial papers, certificates of deposit. So probably big treasuries can afford to have a direct investment, but not only. Then bank deposits, be it overnight or a bit longer. And finally, money market funds. The first criteria that we reviewed is diversification. And usually if we consider diversification, money market funds typically hold more than 50 to 100 different positions and they are highly diversified, versus bank deposits where usually — also mentioned the case of cash that is staying just on the bank account — there's no diversification. So money market funds offer this diversification.
Then in terms of liquidity, the liquidity for money market funds is immediate and obvious — you just need to pass your order. As for direct investment, it's a bit more questionable because of course if you have treasury bills it's highly liquid, if you have CDs and CPs it's liquid as well but you need to work a little bit to have a bid on your assets. And bank deposits liquidity typically depends on your good relation with your bank.
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Marc Pictet12:34
Thank you. And maybe let me take the operational criteria. So we think our money market funds are really a good tool for the operational reasons. First of all, it's very easy to set up — you can use usually online platforms, there are quite many of them, and then you can see if you're on the platform different funds there, you can compare them, and you can easily invest, increase or decrease your investments. But the other point, I would say very important as well, especially compared to maybe deposits, is that if you have cash you can just invest in the fund, leave it there, almost forget about it if you don't need it, and as soon as you need it you can just get out of the fund partially or fully and get the cash back in 24 hours. So compared to a deposit where you have to roll over every time — it's quite time consuming, you need to make sure you don't forget there is a maturity coming, then call the banks and get rates and then roll over etc. Here you can just leave the cash in the fund, which is I think much easier.
Then a more controversial topic, which is the net return. And the net return of direct investments and money market funds are closely related to the money market levels, and then also the type of asset and counterparty risk that you accept to take. Obviously you are more rewarded in terms of return when you invest in a lower-rated issuer. But what we can say is that with direct investment and money market funds, you will have returns that are closely related to the level of the market. As for bank deposits, we have put two pluses only because we noted that the banks are a bit reluctant at the moment to pass through completely the rate hikes that have taken place this year — so a little bit less favorable.
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Philippe Vasserot14:47
Then as for counterparty risk, there is one feature that we need to stress about money market funds: if we want to operate a money market fund, we need to have credit analysts. And in Marc's presentation we see that they have tens of credit analysts including ESG, and actually in all the fund management firms we have a lot of credit analysts dedicated for money market funds analysis. So counterparty risk is mitigated in a money market fund. In terms of sensitivity to rate hikes, as Marc mentioned, if you invest in a money market fund you forget about it, and if there are rate hikes, given the low duration feature of the product, you will benefit from the rate hikes. You have invested in a long-term deposit and the rates are rising, then you can be caught in a negative trend.
Then in terms of transparency, there is something that many people may ignore: we need to report the position of the fund so that you can have it — in some instances like portals on a constant basis — about our position, so that you are aware exactly of what type of risk you take. If we compare that with bank deposits, for instance, banks usually do not display to you the quality or the details about their balance sheets. And by the way, it's important to note as well that money market funds are not leveraged, contrary to banks.
Then if we go into more details about money market funds, you see on this slide the main features of a money market fund. I already mentioned diversification and regulation, but what is important here to note is the type of assets we do invest in: commercial paper, CDs, T-bills, repo deposits, short-term bonds. And here what needs to be clarified is that money market funds do not have any currency risk or risk that are not related to money market risks. So you will not have equity or anything else — it's purely money market risks.
If we broaden our view about the market — and we are in Luxembourg, so Luxembourg is a big marketplace for money market funds along with France and Ireland as for the domiciliations — and we have displayed here the latest statistics from the CSSF regarding money market funds. Here what we can see is that globally it's a very big market, 400 billion at the end of last year, and there is a slight difference between currencies. So if we take the example of Euro, most of the funds are VNAV, whereas if we consider US-denominated money market funds, most of them are CNAV or LVNAV. And that raises the question of VNAV versus LVNAV.
In our view, VNAVs offer a lot of flexibility in terms of investment because you do not need to do buy-and-hold strategies at the same time. In terms of valuation, it's very transparent — what you buy is an asset that is valuated under current market conditions, contrarily to LVNAV. And then, in the regulation there is a possibility eventually that LVNAV will be forced to be converted into VNAV, and that has never been experienced in the market. We think that if something like this happens, the fund will be badly hurt by redemptions. But there are some advantages also of LVNAVs, and many treasurers see the LVNAV more accounting-friendly for their balance sheet.
Then if we move more concretely into the money market fund — what can you find in a Euro money market fund? The first thing that you can see on the top right and left is that those assets are highly diversified. So for instance, in terms of country, you see that the biggest exposure is Japan and also part of it is treasury bills, and then the second one is France. In terms of sector, you see a predominance of financial, but this is completely inherent to the nature of money markets, which is supplied mainly by banks and financial institutions. And also we have to note that usually corporates over the past few years have been cash-rich and less active issuing in the market, so they are not that present in the portfolio. In terms of diversification and transparency, you see on the lower left side of this chart the details of the maximum exposures of the portfolio. So you see that it's mainly composed of banks, highly rated, mainly double-A, sometimes triple-A, like BNG, or treasury bills like Japan. In terms of instrument breakdown, it's massively invested in commercial paper and in CDs — so typical assets of the money market.
Then in terms of structure — so on this slide you see the duration of the funds. So you see it's very short duration: the Euro fund is eight days of duration, the US dollar fund is 33 days of duration. And you see the yield also on the second column: 2.01% for the Euro and 4.55% as of yesterday for the US dollar. And it's relatively consistent with the ESTER and Fed funds levels.
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Marc Pictet22:16
Maybe just a point on the duration: money market funds, with the regulation, have a maximum of 60 days, so we can sort of choose between 0 to 60 days. And you can see that for example in Europe we have only eight, so that's really really short term. The main reason is that we want to benefit from the current environment where the rates are going up. But of course it's up to the managers of the fund to decide to go a bit longer or shorter, but at the moment we have decided to go very short so that we can benefit from the rate hikes all the time.
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Philippe Vasserot22:58
So to end up, a few criteria that should be considered when investing in a money market fund — I mentioned a few of them — but the category of the fund is important: short-term funds or standard VNAV or LVNAV or CNAV structure as well. Existence of an external rating is important as well, and also the ESG integration — Article 6 or 8.
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Marc Pictet23:29
So thank you very much.
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Moderator23:38
So more than a question, maybe just the first remark: as mentioned, we have different positions. If you want to check on Info website you can see the position paper, and ours on EACT's website. But as mentioned during the presentation of the survey, we are against the reform because we do believe that there are some risks of over-concentration of players if we remove the LVNAV. So we think that it could push a lot of investors to go to other products, and swing pricing and additional buffer or gateway could be a problem because the cost could increase, of course the return for corporates at the moment we're interested in picking up. And the last thing I want to mention: we should not forget that corporate treasurers are investing in money market funds, but we have also a lot of corporates issuing some papers. So we need to have investors to buy our short-term papers, and so we should not forget that. What we explained to the EU Commission recently is that it's an important instrument to fuel and to help the economy.
So any questions for our speakers?
A
Audience Member24:56
An element you've not mentioned — it's IAS 7, so cash equivalent. It's really important for a lot of us because we are on the IFRS rules. And I fully agree with your segmentation, but in practice, and I'm sure that some people have faced that, out of corporates consider that everything is operating and therefore short-term. And also because of IAS 7, so it means that you are not really allowed to use other products than standard or very short-term products.
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Philippe Vasserot25:31
I don't know your experience, but I mean, of course it's indeed very important that the funds we offer are considered as cash equivalents, because we know for clients, for corporates, it's very very important to be able to book this as cash. And as you rightly mentioned, we can automate via platform money market fund investments, whereas deposit is still difficult to automate. The investment in bank deposits, furthermore, you need to call the bank, and it's difficult to call the bank. At the same time, it's more manual and you concentrate your risk. And sorry, but these days we know that some banks could face some difficulties — I know a certain famous bank in Switzerland recently — so that's quite important to diversify sometimes.
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Marc Pictet26:19
Yeah, not you. And in terms of returns, we also noticed that when you call the bank on a daily basis for overnight rates, these rates are fluctuating depending on the needs and currencies. In Luxembourg, dollar is usually well, let's say, quoted, but for Euro it could be fluctuating. So if you compare on the recent days — and of course taking into account the pickups in interest rate — usually your funds, like Pictet's and some others, could be more performing compared to bank deposits. And easier to manage, because once you invest it's compounded. So I think the point you mentioned there — which I mentioned before as well — it's so much easier, I would say, because as you say, when you roll over the deposits you have to call the banks, the rates can change quite quickly depending on the cash needs from the bank, depending on the timing as well, if it's end of the year etc. So it's a lot of work to literally just leave the cash in. The early redemption could end up with a penalty — you lose the benefit of your deposit.
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Moderator27:34
So in order to respect the timing, I do propose to close this session. But in any case, Marc and Philippe will stay around, so no need to raise questions now. Veronica is there, and thank you for coming today because she was visiting the CSSF — we keep lobbying with the different stakeholders. So if you have any questions about the reform, I'm sure Veronica could give you a lot of insightful information. And we have also three other colleagues there — Jean, David, and Stephen. So any questions? Happy to answer any questions after. Thanks a lot.