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“Entrepreneurs and younger clients insist on green investments”- an interview with Frédéric Rochat, Managing Partner
Article first published in TheMarker on February 16, 2021
As the baby boomers (born between 1946 and 1964), who account for one of the largest generations in human history, retire or plan their retirement, the next five years will see the biggest inter-generational wealth succession to date. $68 trillion will be handed down by the baby boomers to generations X (1965-1980) and Y (1981-1996). Forty-one percent of this wealth will change hands in the USA, 32% in Europe, the Middle East, and Africa, and 27.5% in Asia.
Such a significant transfer of wealth takes a long time, but as we have witnessed with so many things, the COVID-19 pandemic is expected to accelerate this process too.
According to Frederic Rochat, Managing Partner at longstanding private bank, Lombard Odier, the Coronavirus crisis has changed the situation not only for the younger generations, who are reassessing the levels of risk in their investment portfolios, but also for the baby boomers, who are suddenly required to rethink the way they have been saving and managing their capital for many years.
“The pandemic has accelerated many processes, including capital management,” says Rochat. “Many people, including the younger generations, have developed health concerns while at the same time realising that investing in their future now, is advisable. Today, millennials understand better than ever before that they need to look after themselves and their money.
“While the younger generation challenges traditional approaches to constructing an investment portfolio, especially with their focus on greener investments, COVID-19 has made even the successful young entrepreneurs understand that risking their capital is not a good idea.”
Rochat, 44, took on his role almost a decade ago following a banking career at Goldman Sachs. Today, he is responsible for private banking at Lombard Odier, a privately owned bank established 225 years ago in 1796. Known for its conservative approach, the Bank has been focused on sustainability over the past few years. It is a signatory of the United Nations’ Global Compact, the largest corporate sustainability initiative globally, and supports the UN’s Sustainable Development Goals (SDGs) set by the UN in its agenda for 2030.
“Sustainability or the green economy is a key issue for us, and we believe that investing in it will generate long-term returns for our clients,” Rochat says. “For us, sustainability is an investment philosophy and therefore, think that our clients should build their portfolios with the green economy and sustainability considerations in mind. We believe that companies that fail to become sustainable will not survive. Since sustainability challenges are present in all sectors, the companies that address them in the right way will generate more profit for our clients.”
The GameStop story: will it go away?
When trying to find an answer to the eternal question of how to balance risk and stability, and the long and short term, the hype around GameStop’s stock and online trading platforms such as Robinhood immediately comes to mind. If this new trend persists and grows, a new generation of wealthy clients who made their fortune this way will join the more traditional client base that Lombard Odier has been serving throughout its history.
Rochat thinks GameStop is an interesting story that illustrates the dynamics of price setting on the market. “It was the power of technology that made individual investors realise they will have power if they join forces,” he says. “Recently, we’ve seen individual investors – some of them jobless because of the pandemic – who invest the money they have on the capital market."
“It is too early to tell if this trend will continue in the long run. One thing is clear though: many people have begun to make a lot of money on the stock market, and this may motivate them to use private banking services. Fifty years ago, private banking was relevant only for wealthy families with ‘old’ wealth. Today, we are catering for a new breed of clients: young, creative clients, often from the technology industry, who are looking for experts to manage their money,”
Israel has become more relevant than ever
Rochat says many of these young and creative entrepreneurs are located in Israel. “We see a big opportunity in the Israeli market. Many young entrepreneurs grow in Israel. Over the past few years, we have reassessed our strategy, choosing the markets in which we want to invest more. Israel is one of our destination markets. It has a unique ecosystem of entrepreneurship, which offers many potential clients. We opened a new office in Israel and the banking team is already working there.
“Another attraction of the Israeli market is that some of the innovative companies we target for investment are involved in areas like smart agriculture. These companies will help in correcting the natural balance that has been disrupted by humans.”
Rochat explains that those young entrepreneurs and heirs are the ones who are pushing in the direction of wealth management via green and sustainable investment. Whereas previously it was the older generation that managed the family’s wealth, today it is the younger generation that questions the design of their parents’ investment portfolio. This generation seeks a higher proportion of investments that factor in ESG, social justice, and corporate governance considerations.
“Part of our work is about designing different investment portfolios for our clients’ diverse needs. Companies that bury their heads in the sand and ignore the climate crisis will eventually become very costly for investors. Companies that rise to the challenge of addressing sustainability issues in their sector and as compared to their competitors, have a better chance of growing and generating profits for their shareholders.”
Given the numerous changes that have taken place in private banking in recent years, have the people who manage the family wealth changed too? Are they still exclusively men, as it used to be?
“It is rare to see a family with a single ‘sovereign,’ be that a man or a woman, but today’s generation is different,” says Rochat. “There are many successful female entrepreneurs and many female leaders, both in Lombard Odier and amongst our clients. I do not think this impacts portfolio management. Women do not have a different way of investing than men. Generally speaking however, they do want to know more about the risks that influence the portfolio and are more closely involved in the investment process.”
What do you do at a time of zero interest rates?
Another significant change facing banks and their clients is the monetary policy pursued since the financial crisis of 2008. Rochat says this policy also influences investment management, especially when interest rates are so low.
“We continually research the different ways to invest for the long term. We experienced the crisis of 2008-2009 and Coronavirus has only accelerated the trend. In terms of fiscal and monetary incentives, we have seen much greater levels of stimulus than in 2008, with the most substantial impact on interest rates. Savings have grown during the pandemic, as people have been saving more; using the aid funds the government gave them. However, saving and funding needs are not balanced. Demand has slowed down, and if it were not for the central banks' generosity, we would have experienced negative inflation.
“Coronavirus has left interest rates low. This has caused us to question the basic structure of investment portfolios, which 20 years ago used to be balanced between stocks and bonds [stocks generating a return for the long-range and bonds for the shorter term.] As a result, we have continued to develop our expertise in long-term returns generating assets, such as infrastructure, sustainability, private debt, and venture capital.
“We have also seen the comeback of hedge funds, which until the financial crisis were a source for high returns. Many investors had grown disappointed with them, but 2020 was a good year for hedge funds, with many sectors yielding handsome returns, especially in credit. We are using hedge fund strategies to maintain the balance, especially when capital markets are volatile.”
Rochat also believes the new administration in Washington will continue to pursue a policy of significant fiscal support, alongside the Fed’s expansionary monetary policy. “The sheer size of the aid is a key factor for both the US and global economies,” he says. “We expect that consumer demand will recover in the first half of 2021 concurrently with additional fiscal incentives, reduced COVID mortality, and the bounce back of the labour market. Hence, stock markets will continue to perform well.
In December 2017, former US President Donald Trump lowered the corporate tax rate from 35% to 21%. This move supported the stock markets since corporate earnings have grown. However, his impact will be more pronounced in the coming decades in other areas, such as increased racism, demotion of the US’s international status and the growing polarisation of the American society. At the same time, President Joe Biden has already revoked some of Trump’s harmful actions in his first days in the White House, setting himself the goal of reinstating the US’ international standing.
“We believe the trade relationship with China will warm up and the threat of an all-out trade war will dissipate. Nonetheless, we do expect technological and geopolitical tensions between the two nations to remain, especially over the question of whether the USA will continue to be the central engine of global growth.”
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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