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Helping private clients navigate market volatility and the road to net zero - an interview with Frédéric Rochat, our Managing Partner
Article published in the NZZ, 8 September 2023
Mr Rochat, we've been through some difficult years. What is concerning your clients most right now?
Investors think that the world is at a crossroads. To reach for a parallel, we have to look back not two or ten years, but nearly 40. Since the fall of the Berlin Wall, we have experienced decades of almost unfettered globalisation. Input costs have fallen sharply, and at the same time central banks have gained greater independence. These factors have combined to drive down inflation, which in turn has led to greater economic growth and big gains in value for many financial investments. After almost 40 years, however, this cycle is coming to an end. Globalisation is giving way to regionalisation and nearshoring. This reorganisation of the value chain, along with the huge government and central bank support schemes during the Covid pandemic, has ushered in a new age of inflation and higher interest rates. Many investors find themselves constantly wondering what the long-term effects will be.
That scenario doesn't sound very positive.
Pessimism is unwarranted. Governments and central banks are taking the fight against high inflation seriously. It may take a little longer than investors originally anticipated for central banks to bring inflation back down and keep it at a normal level. Consequently, interest rates will probably remain elevated for a while yet. But that does not mean that there won't be any opportunities. Bonds will become more attractive as an asset class.
What do clients expect from a bank like Lombard Odier in these circumstances? It cannot foretell precise interest rate trends either.
Our clients seek security and a bank that helps them to navigate their way through complications. We don't carry out any proprietary trading, but are there for our clients as an investment firm. Many of our clients are entrepreneurs with strong convictions of their own. They come to us because they want to apply those convictions to their investment portfolios.
Is that profitable then – investing based on convictions?
The performance of their investments is hugely important. But behind every entrepreneur you will usually find a family. As such, their deepest wish is often to put the right succession planning arrangements in place. That is not easy when you have children living and studying in different countries. People therefore choose a bank that will be at their family’s side when they no longer are. When a business leader invites us to get to know their children, we consider this a mark of success.
So that means that bank advisors need to have the technical and social skills not just to explain the financial markets, but also to understand family psychology?
Exactly. We want to give our clients the best technical expertise, but also listen closely to what really drives them – what goals they want to achieve.
Those are very different requirements. How do you bring them together in practice?
We are organised as a team. The days when one banker would take care of everything for their client are gone. Although one advisor remains responsible for managing a relationship with a particular client, they are joined by wealth planners and dedicated portfolio managers where required. A Lombard Odier Partner will generally oversee the relationship.
It used to be the case that the client advisor was an expert in everything. Did old school bankers find it hard to get to grips with the team approach?
It should never be the case that bankers confuse their own interests with those of the client. Good bankers want to provide their clients with the best that their bank has to offer. Those are the people we depend on.
Private bankers move in very exclusive circles, day in, day out. That can turn some people's heads. How do you work with clients on an equal footing, without losing sight of the fact that you don't "belong" there, but are providing a service?
In days gone by, there may have been bankers who sought to make up for a lack of expertise through friendship. That is not our approach. We have never tried to place ourselves on the same footing as our clients: they make the decisions. Our role is to understand what they are trying to achieve and to bring the right expertise to the table. That is where private banks can make a real difference in the 21st century.
Your firm helps to instil a long-term perspective in your clientele of entrepreneurs, but like everyone else, investors are susceptible to FOMO: fear of missing out. How hard is it to dissuade your clients from making the wrong decisions out of panic?
This fear arises when there is not sufficiently broad discussion of the long-term investment horizon and portfolio structure at the outset. We make time for this in every client relationship, because in the long run it accounts for 80% of a portfolio's performance. I'm not talking here about the precise breakdown between equities and fixed income. When you're working with entrepreneurs, it's important to understand what the main source of the assets really is. How much is contained within their company? What properties do they have, what do their pension arrangements look like? We then present and test some economic scenarios. Sometimes it takes a series of meetings to define a long-term investment strategy.
To take a real-life example, when Russia invaded Ukraine in 2022, coal and arms stocks – which are excluded from many ESG portfolios – went up. Was it hard to convince your clients to maintain their sustainable investment stance?
Sustainable investing is not a marketing strategy for us. The transition to a sustainable economy offers our clients considerable return opportunities. This transition is one of the few rays of hope for investors at present. There is a growing consensus among the countries of the world that we need to shift to net zero emissions globally by 2050. The US, China, Europe and emerging economies are all on board.
But that is still an extremely long view to take – how do you persuade clients of it today?
Various myths have grown up around sustainable investment. One is that the asset management industry has confused sustainability with ESG, seeking to use a single score to measure not just environmental and social performance, but also good corporate governance. That is understandable, but it makes the ESG score unsuitable for measuring how firms will fare in a net-zero world. Another issue is that asset managers assume that an equity portfolio's ESG score is easy to measure and optimise. However, all it tells you is how a company is currently operating. We are interested in whether its activities will actually help advance the transition and whether the company will itself benefit financially from it. Does it produce or distribute renewable energy? Does it solve a significant roadblock on the path to net zero? You can't answer these questions by playing around with a database. You have to understand what the net-zero world will look like and how the transition towards it will play out. That is why we invest above all in fundamental research.
Everyone would love to know how this net-zero world is to be achieved. What does Lombard Odier think?
We think that four major revolutions are already underway. The first is electrification using renewable energy. Second, agriculture is going to change radically: we need to feed more people using less arable land in order to free up space for biodiversity and reforestation projects. That will require large-scale changes in eating habits and agricultural production. Third, consumption of raw materials needs to be cut, and recycling rates must improve. And fourth, the capitalism model will need to be expanded to price in external impacts – above all, we need to be able to introduce a carbon levy.
With these four revolutions, you describe clearly where we want to get to, but experience shows that will be twists and turns along the way. As an investor, however, if I put my money in the right thing at the wrong time, I will make a loss.
We don't claim to be able to predict the precise path to 2050. However, our groundwork is a starting point, and we combine this scientific research with financial analysis of individual companies and sectors. That said, we should not underestimate the enormous changes that are needed to bring about the transition to a sustainable world. We are not talking about a non-binding target, but a serious project with financial backing. It is already underway and is currently gathering a lot of pace.
What are you basing that assertion on?
By adopting the Inflation Reduction Act, the US has already put in place a support programme for domestic manufacturers, to help drive forward the transition. Also motivated in part by the war in Ukraine, Europe has settled on the objective of energy independence – i.e. to be independent of fossil fuels from Russia and the Middle East. We need to reflect this in our portfolios.
But governments can only kickstart this process and act as catalysts – private households also need to get on board.
We are optimistic: the costs of sustainable solutions are coming down to such an extent that they are becoming cheaper than traditional ones, for example in heating or mobility. And that is the point at which consumers will adopt them en masse. In the UK, for example, households are increasingly investing in solar panels because electricity and gas prices have shot up. We are seeing similar patterns of behaviour in other countries too.
What does this mean for Switzerland?
We are starting from a position of strength because, thanks to our geography, we already generate a lot of our energy from renewable sources; mainly hydropower, but also nuclear. Switzerland will find its own path to net zero. And it will get there, I have no doubt.
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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