Episode 10 - Christel Rendu de Lint, Co-CEO Vontobel

00:00:02:

00:00:02: Back to the Swiss Structure Products Association podcast, your go-to series for insights into structure products and a broader financial

00:00:10: market.

00:00:11: My name is Dominique Perle.

00:00:13: I'm responsible for the retail working group of The Swiss Structural Products Association.

00:00:19: I am joined by my cohost Janne Wilbrecht.

00:00:21: Hi Janine!

00:00:22: Hi Dominique great to see you again.

00:00:24: We've had pleasure couple times in

00:00:26: last two days

00:00:27: because we are still at International Structure Product Forum in Interlaken this year And what we want to do here in this podcast is make the speeches and some of the information available... ...to our listeners that can't be hear these days.

00:00:40: Now

00:00:41: today,

00:00:42: We're glad to welcome Christelle Rondu de Lintz, co-CEO of Fontobot

00:00:46: who was

00:00:46: part of a panel with the title Allocating Through Uncertainty from Macro Trends To Portfolio Solution.

00:00:55: That's exactly what we talk about with you, Christelle Today.

00:00:58: Welcome!

00:00:59: Thank You for having me.

00:01:01: Thank you.

00:01:01: Well, if it's okay for me let's kick off.

00:01:04: Sure.

00:01:05: Jani and Amy we discussed in the past which should immediately start a bit with provocative questions- No warm up!

00:01:14: Let us get straight to the point.

00:01:15: Okay very good.

00:01:15: So Kissel lets' start with this provocative question Have investors become too comfortable With the idea that markets will always eventually be rescued by central banks?

00:01:28: falling rates or policy support.

00:01:30: Are we now in a regime where some of the old investment playbook simply no longer work?

00:01:40: To an extent, I hope it's not too provocative and that the investors haven't realized we have changed regime.

00:01:46: You stated exactly in the right way... That regime where you were rescued by central banks actually stopped in twenty-twenty two.

00:01:55: We had after COVID which sent all governments really pumping liquidity, fiscal stimulus into the system.

00:02:03: We ended up with much higher inflation than expected.

00:02:06: and in twenty-twenty two was at the end of fourteen years of quantitative easing.

00:02:15: Any time you had the shock, any time you have a wobble central banks were not conflicted and they could really add liquidity.

00:02:23: They weren't having to think about inflation but only thinking of growth because inflation was never binding in a sense.

00:02:32: And so twenty-twenty two is this massive wake up call where for first times since the financial crisis cool down the economy, bring inflation down.

00:02:45: And so they increased rates that sent both fixed income and equity markets.

00:02:54: This is it, we're back into having monetary cycle.

00:02:58: We have finished the always-on expansionary monetary policy and so yes that's a big difference because It was acting as a big volatility dampener And in a big put right?

00:03:12: That with the Fed put that would come to rescue?

00:03:17: Yeah, this is one to definitely take into account as we think and it's not the only one that's fueling more volatility but that's definitely from the macro perspective.

00:03:25: One big dimension

00:03:27: also are you going actually back to a world?

00:03:29: We had like fifteen years ago?

00:03:32: Yeah, I think so.

00:03:33: We won't live long enough to see and have the perspective because it's over a hundred year period or whatever the horizon is.

00:03:42: but i do think that indeed the two thousand eight twenty-twenty two might turn out.

00:03:53: Of course, the central bank's mission is always to stabilize an economy but you do have cycles around it and that big

00:04:00: QE

00:04:01: period was probably the anomaly.

00:04:03: To an extent its too be hoped because zero interest rates no inflation is not a comfortable...

00:04:11: It´s

00:04:11: challenging environment.

00:04:13: yes so

00:04:14: it isn't necessarily taken as bad thing

00:04:17: at all.

00:04:19: Now, if these quote-unquote old rules are less reliable now.

00:04:23: These all tools that were applicable for the last fourteen years What does that mean ultimately?

00:04:28: For the strategic asset allocation

00:04:30: what

00:04:32: Do investors have to keep in mind?

00:04:33: concerning regions for example you mentioned emerging markets and your speech

00:04:38: but also

00:04:38: asset classes alternatives.

00:04:40: What is your opinion there?

00:04:41: yeah so I think this sort of first thing is true To really register that What it meant in terms of asset classes performance, the years through way to two-twenty-two was really to simplify everything that's going up at the same time.

00:04:59: Because liquidity is a one tide that lifts all boats and so suddenly you are in a world... By the way we still have felt like that with the exception of twenty-two because AI for market feels like new QE.

00:05:14: It is powerful as theme that it has again lifted really a lot of the markets and had has permeated into many asset classes.

00:05:25: And this is what brings me to the asset allocation question, so number one we should not assume or should assume as our own risk?

00:05:33: That everything will always go up at the same time And that means you need to go back to these fundamental principles of diversification.

00:05:41: It feels boring, but it really is extremely important.

00:05:45: so how do you diversify across asset classes?

00:05:48: Can be across geographies as well meaning interest rates can up and down equities the same then if actually the analogy is pertinent or relevant thinking about AI like QE The concentration risk is a big risk nowadays, because we have this theme and it's normal.

00:06:11: Because its very powerful and meaningful for the economy in where the world is going but being reflected on all asset classes Of course public equity markets with no other magnificent sevens But private market as well.

00:06:28: A lot of lending has gone through these themes Aswell as alot capital And nowadays, even in fixed income markets where tech companies because they were so cash rich and are never issued.

00:06:43: Suddenly there's going to be a double-digit percentage of fixed income market.

00:06:48: So I think it is not getting oblivious that sort of going with the blind eye into.

00:06:54: I'm diversified by my own equities.

00:06:57: on fixed income you might not quite as diversified than before.

00:07:03: How do I want to build?

00:07:04: portfolio is really going back.

00:07:06: You never have one allocation for all kinds, but it's what are you trying to achieve and within the defined horizon an outcome?

00:07:16: Are your more growth or income than you diversify?

00:07:20: that's a basic principle.

00:07:23: Can i pick up on two topics?

00:07:25: so the way i understand this diversification has become a challenge.

00:07:29: It's more challenging then it used to be.

00:07:32: So given the current environment, where can you diversify?

00:07:38: Is that why we were talking about emerging market?

00:07:41: is an area where diversification is more real.

00:07:45: Yeah so I think it's becoming more complicated.

00:07:48: probably or...I'm not sure if…so this theme makes it probably more complicated.

00:07:54: um i think just wasn't.

00:07:56: there needs weren't perceived for a long time because you didn't need to.

00:08:02: And if you can always pick the right asset class, but no one really can.

00:08:08: and so it's coming into your question.

00:08:10: yes I think emerging markets are... I'm struck how little we speak about them nowadays in a sense of conversation.

00:08:18: It is all around very much US For an obvious reason there's powerhouse There're many topics around that etc.

00:08:27: But in a world where obviously the geopolitical situation is being written live, we don't know whether winners, losers if any or how their forces are going to shift.

00:08:40: Where our new technology is reshaping the world and I would be hard-pressed to tell you who the final winner will be If there are any... How many?

00:08:48: There WILL BE!

00:08:50: That you have zone that is fifty percent of the economy i.e emerging markets Of The World of the world economy that we speak so little about.

00:09:00: And what is also very interesting, and it's a tool I really caught my eyes at actually over the last seven or eight years... The volatility of emerging market has come down.

00:09:11: its correlation to global equities have come down.

00:09:15: So doesn't mean completely different It's orthogonal.

00:09:19: but diversification power has increased.

00:09:24: Again thinking big part On certain worlds, diversification power will not be perfect but has increased.

00:09:33: Yeah I think we should definitely look at it.

00:09:37: I think you mentioned in your panel that when people or investors are passively investing they're on the impression that they are diversified.

00:09:45: what?

00:09:47: In fact only if i recall correctly two-thirds of their portfolio is diversified.

00:09:52: Is this because they usually neglect emerging markets?

00:09:55: They are focused on equities?

00:09:57: or where does the result of two-thirds come from.

00:10:03: Yeah, so it's actually really based in US equity market and you know over time the biggest mistakes that I've seen... The biggest costs to individual portfolio was misunderstanding.

00:10:21: One owns risk tolerance, even.

00:10:23: So of course you can have it in the industry and I wish and hope that I can't repeat enough making clear what a portfolio is doing whether risks are... But often if an individual overestimates his ability to tolerate risks It will end up going out on investment at worst possible time.

00:10:46: so That's something absolutely crucial.

00:10:49: And it goes into the same vein, which is if you just internet search or nowadays AI search what a passive investment is.

00:11:03: You will very quickly come to the word diversified.

00:11:07: Now If take US stock index two-third of it there are S&P five hundred Two third is four hundred ninety three stocks.

00:11:16: So for sure diversified A third is seven stocks.

00:11:21: I'm not saying bad or not, I am just saying if i was telling you give me a hundred francs what it means two thirds will be very diversified but for actually one-third won't be and that's making this clear to investors.

00:11:35: This where we are transparent also And its happened through market forces for good reasons.

00:11:44: But thats the result of And it's quite uncommon historically.

00:11:49: Yeah, that is a good point and I mean with the risk-point you just made... ...I think also something like what you mentioned about volatility?

00:11:58: Yes You

00:11:59: said there

00:12:00: are two

00:12:01: options how to deal with this volatility.

00:12:05: either you would just endure or find out your portfolio can hedge against it.

00:12:14: So maybe you can elaborate on that a little bit.

00:12:16: How should investors handle this volatility they see in the market more than before?

00:12:23: Yeah,

00:12:24: absolutely!

00:12:26: There is almost this mix of very strict rules and then behavioral aspects which most often get into sound investing to be honest.

00:12:39: And so what I meant by it was What you don't want to do is obviously being on the wrong side of volatility.

00:12:48: It seems stupid, but this was exactly my example before... You think you can tolerate it?

00:12:53: It drops!

00:12:58: And there's nothing particularly wrong beyond the volatility in asset class.

00:13:02: So either build a portfolio where say I have an allocation and hold through.

00:13:07: or see.

00:13:08: if true I like this allocation,

00:13:13: but i

00:13:13: won't be able to have that extreme scenario.

00:13:16: and you can build hedges for this tail risk.

00:13:20: They will cost your performance.

00:13:21: there's no trade thats ever free.

00:13:24: But This is one thinking You're gonna Have in saying okay That level of correction?

00:13:28: I Can't tolerate And I Inbuild the protection.

00:13:31: or you can just also say well you know I Will try and Seize The Moment Of of exaggeration or dislocations.

00:13:43: And I know that this is for instance a segment, stock whatever it might be like to get into and out And I'll try and use those extremes.

00:13:54: Of course, we are here at the conference around structured product... ...and this is precisely one thing that you can do.

00:14:02: The structured product for me is a craft of working with volatility.

00:14:06: It's professional crafts like any investing so one has to either know it or delegated to people who own that craft and need to make it transparent for you so they understand what is happening.

00:14:19: The challenge with structural products, if we come a bit into the topic of structural product personally I find also talking about investors.

00:14:29: when you purchase a structure product often you commit something because you give yourself a given timeline where something should occur.

00:14:38: And you usually do have to, You use a structure product when you need the view for it and I think that's not all financial products are like that.

00:14:49: Correct!

00:14:49: Like someone mentioned yesterday there is some like a product, a sofa investor.

00:14:54: Not a product but an investor.

00:14:56: Sofa investors buy a passive fund and i just sit on my couch and enjoy what will happen... You can't do this with a structured product?

00:15:05: industry in general?

00:15:09: I don't know if it's one, but probably is.

00:15:14: Investors find that very difficult to give up on liquidity which is understandable.

00:15:20: If you take the various stages of investing and when You know, you're probably going to start more simple in your allocation and only then if think about private markets now.

00:15:35: Come back to structured product of course but... Only when you think that you can avoid or forego liquidity will go into this type asset classes.

00:15:46: So it's the same way to think about.

00:15:48: And its true giving up on liquidity firstly must be rewarded.

00:15:54: like any risk, it's a risk you lock yourself up.

00:15:58: But I think that should mostly be only to lock the self-up on your part and then go back into same question what am i trying do?

00:16:11: You define asset class as being in structure product might thing for your needs or not.

00:16:19: So that's one aspect and the most important, I think is... One of a big barrier as well is transparency, accessibility even in terms of language.

00:16:32: The financial industry is very good at staying complex unfortunately And i say really unfortunate because it should be made accessible pension funds, where anyone needs to have a capital.

00:16:51: We also live longer so it becomes even more important and if I do smaller your capital is the most importantly this that you manage it well And You can only do so If you understand all of It.

00:17:02: So its one big thing for industry.

00:17:04: Yeah

00:17:05: i think thats an interesting aspect.

00:17:07: we in the structural products industry were so focused on explaining or mentioning The technical aspects Of our product whereas instead of just saying You want to do this, use the product.

00:17:17: What is it for?

00:17:18: Yes!

00:17:19: The application of these products instead going into technicalities.

00:17:23: I've got one more follow-up question regarding... I'm back in the hedging part.

00:17:27: From my experience investors are somewhat conservative In how they hedge their portfolios.

00:17:39: What's your experience like?

00:17:40: Is it can you put a number on the amount of portfolios that actually do apply or use hedges for their positions, is there like ten or fifteen-twenty percent?

00:17:50: It's very hard actually to put a number but you're right.

00:17:53: it's pretty low for an obvious reason which is that costs and people don't want to spend.

00:18:02: You look at your wounds when this happens.

00:18:05: so I think really what i said also emotions are time.

00:18:10: Investing should be based on what are you trying to achieve?

00:18:13: What are the principles?

00:18:14: and I will stick to them unless the facts really change, not my emotions.

00:18:23: Is there a point that you cannot tolerate in terms of drawdowns ?

00:18:28: And if and your allocation might lead you to that, either you need change the allocation or build a hedge.

00:18:38: I think this is way of thinking about it but... But we are seeing more questions around that because the world has become... Around hedging?

00:18:52: Because there's more stop-and-goes in markets, there're more air pockets literally.

00:19:01: We are seeing more inquiries around, you know how do I deal with it in a sense?

00:19:07: And is there something better that i could do With my portfolio than sitting through It.

00:19:13: Maybe to make this very concrete and To boil down everything That was being said In the last couple of minutes.

00:19:20: If he were advising an institutional client here today What would You tell him or her How to position The portfolio for next?

00:19:28: let's say three to five years?

00:19:30: Yeah, so you know we obviously always get those questions and I'm absolutely not dodging it but there is no one size fits all.

00:19:39: There really If you are, for instance... So an institution typically will have liabilities very often.

00:19:47: The first thing is match your outcome to your liabilities.

00:19:52: then if I was to take and there were a few of them family that has infinite horizon because it's intergenerational Then we'll say build the maximum growth through it Because you're inter-generational.

00:20:07: But my superseding role is always never more risk than you can tolerate and truly tolerate.

00:20:14: And diversification, that will mean in terms of the concentration we spoke about.

00:20:22: it could be currencies or custodians.

00:20:27: where are your risks?

00:20:28: So this would have been three C's often forgotten but ultimately match your portfolios to need define your horizon defined your risk tolerance and diversify.

00:20:42: Crystal, thank you so much for this very interesting final statement and for sharing all of your insights.

00:20:47: it's been very insightful!

00:20:49: Thank you very much for having me with a pleasure.

00:20:51: lovely thanks

00:20:52: And

00:20:53: to all our listeners.

00:20:55: if we'd like to learn more about the SSPA's initiatives or upcoming events please check out their website follow us at LinkedIn and follow off course his

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