The better the teamwork, the better the investment result

Gérald, you and your team of investment strategists regularly meet in the morning for coffee and croissants to talk strategy and exchange views. What's the added value of getting together in an informal setting?

Gérald Moser: It's important to know each other, to build trust, and to have honest and open discussions. When you have 160 people on a call, nobody will say anything. Investing is difficult, and mutual support is essential. There will always be colleagues who are better qualified than you in certain areas. And the higher the level of trust, and the closer the collaboration, the better for everybody. I think some of our best ideas have come from discussions in small groups when people felt free to say what they wanted to.

Can people just walk into your office and speak their minds?

Of course they can, and they regularly do. When I'm in Vaduz, I sit with our wealth advisory colleagues. And when I'm in Zurich, I don't have a fixed desk. So I move around, joining various teams. When you sit down with people, just like with the morning coffee and croissants, that's when you get a real exchange of views.

Have the owners of LGT ever knocked on your door?

Given his career in private markets and his strong network, H.S.H. Prince Max von und zu Liechtenstein, Chairman LGT, has presented us with various investment ideas, to sound out whether they could be of interest to our clients. But there has never been any pressure from him or the family. They have always been very supportive.

Much of your effort goes into the construction of so-called model portfolios. Can you elaborate?

The US investor Howard Marks once said "You can't predict, but you can prepare." And to prepare, you need a balanced and diversified model portfolio. We construct this as part of a process called strategic asset allocation, and review it regularly. We trust that the portfolio will soften the effect of market downturns, and also help us to perform well in a favourable environment. For example, if you were to put your money exclusively in equities, emerging-market bonds, and assets denominated in "risky" currencies, you would get a very volatile portfolio that could go up a lot, but could also go down a lot.

How do you ensure that LGT's model portfolio is robust yet flexible?

We perform regular stress tests that tell us how the portfolio would behave in times of high inflation, during a recession, or in a Chinese equity-market meltdown. Other parameters include our estimates of returns over the next five years for all the asset classes we cover. We also assess the correlations between them to ensure they don't all "pull" the portfolio in the same direction. And once a month we do what we call tactical asset allocation, when we decide whether we want to deviate from our strategic asset allocation.

Some clients want to make their own decisions. How does that work?

If clients have a so-called discretionary mandate, we take investment decisions on their behalf. But there are also clients with advisory mandates. Here, we start by discussing the model portfolio, but usually end up moving away from it because the clients have special wishes and strong views on some stocks. In such cases, we obviously advise the clients, but they take the decisions. 

What happens in LGT's "investment engine room" during a stock market downturn?

When times are difficult, our clients expect guidance and handholding. Let me illustrate this with the example of the massive downturn in the Japanese Nikkei index in early August. On August 5, we did the following: because the crisis was due to a flare-up of fears of recession in the USA, the first thing we did was publish a short note to communicate whether our views on the US economy had changed. Around noon, we convened an ad-hoc investment committee meeting to inform clients whose money we directly manage about our next steps. In the afternoon, we published a newsletter from portfolio management explaining our decisions in more detail and setting out what had happened in the different portfolios we manage for our clients. 

So what could an investment decision look like on a hectic day like this?

Again, let's take a look at what we did on that day in August, after Japanese stocks lost 12 %. We moved to neutral on equities from a previous slight overweight. This mirrored the actual state of the portfolio, because the size of our equity holding had fallen relative to other asset classes after the mini crash. 

As a so-called active manager, LGT aims to "beat the market". Do you use passive instruments at all?

Our stance is more active than passive. We know how to invest in Europe and the US, and that's where we hope to create some alpha - in other words, to beat the returns on the broad equity indices through selecting the "right" equities. But investing isn't an exact science, and being active doesn't always work. We sometimes use passive vehicles like exchange-traded funds (ETFs) because they are convenient.

If you want to quickly increase your exposure to equities, you can buy a "global" equity index fund, and you can react very fast. If you do it through individual investments, you need further analysis: which stocks do you want to buy, and how would they impact the overall equity portfolio? If time is of the essence, ETFs are a great tool. And they also provide opportunities in markets where sometimes we don't have the right expertise or strong convictions about the equities in question. That said, ETFs can involve certain risks, like any investment.

One important aspect of active management is stock picking. Do you get feedback from clients in this regard?

Many clients want to learn more about specific stocks and expect us to take a position on these companies. That's fine with us, but we also have to think about whether the time is right to invest in certain regions, sectors, or factors. And yes, we also get challenged if we're not invested in a company that's the flavour of the month.

Does being neutral equal "playing it safe" in your opinion?

Sometimes, we are told "Oh, you're not very active, you're neutral." But neutral still means you have a view: you believe that your current strategic asset allocation is the right one. Terms like "neutral" are always relative - people tend to forget that. For example, if we underweight shares, they probably account for around 40 % of the portfolio in a balanced profile. If a client fits that profile but has only a 30 % equity allocation, the recommendation in this case would be to buy shares, despite our underweight rating.

It's also worth noting that a balanced portfolio isn't the same everywhere. In the US, for instance, where you have more of a "risk-on" mentality, you would typically favour shares versus government bonds. There, a balanced portfolio probably has a 60 % neutral point in equities, whereas for us it's usually 45 %.

When I speak to my counterpart in the UK, he tells me that a 55 % equity share in a balanced portfolio is below that of most of his competitors, who typically aim for around 60 %. Whereas here in Switzerland, with 45 % you're probably right in the middle of the range. Some private banks have an equity share of 40 %, and the highest is around 50 %.

Would you say LGT is a cautious investor?

I would prefer to call it quality-conscious rather than cautious. Most of our clients are rich already. They want to grow their assets, but in a safe manner that allows them to preserve their wealth. Loss aversion, a proven concept in behavioural finance, is quite strong in all of us, I think. If we lose 10 %, the pain is greater than the joy of gaining 10 %.

We are generally looking for companies with strong balance sheets and, most importantly, strong business models. If they are well positioned and can keep delivering on revenue and earnings quarter after quarter, the financial markets will ultimately reward the shares. But this doesn't mean we only buy so-called defensive names like food producers or pharma companies, which are able to generate steady profits regardless of the economic environment.

Is there something LGT would never buy?

We are a private bank, not a hedge fund, and we don't normally invest with a high degree of risk. For example, we're not chasing penny stocks - available at a massive discount - and we're not going to invest in highly leveraged companies with weak balance sheets, even if they're doing well on the market. Such an investment style might work for the short term, but never over the long run.

Likewise, we aren't going to actively invest in emerging markets, because this requires specific knowledge of every single country. In this instance, we would use ETFs or third-party funds to get exposure to these markets.

Do investors also ask about your views on specific bonds?

It's shares most people have in mind when considering a company. Investing in bonds is more technical. You can see one company issue three corporate bonds, and each of them will be different in terms of maturities, currencies, and yields. It's not typical for European investors to be very knowledgeable or to ask a lot about fixed income. But in emerging markets, where interest rates have historically been much higher than in the developed world, we have quite strong demand for ideas, advice, and bond investments.

Who is involved in LGT's investment decisions? 

The investment committee, which includes the head of portfolio management, the head of research and strategy, myself, and a few other colleagues, decides on the asset allocation based on inputs from our many investment teams. Once we get to the point of implementing a specific view, the call is made by others. We have specialists on equities, bonds, and investment funds, and they decide on the concrete steps. 

How do you communicate with your clients?

There are documents we make available to all our clients. They get published, and if the relationship manager decides to send them out, they go to the clients. Then there are quarterly outlook calls four times a year, during which participants can submit questions that we answer. We do these in English, German, and now also in French. We also do ad-hoc events in the form of calls on specific topics, such as the US presidential election. And then, of course, we have different advisory levels, with different fee structures. In the top category, clients can pretty much call their LGT advisor whenever they want. 

You invest client money on a daily basis - how successful are you with your own investments? 

A property transaction in London turned out to be a brilliant move. Regarding stock market investments, I have made some good ones, but also a really bad one in something called dividend futures, which is a leveraged instrument. It backfired quite badly during a sharp market correction. I should have remembered what Howard Marks said and been better prepared…

About Gérald Moser
As Head Investment Services and CIO Europe, Gérald Moser oversees all investment-related topics in Europe, notably Portfolio Advisory, Research & Strategy, Discretionary Portfolio Management, and Sustainable Investing. After gaining a degree in international management from the University of Paris-Dauphine, his professional career led him to Barclays, Goldman Sachs, Credit Suisse, and to LGT in 2021. As a true Frenchman, he loves good food and wine, as well as cycling. Gérald Moser lives near Zurich with his wife and young daughter.