How do chief investment officers make their decisions, and what tools do they use in driving clients' portfolios? CIOs shared some of their insights at a recent WealthBriefing conference.

How do the investment chiefs of wealth management houses go about the task of protecting clients’ wealth and growing it where they can, and what practices and habits do they seek to cultivate? 

These were some of the questions posed to a panel of chief investment officers at the recent WealthBriefing Investment Strategy Summit held in London. 

One of the subtle differences emerging from what the panellists said was how firms’ different liquidity requirements played a subtle but important part in their asset allocation approaches. Wealth managers also vary in the use they make of funds and direct investments – sometimes such considerations are driven by cost and time as much as by available expertise. 

Speakers at the conference were David Cavaye, chief investment officer of C Hoare & Co; Nancy Curtin, chief investment office and head of bespoke investment for Close Brothers Asset Management; Mark Hendriks, chief investment officer for Sandaire; and Markus Stadlmann, chief investment officer of Lloyds Private Banking. The panel was moderated by Bruce Weatherill, chairman of Clearview Financial Media. Conference sponsors were Dragon Capital, smartKYC, BB Bellevue Asset Management, ETF Securities, Lyxor, and Pulse.

A broad background factor with which all CIOs wrestled is today’s low-interest rate environment: low, or even negative cash yields and a hunger for income. There is also a need for firms to educate clients into adopting attainable investment returns at risk levels they are comfortable with – not an easy balance to obtain. 

In such an environment, bond markets, especially on the sovereign side, don’t look attractive and don’t have the safety factor they used to be known for, the conference was told. 

“I think fixed income at the moment is highly risky especially among sovereign bonds, or just not worth it in terms or returns,” Hendriks said. 

As far as the more general approach of how investment decisions are reached, Hendriks and other panellists were asked about whether it was worthwhile to pay for external research as well as have in-house capabilities. “We outsource to an India research company that assembles data for us; we don’t outsource anything else apart from political analysis,” he said. 

C Hoare & Co’s Cavaye said his firm will buy specific research, such as tracking sentiment indicators, or to track liquidity flows, and for funds analysis. “Our relatively small size (£2 billion of discretionary AuM) is not a constraint, we can gain access to a diversity of ideas and expertise which helps build greater diversification,” he continued. 

Regulatory change such as the European Union’s MiFID rules are unbundling research costs; this will force firms to revisit what research they need and how much they pay for it, Cavaye said.

“C Hoare & Co has slightly more of a `we’ rather than `I’ culture,” he said, referring to the issue of how the CIO and team arrive at decisions. 

Close Brothers Asset Management’s Curtin explained that specific managers at Close Brothers make the final decision on investments as they know the client and are best suited to tailoring the portfolio, but everyone derives their ideas and strategy from a common, highly rigorous process. That way there is individual ownership of the decision-making process, after disciplined and collegial considerations of the options, she said.

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Lloyds’ Stadlmann said: “External research is really important and we are looking at alternative opinions that challenge our views. It is a good discipline to have in place.”

He talked about the “committee” approach versus individualism when asked about the issues of consensus thinking and the dangers of being part of a crowd. Investment committees lend themselves to a consensus mindset, he said. “I always start to look for Alpha where the market positions aren’t,” he said.

Technology – help or hindrance?
Asked about technology as an aid – or possible complicating factor - Sandaire’s Hendriks was positive. “The unequivocal answer is that it has made my life easier. In various ways, technology has completely changed the way we operate for the better. The real challenge and opportunity is not in data collation but in communication,” he said. 

Curtin agreed, but added this caveat: "Technology is useful in areas such as tracking portfolio risk and in performance attribution. Having that kind of client information is hugely important.”

Another issue on which Hendriks was emphatic was that, despite a structured team around a CIO coming up with ideas, in the end, the buck stops with the CIO in driving the investment engine. “At the end of the day, we don’t want to do anything we don’t’ agree with,” he said. 

In Cavaye’s case, he said: “You need to take some bets and have conviction that your bets are paying off.”

“We are probably at the more liquid end of the [investments] spectrum. Most of our clients like their portfolios to be easily realisable,” he said, adding that there are opportunities among liquid alternative vehicles such as UCITS funds.

On the alternative asset class theme, Hendriks stated that his firm does use hedge funds but not as an asset class, adding that the firm holds real estate, farmland, private equity and venture capital. He said he was “very excited” about the venture capital space.

Building blocks
“We strongly believe that diversification can be the best way to drive strong risk-adjusted returns,” said Curtin. "The building blocks of our portfolios are equities, (global equities), fixed income and alternatives, such as liquid real estate and infrastructure. We have a long-term strategic asset allocation framework. We are active investors and add value through asset allocation and security selection. We are looking to buy the best large-cap global franchises, with attractive growth and visible earnings, and look for sector `tailwinds’ and firms with great management teams. We believe in being patient and look to buy these great ideas at an attractive price,” she said.  

“Liquidity is relevant to the size of the wealth pot,” she said; the need for liquidity will depend on the amount of money a client has and their need for income. “If you have a portfolio below a certain size you should not be in private equity and hedge funds,” Curtin continued. 

Curtin concluded by giving an upbeat assessment of the healthcare/pharma sector, talking about breakthroughs coming in areas such as cancer treatment; the US FDA has gotten faster in approving new treatments – some 41 blockbuster drugs were given the all-clear last year. 

Lloyds’ Stadlmann said that his approach favours taking a strong stance in picking investments. "We are not dogmatic in having particular diversification. We are more conviction-orientated and have stronger views [than the general industry]. It is important to understand trend reversals early.”
 
Asked about liquidity issues, he said: “The average US corporate bond trades only once a year. The liquidity premium is 1 per cent and it is very important when thinking about asset classes that you understand what the liquidity premium is. Since the financial crisis, regulation has completely changed the way that buyers and sellers in markets operate. Some quality operators have completely left the scene. Trading liquidity is worse than it used to be."