This publication recently caught up with Pictet at its HQ in Geneva, Switzerland, to talk about some of its investment philosophy and how to avoid the pitfalls that humans are prone to.

The wealth management industry is familiar with diversifying investments. A less developed idea, however, is the notion that it makes sense to entrust pots of money to people with contrasting personality types and philosophies of how to make – or not lose, money. Even less obviously, there are times when a purely automatic approach - taking emotion out of it - might make sense.

During a visit last week to the Geneva offices of Pictet, this publication explored some of the more cutting-edge approaches to money management with this venerable Swiss firm, now almost 210 years old. It spoke to Edgar Van Tuyll Van Serooskerken, who holds the title of chief quantitative strategist at Pictet Wealth Management, part of Pictet & Cie. And as well as chatting about his own “systematic”, quant-driven approach to money management, some other, more “human” insights came out.

“Diversification in investment styles is underestimated in this industry,” he said.

This point is arguably more important than the well-worn debate about the pros and cons of passive versus active management. (It is important in part because a lot of what passes for passive investment actually involves more human labour than might be thought and active managers sometimes are content to hug a benchmark and still charge clients a fee for the privilege.)

At the heart of Van Serooskerken’s approach is a momentum-based, systematic strategy mandate, known as MSM, that is a long-only, un-leveraged and 100 per cent invested approach, holding one of just five assets: the S&P 500 Index of US equities; MSCI Emerging Markets; US 10-year Treasury notes, gold, or cash. Pictet’s team’s approach looks for momentum, for behavioural trends that will suggest, for example, that markets typically overshoot, or move in directions far beyond what might be considered rational. The team look for signs that momentum in a market is changing and these signals then will lead the team to rapidly move, such as adding equity exposure in some cases or reducing exposures in others. The approach strips emotion from the equation, he said.

He illustrated his approach by referring to the movement in the gold price; wary of how momentum in the market in the period leading to the peak in September 2011 was fading, Pictet's MSM strategy sold out of gold, having been a notable buyer earlier on. “The systematic approach can tell us if a trend has become exhausted.”

The systematic approach can form, say, 20 per cent of a client’s portfolio, so that even while other parts of a portfolio are run in traditional ways, the systematic approach works in tandem. “You don’t need to change your main assumptions for the 20 per cent,” he said.

There are all kinds of reasons why, in behavioural and other terms, markets move in ways that seem irrational, he said, noting issues such as the fact that a lot of analysts/others are reluctant to go against a “crowd” since this can be dangerous for a person’s career. “The systematic approach is a discipline; it can limit the impact of emotional biases….We take our own biases and fight against them,” he said.  

About $1 billion of money is managed using the systematic approach – still a relatively small sum compared with Pictet’s total of $446 billion under management/custody.  

The MSM momentum strategy mandate, one of those using this style, has performed strongly – so far. It returned 67 per cent (in net un-leveraged terms) from January 2008 to 21 May this year compared with 13.29 per cent for Pictet's LPP 60 Swiss Pension Fund Index 2005 (an international multi-asset pension fund benchmark with 60 per cent allocated to risky assets), or 23.51 per cent for the Credit Suisse Hedge Fund Index.

Such an approach is quantifiable and is back-tested; it can be debated and challenged, he continued.  The strategy is very flexible; it can move from being totally invested in one asset class to taking a 100 per cent ownership of another very quickly. “We are very nimble and have no pretence at forecasting everything,” he said.

Don’t be a hero
Van Serooskerken said his own experience working in different parts of asset management – he has been at Pictet for 20 years – gives him an insight into the follies of trying to make lots of economic and investment forecasts, hence his affection for the new approach.

“I used to be a strategist and we tried to predict trends early – people want to be heroes,” he said.

His approach is not the only innovative idea coming out of this firm, which on the face of it should be a byword for tradition and unchanging approaches. Pictet has, for instance, been a relatively early champion of what is known as thematic investing, an approach that has gained more adherents recently. And as Swiss banks are finding in the age of facing bank secrecy, a firm needs to have more value-added ideas in its offerings to keep clients and attract new ones. Banks need to sing a lot more for their supper.

And Van Serooskerken – an avid reader of technology journals and sources for new ideas – certainly seems to have the innovative spirit. He also seems to have a fondness for certain images: On the subject of diversification, he says it is not enough to look at the spread of assets at any one time in history, but rather to think of it as a process through time, requiring constant monitoring and adjustment where needed, he said.

“Diversification is movie, not a photograph,” he said.