Most private wealth portfolio managers will focus on allocating dollars or capital when it comes to investing. Executive Director and Chief Investment Officer at private bank Bordier & Cie, Bryan Goh, allocates risk instead.
We find out more about his long-term thematic approach and key strategies.
Bryan’s Top Four Investment Themes
Trade barriers and trade pacts
Since 2008, we’ve been in a global trade war. It’s a war that’s first fought in FX and then in regulations and trade pacts between the various countries and regions if you look at the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) agreements. Some of these trade pacts are more protectionist rather than promoting trade. Global trade peaked in 2011 and has taken a tumble recently if you look at the volume of imports plus exports.
Central bank policies
Since 2008, central banks have been driving asset prices up through their quantitative easing (QE) and zero interest rate policies. The idea is to cheapen debt service, and if the currency weakens, who is to complain about an improvement in the terms of trade. Yet there are limits to monetary policy and we are closer to those limits now than ever. The time may come, and soon, when central banks pass the baton to fiscal policy, although fiscal policy is often fraught with politics. Whatever happens, regulators are so beholden to markets that they are bound to telegraph their intentions well in advance.
Banking regulation provides us with attractive investment opportunities which are less driven by macroeconomics and policy. The banks have been given an untenable mandate, namely, to make more loans and take less risk. These tensions generate many investment opportunities. Banks are deleveraging and this de-risks their capital securities, making them more attractive. Banks are also encouraged to seek capital relief solutions which the sophisticated investor can provide, for a price. These are examples of investments which are more sensitive to the underlying credit quality and to the specific regulatory environment of the banks.
Following from the point above, as banks have raised more capital and adopted more conservative lending strategies, the burden of financing economic growth has shifted to the bond markets and other areas of the shadow banking system. Alternatives to banking finance disintermediate the banks, matching savings to investments, often without the asset-liability mismatches of fractional reserve banking. Areas, where there are attractive opportunities, are the ABS (asset backed securities) market and the leveraged finance (leveraged loans and CLOs (collateralised loan obligation) market.
Bryan’s Four Key Strategies
We try to avoid crowded trades and over-owned assets. At the moment, given the weight of central bank liquidity, these are large cap equities and the plain vanilla bond markets, basically assets of all types that may be too easily accessed through ETFs (exchange traded fund) and retail mutual funds.
Invest in leverage loans
We’ve now reached the limits of monetary policy. So I think the world will gravitate towards fiscal policy where government will increase their spending in key areas such as infrastructure and healthcare. As a result, they are directly competing with the private sector for financing. So we are investing in leverage loans – which companies typically use to finance mergers and acquisitions, recapitalise the balance sheet or to refinance debt.
Senior, secured, bank loans is an area we favour. The floating rate nature of the coupons reduces duration substantially; that LIBOR has been climbing animates this feature of loans. The structural seniority of claim, most of these loans are first-lien secured, provide additional safety and higher recovery values in default. While these assets are not cheap, the structural seniority is not fully priced relative to their more common senior, unsecured claims.
We see value not only in senior, floating rate loans, which are typically high-yield investments, but also in structures which offer credit enhancement and transform these claims into investment-grade securities. The investment-grade CLO market has some of the features of loans but is securitised and eligible to sit in a UCITS (Undertakings for Collective Investment in Transferable Securities) structure while benefiting from further structural seniority.
Put money in trade finance funds
We invest in trade finance funds. The trade finance opportunity exists as the banking industry consolidates, and as a consequence of scarcer capital and the need to optimise bank balance sheets. Trade finance is more efficiently housed in a non-bank structure as banks may not fully recognise the risk mitigation in the capital treatment of trade finance loans.