Buy-and-hold passe? Says who?

Pictet has enabled its clients to profit handsomely from markets over the long term, investing in stocks, debt, hedge funds and PE.

AMID markets' dizzying swings, investing using a buy-and-hold approach appears to have fallen by the wayside as more fund managers advocate a "dynamic" stance on investments. But Pierre-Alain Wavre, group managing director at Banque Pictet & Cie, says that buying-and-holding has enabled his clients to profit handsomely from markets over the long term, investing in assets such as stocks, debt, hedge funds and private equity.

"We do a lot of buy-and-hold. If you have a good business that's well managed, I'd rather keep it than sell just because it has outperformed an index. Usually, the reinvestment risk is massive."

Mr Wavre set up the Pictet Investment Office in 2010 to invest on behalf of ultra wealthy clients. Funds are managed through discretionary portfolios; to date, the office has assets under management (AUM) of US$9 billion.

Long-term view

A discretionary approach means the manager is given the authority to buy and sell, without having to seek approval for every trade. A caveat to the office's investments is that the typical portfolio size for a single client may be US$300 million or more. Such clients are able to tolerate illiquidity and take a long-term view of holdings.

In Singapore, three clients are understood to have committed to mandates of about US$50 million each.

Mr Wavre himself has had more than 28 years of advisory experience. He joined Pictet in 1986 as a portfolio manager, and eventually rose to group managing director in 2006. His long experience appears to be persuasive for clients. "Investing is what I like most to do," he says. The veterans on his team have around 20-30 years' experience on average, he says.

"We're deeply committed to long-term investments . . . We want to make sure we can invest in strategies that give the expected return."

An example of stocks that have been held by clients for decades is Richemont, which owns a stable of luxury brands such as Van Cleef & Arpels, Cartier and Montblanc. The stock, he says, has been in some clients' portfolios for over 20 years, and has delivered an annualised return of 15 per cent (dividends reinvested) in terms of Swiss francs.

Another stock is Hennes & Mauritz, better known as H&M, a Swedish fast-fashion chain. The stock has also been held for over 20 years, and has delivered an annualised return of 22 per cent in Swedish kroner terms (dividends reinvested).

The portfolios tend to be concentrated, with just 10-12 stocks. "We try not to do everything. But what we do, we do deeply. We invest in a highly researched, entrepreneurial way. We're also very concentrated. Most clients are entrepreneurs and have their wealth in one business.

"A very diversified portfolio may be good for the second and third generation, but for entrepreneurs who want their wealth to grow and have a very good return, you need to be more concentrated. Some people say that means taking more risk. But when you know what you are doing, you don't take so much risk."

Risk, Mr Wavre says, is not volatility; instead, it spells opportunity. The risk to be wary of, he adds, is that of incurring permanent loss. He is also very wary of reinvestment risk, which arises when profitable holdings are sold, as it raises the question of which assets would give a comparable or better return.

"We try to stick with the winners and not trade too much. By experience, the best way to get a good performance over time is not to try to find the next horses if you have good horses. People usually sell to have a profit, and not because they have another opportunity as good as the one they are selling.

"I think there are tremendous companies in the world and they are liquid. Our philosophy is to invest in companies with free cashflow, which provides long-term investors with a fantastic return. You do have to accept some volatility. If you can buy and hold, you'll do very well."

Portfolios are likely to have allocations in private equity and hedge funds, both of which have some degree of illiquidity. Mr Wavre also likes "credit opportunities", which can deliver equity-like returns but rank higher in the issuer's capital structure than stocks.

PE holdings

Clients' private equity (PE) holdings appear to be particularly profitable. For one long- term client, for instance, the PE portfolio has delivered an annualised return of 14 per cent since 1998, or a cumulative return of 791 per cent.

"Private equity's business model is simple. You buy a company, manage it, create value and sell it after five years. The base (expected return) is a gross IRR (internal rate of return) of 20 per cent; that's 15-18 per cent net. This has been successful for private clients but you must have the time, accept illiquidity and be patient," Mr Wavre says.

He says that clients should have a strategic asset allocation that matches their circumstances. The investment approach and strategies should also be explained clearly so that clients' expectations and behaviour can be managed.

"During the crisis, some stocks were down 40-50 per cent, such as Colgate. But the world doesn't stop and you still need those things. You should be able to sleep at night. So you have a strategic allocation that allows you to take those opportunities. If you have deep analysis and you know the companies, the world won't fail completely.

"You have to make sure the investment philosophy is well understood. Otherwise, people will behave wrongly because of pressure from the market. Have a long- term objective and manage according to that. That's the best way to make wealth grow."



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