Credit Agricole Suisse is the main private banking arm of Credit Agricole Group, with Middle East offices in Abu Dhabi, Bahrain, Beirut, Doha and Dubai. Executive recently sat down with Frederic Lamotte, the bank’s chief investment officer, to discuss how private banking has changed in the last two years.
E How did you manage to keep your clients during the crisis?
First, the structure of the bank is very solid and the name itself has helped retain some clients. Second, I would say that from more of an investment point of view, we had the insight of not pushing our clients into risky products.
We have always had a, not conservative, but relatively safe approach to investment. We never had any Lehman products; we never thought that Lehman or other United States investment banks were adequate for supporting investment products for our clients. We never proposed structured credit products to our clients.
In general, we never had [to worry about the Lehman crash, the ensuing ‘credit crunch’ or Bernard Madoff’s Ponzi scheme debacle] because someone stood up in the line and said they didn’t understand, or didn’t believe [in them], or that something had not been sufficiently explained, and so we didn’t market [high risk, complex] products to our clients.
This meant we never had any problems of that nature to deal with, which I think kept us from losing some clients.
On the contrary, we have gained many clients who had these bad experiences with other banks in terms of investments.
I think we have basically the same total assets as we had before the crisis: roughly $50 billion if you take the whole Credit Agricole Suisse group.
E Today’s client really wants assurance. What type of reassurance on the level of corporate governance can be communicated to the client?
First of all, we belong to a large banking group and as such we have several layers of compliance issues locally in Switzerland, but also wherever we are operating. For example: we have a branch in Singapore, which has to follow the local rules in Singapore.
Because we belong to a French bank we have to follow some French rules and since we are incorporated in Switzerland, we also comply with the Swiss law. So we have three layers of rules that we must follow.
It puts a lag on various angles of the asset management process, but it does give reassurance to our clients.
As for the decision making process, we have investment committees every two weeks and we have designed our investment committees a bit differently after the last two years because we recognized that in some instances we wanted to acquire the specific knowledge of a specialist to best exploit some asset classes.
I will take the example of commodities. Two years ago we decided to start investing in commodities. We started with gold and had a very good experience and made a lot of money for our clients. But it was not enough. We wanted to really learn more about the investment process on commodities.
So we partnered with a company called Diapason, which is actually a Swiss company managing around $11 billion in assets in commodities, and we asked them to participate in our investment committee. This has been extremely successful because we recognized that we were not specialists in this market, so we were happy to share with somebody who is a professional in the field. But they are not managing the money for us. We manage together and that allows us to learn about the process and to be able to explain to our client why a decision was taken.
Selling funds to clients in the past was equivalent to taking their money and giving it to a third party to manage without really controlling what it was doing. This model has reached its limit because we could not completely control how the money was managed, which was difficult to explain to our clients.
The second conclusion we drew from the crisis was that we had to show our clients the exact risk [their portfolio was exposed to]. To do that, we designed a special investment fund, which is an umbrella fund where we have 29 different compartments [for different types of assets]. The client is able to see exactly and in real time how the fund is composed.
This is backed by a portfolio guardian who does not report to me, he reports to the risk control division. And the portfolio guardian makes sure that nothing in the portfolio starts to diverge from the [risk] profile [of the client]. I think this is quite an important change that we have put in over the last two years.
E On an investment level, how did the crisis change the conditions you put on the managers of hedge funds?
Hedge funds is an industry where we have been lately investing. It was fortunate. It’s a product for large investors — very large investors. It’s also a product where the approach of institutional investors and private investors is very different. The concept was developed, as diversified, low risk and liquid — exactly what private clients want.
But actually we’ve seen it’s not very low risk, sometimes it’s not very safe and sometimes it’s absolutely not liquid. When you look at the alternative investment space today you can see that institutional investors did not come out of hedge funds. The only ones who came out were private investors because they heard a marching call somewhere else, so the alternative problem came because of liquidity issues with private clients.
A lot of products sold to private customers were funds of funds, where you delegate to a third party and they go and delegate again to somebody else. It’s a double black box when risk is rising globally in the market. We sold 35 percent of our alternative investments in March 2008. I should have said: “Sell 100 percent.”
Now we’ve changed the way we approach alternative investment completely. First of all, we only go back to large investors [those who can invest $10 million into a single product]. Our new scheme on alternative investment is a direct investment in hedge funds exclusively through managed accounts. This approach ensures a high level of liquidity.
E How did the crisis change the offers that Credit Agricole makes to clients?
On the investment front, the crisis has brought back the idea of going back to more of what I call real assets. Collateralized debt obligations were pure financial mental constructions; you didn’t know what was behind them. You had to dig so much and understand the correlation issues, which is a very complex issue for normal people. So the idea is to go back to real assets, such as commodities. We are very bullish at this point in time on industrial metals and precious metals. They are real assets that have the capacity to store value independently of which currency you use to measure its value. It’s a storage of value.
Second is real estate: we are defining a new offer on real estate. At the moment we are advocating London, because sterling is low and the prices of London real estate on the office side have gone down drastically. So we think there is a niche. And we are proposing to our clients a very concentrated risk. We tell them to invest there. We can show them the buildings. It’s not like we give you global stuff. We concentrate the risk. We show them the exact asset.
Third, I think what is very important about the real asset is to include corporations. And to that extent private equity, I think, is a real asset. When you own a share, not the listed shares, but a private share of a company who has a product or a service, this is a real asset. So for us private equity is part of the real asset panel, which we promote to our clients.