We talk to Hans Peter Portner about how Pictet Asset Management developed the industry’s leading thematic equities franchise.
Hans Peter Portner, head of thematic equities at Pictet Asset Management, has been central to creating what Morningstar notes is the world’s leading thematics investment franchise. He talks to us here about its origins, philosophical underpinnings and the dramatic challenges confronting its investment managers.
How did Pictet’s thematics franchise come about?
We launched a biotech strategy in 1995, in the days when DNA sequencing was still a herculean task and nearly a decade before the human genome was fully unravelled. It was prescient timing. Over the following years we built up a strong track record, so that by the time the Nasdaq started to rocket at the end of the decade, the strategy attracted a great deal of demand.
In 2000, when everyone’s focus was on the Internet, we started looking at the data and realised that global trends like urbanisation, industrialisation, population growth and climate change would all affect demand for water resources.
We were clearly onto something because our water strategy was a success from the start: it outperformed the global equity index by 7% annualised, during the first three years, attracting substantial investor funds.
What was your role in developing the water strategy?
The water strategy was really where Pictet Asset Management’s franchise took off. I was involved in the strategy from inception and early on became its lead manager. We developed a rigorous investment process, that then became the blueprint for all the subsequent strategies.
Water became the nucleus of the franchise. Not long after, we launched yet more strategies, including timber, clean energy, nutrition and global environmental. All followed the water strategy’s template, all had common investment beliefs that enabled us to build a common platform for thematic equities.
What are you most proud of?
I’m really proud of the strong team I built around the idea of the global environmental strategy, which is now one of the world’s largest of its kind. Initially it was a pure linear combination of our water, timber, clean energy and agriculture strategies. We were pioneers in applying the planetary boundary scientific framework to identify our investment universe (see Fig. 1). This approach, together with the strategy’s strong absolute and relative performance against the global equities index, enabled us to grow it significantly in a short period of time.
With dozens of analysts across multiple investment companies looking at the same stocks, how do you gain an edge?
It’s not just about looking at spreadsheets. For instance, around 20 years ago I attended a water utility conference that was being held at an expensive Zurich hotel. The chief executives of two leading US water companies were attending. The morning the conference started, it was raining cats and dogs – which I guess was maybe appropriate for a water industry event. I was soaked to the skin by the time I arrived only to bump into the CEO of one of the companies looking fresh and dry because he’d taken a suite at this very expensive hotel. Behind me was the other CEO. He was just as soaked as I was, having come from the budget hotel he was staying in, looking a little tired because he’d flown over from the US in economy class. Just then, I learned a great deal about the cost cultures of those two companies. I’ve always preferred the stock of the frugal CEO’s company – and it’s rewarded my portfolio.
So, it’s important to put in the miles.
It’s important, but it is also demanding. And sometimes the difficulties involve more than just jet lag or hurried airport meals. For instance, one of our colleagues, Philippe Rohner, had arranged to meet the management team of an Indian water company at the Oberoi Hotel in Mumbai. He’d only just checked in when terrorists stormed the building, spraying it with machine gun bullets. Philippe hid behind the reception counter and, with the help of the hotel staff, survived the carnage that ultimately killed 166 people.
These horrific events are thankfully rare in our line of work, even if sometimes it’s said that in the financial industry one swims with sharks.
For the 10th anniversary of the water strategy, our Paris sales team hired the Trocadero Aquarium for a client event. The guests sat arranged around one of the giant tanks and watched a diver, wearing a t-shirt with my name on it, slip into the water. He literally swam with the sharks. I was standing out of sight and when the diver left the tank, I poured a glass of water over my head and stepped onto the stage drying my hair with a towel. Some clients still come up to me to ask what it was like to be nose to nose with Jaws.
Figure 2 – The Megatrends Framework
What has determined Pictet Asset Management’s success in thematics?
The success of our franchise lies in our ability to innovate, rather than follow the market, and to base our ideas on long term megatrends (see Fig. 1) rather than short-term fads. This is reinforced by the stability of the governance and the homogeneity of our investment beliefs and processes – though at the same time we keep refining our strategies based on how themes develop. Over the past 30 years we were able to assemble and keep a very talented team working together based on mutual trust, skill and peace of mind in Geneva. This investment platform was in turn supported by Pictet Asset Management’s distribution network, which is second to none.
The breadth and depth of our franchise is unrivalled. It takes time, patience and a strategic view to build such a business. It’s like building a large park – you need to have the vision, the long-term view and the resources to let it grow and become mature. And then there’s our investment process, with specialist investment managers investing in companies that have a specialist focus, operating in highly dynamic industries.
How do we maintain an edge against, say, passive strategies?
We spend a lot of time and resources analysing the positioning of a theme with the help of our advisory boards – external advisors, academics and industry experts, who help us shape our thinking. We have 14 thematic advisory boards, with a total of 35 external experts supplementing our internal expertise. This depth of knowledge lets us react in a timely and intelligent way to shifts in technology.
Does thematic investing have a future?
Investing in general is investing in the future of something – the future of food, or work, or medicine, or travel, or consumption or industrial production etc. Thematics represents a very focused approach to the future. It is just one form of highly active share investing. With the help of our advisory boards and think tanks like the Copenhagen Institute of Future Studies (see Fig. 2), we will continue to analyse the trends that are destined to affect the future. Having a large platform of thematic equity products allows us to assemble bespoke portfolios to cater to investors’ precise needs and preferences. This is a particularly interesting proposition for institutional clients.
Pictet Asset Management’s thematic franchise has been successful because it has represented the Pictet Group’s investment philosophy. Its approach has always been for the long term. If you don’t have the willingness to wait, you shouldn’t be doing it. And when you commit to an approach, you really have to believe in it. For instance, from the start we were focused on being responsible. We took social, environmental and governance risks seriously. Many competitors jumped on the bandwagon when ESG took off. Many of those same competitors have started to pull back now that the political winds are blowing from a different direction. But we remain committed, because these are things we believe are important.
If you had your investment career to do again from the start, would you have done anything differently?
With the wisdom of hindsight, I would have defined my investment beliefs as early as possible.
In the mid-1990s, when I was only a few years into my professional career as an investment manager – before I’d joined Pictet – I’d inherited responsibility for managing the equity segment of a pension fund portfolio. One of the companies in the portfolio manufactured tech hardware. Sales were booming and the stock was appreciating sharply. But I couldn’t understand the firm’s business fundamentals or its long-term prospects. So after watching the shares ride higher for a few weeks, I took profits. The company was Cisco.
From where I sold the stock to its eventual dot com peak – this was just before the tech boom of the late 1990s – the stock’s price increased by around 20 times. The experience taught me two things.
First, the importance of being a specialist in the investing world. Being a portfolio constructor and simply taking top picks from a pool of sector analysts isn’t enough. You have to be a sector expert and have truly deep stock expertise to deliver clients robust, repeatable outperformance over the long term. And second, that the world is changing faster than ever and being on the wrong side of this change has serious negative repercussions for your investments. That’s why at Pictet Asset Management we keep an eye on the longer term and why we focus on developing megatrends – and that’s also the secret of our thematic strategies’ success for the past three decades.
