Fabien Pictet began his investment career with Merrill Lynch in New York as an institutional salesman selling non-US securities to US institutions
Fabien Pictet began his investment career with Merrill Lynch in New York as an institutional salesman selling non-US securities to US institutions. In 1985, he joined Pictet Asset Management Limited where he started the emerging markets and small cap investment group and built it into a $3 billion business. In 1996, he became a partner with responsibility for the $20 billion institutional division. He left Pictet in September 1997 and, in 1998, he began to set up Fabien Pictet & Partners Ltd. in London, receiving approval from IMRO in November of that year. Joined by seven partners including Jonathan Neill, Yves Kuhn and Richard Yarlott who were previously portfolio managers with Pictet in London, the new firm launched FPP Emerging Hedge Fund in November 1998. Two other funds were started more recently, FPP Emerging Markets Fund II in November 1999, a long-only emerging markets fund aimed at institutions and, in December 1999, the 395 Fund, a European emerging markets hedge fund focused on Eastern Europe, the Middle East and Northern Africa. The firm currently has $60 million under management. Fabien Pictet spoke to HFN publisher, Antoine Bernheim, in mid January 2000.
Profile of Fabien Pictet
Profile of Fabien Pictet
Born: April 17, 1958
Education: University of San Franciso, BA in Economics; Master in Finance, American Graduate School of
Family: Three children
Last vacation: Mexico
Last book read: Le Parfum by Patrick Suskind
Hobbies: Polo, skiing and tennis
Favorite quote: "Great spirits have always encountered
violent opposition from mediocre minds" Albert Einstein
How he best describes himself: "I have always tried to
anticipate themes and events ahead of the curve. I am
someone who goes forward, some might say aggressively, but with my feet firmly planted on the ground.
Q. Could you describe your approach to emerging markets?
A. When I started in 1986, emerging markets meant primarily Asia and a few countries such as Spain. I thought it was an asset class that would be developed over the years to come because of globalization and privatization. Then, the Berlin Wall fell in 1989 and the whole communist sphere opened up. The big difference between then and now is that there is good research, the quality of the data has improved substantially as has liquidity. We are all analytical by temperament and we are entirely bottom-up driven. In our hedge funds, we strive to look at inefficiencies in emerging markets and given the crisis of the last two years, there are relationships that have gone completely awry creating spreads that are very attractive. We look at ADRs vs. local shares, holding company arbitrage, closed-end fund arbitrage and pairs trading. We are not trying to be active in getting these spreads to narrow, but we look at hundreds of these spreads every day and every time they leave their historic norm by a wide margin, we take a closer look. These spreads do have a bullish bias because they tend to narrow in up markets and expand in bad markets. While for risk control purposes we focus on very liquid markets and very liquid securities, we find that emerging markets have suffered so badly that the discrepancies occur in the large cap stocks making it unnecessary to take the risk of second and third tier stocks for the time being.
In our long only product, we run a very focused portfolio in twelve major markets and four peripheral markets. Our process is also bottom-up and we look for growth, return on equity and dividend income and how to get the best of these three factors at the cheapest price. We rank the emerging markets universe on that basis and make adjustments for the cost of capital and the size of the markets. We come up with an allocation model which is rebalanced every month. While we manage this product on a relative basis compared to the MSCI Emerging Markets Index, our allocation can vary quite dramatically from the index.
Q. Could you describe your research process?
A. We rely heavily on research. Further, we use a platform called FactSet which integrates a broad array of data into a single comprehensive data library and from that we can access Economatica, Worldscope, Extel and look at thousands of companies according to our investment criteria. This process narrows the universe down to a smaller number of companies where we can get into more details and visit the companies if we need to.
Q. What is the mix between macro factors and bottom-up analysis in your investment decisions?
A. The macro side is not important to our investment decisions but we obviously consider macro factors in our risk control procedures.
Q. How do you control risk?
A. History has proven that a 20% loss in emerging markets can easily turn into a 60% loss or even 90% in the case of the Asian markets and Russia. It took six years for the MSCI Emerging Markets Index to recover to the high of 1993. In the global hedge fund, we have four equity trading books: Asia, Latin America, Eastern Europe and EMEA and one fixed income book. Each portfolio manager/trader is given a maximum allowable loss equivalent to one-fifth of a 2.5% quarterly loss of the entire fund's equity capital. If all five traders reached the maximum loss during a quarter, the fund's exposure would be a 2.5% quarterly loss. For the fund to be down 10%, all five traders would have to reach their maximum loss four quarters in a row. When a portfolio manager reaches the maximum allowable loss, his portfolio is liquidated at the rate of 20% a day for five days. If after five days he is not above his trading loss, he is out for a month. The reason is not to punish anybody but that, often, big losses start as a slow continuous process as we saw in 1997 and 1998. We would rather be out and put our minds together to understand what happened than be in with the wrong positions and getting hurt. Each trader has to control the volatility of his balance sheet: as they are making gains, they can expand their balance sheet but when they lose money, they have to do exactly the opposite. This mechanism governs the type, size and mix of trades they put on. As a result, we have almost no correlation to any index one can look at, which obviously has value for investors. We want to run a portfolio in emerging markets on an absolute basis in order to add value on a month to month basis rather than have huge fluctuations. These rules obviously are not applicable to our long only fund.
Q. Could you describe the typical structure of your portfolio?
A. In the global hedge fund, we have 10 to 15 key trades and close to 150 positions. Our leverage varies between 1.2 and 1.7 and our net exposure ranges from 40% to 70% and is a reflection of the type of transactions we have on the books. The trading loss is so tight that we do not need to have specific guidelines on sector and geographic exposure or leverage. We do very little hedging outside the hedges embedded in our arbitrage trades, except maybe on an intra-day basis. We currently have 48% in equities vs. 51% in bonds. Bonds tend to represent a large percentage of our capital given our risk control process because the volatility is much less. Recently, we had 57% in Asia with India being the largest country exposure at 24%.
Q. Could you describe the areas of responsibility among the partners and how you interact to make investment decisions?
A. Each portfolio manager/trader has responsibility for a region. I have tried to institute a de-correlation within the firm by having the investment decisions made individually even though we share the same systems and sit in the same room. The style and execution is different from book to book. Some people are more technically oriented, some more fundamentally oriented. There is a lot of freedom other than the house principle which is the trading loss that nobody can escape. Once a week, we have a risk management committee meeting where we pull out all our statistics and look at the inherent risks of each of the trading books and we exchange our views. There is no individual responsible for capital allocation. Our trading loss system is the guide for that. The most successful trader will tend to draw more of the capital, whether it is because his region has the most potential or because of his superior skills. For example, I am responsible for Latin America which was very quiet between March and September 1999 and my balance sheet was very small during that time. Simultaneously, the Asia portfolio was larger than anybody else because the trader found a lot of opportunities adjusted for the volatility that he could take within his balance sheet.
Q. Could you describe your organization's execution and administrative functions?
A. Each portfolio manager is his own trader. The quality of execution is obviously very important to them because of the trading loss requirement. In addition, we are IMRO regulated so that we keep statistics to show that we always have as good an execution as possible. Each one has his own balance sheet live on the screen. Every time an order is put through, it is entered on our main TRADAR system by the head of investment administration and these are batched every night to our prime broker, Morgan Stanley, for execution and settlement. Our administration is virtually all sub-contracted to our prime broker and to our custodian and administrator for the long only fund.
Q. What are your goals for the future?
A. We want to be able to generate 20% plus returns with very low volatility year after year and become a household name in emerging markets using alternative strategies in a successful manner. The long-only business which is primarily of interest to institutions can be built into a multi-billion-dollar business. The hedged side is limited by liquidity. Today, we would probably cap our hedged products around $400 million evenly divided between the global fund and the European fund. We will develop new products through similar strategies in sectors or other areas. I have a lot of money invested in the company and the funds as have the other partners. We are here to make money for our investors in a controlled fashion. u