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market insight geneva q3 2014

Asked what regulatory challenges the Geneva fund selector community is currently facing, Mifid II was mentioned at a number of occasions. Several fund buyers said they expect foreign banks to close their branch in Geneva, as the regulatory framework in Switzerland would be much more similar to the rest of Europe following the implementation of the directive. As a consequence, the benefits of keeping a branch in Switzerland would often no longer outweigh the costs. On the other hand, several interviewees see opportunities for Geneva to grow its relatively underdeveloped asset management business, for example in the field of socially responsible investing (see below).

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US equities

Countering the trend

While Pan-European sentiment towards US equities has dropped sharply in recent months, the asset class has grown in popularity with Geneva-based fund selectors. Moreover, Pan-European appetite for US stocks was at an all-time high in the first half of 2013, when EIE’s previous Geneva conference was held. At that time, only 38% of Geneva’s fund buyers were going to increase their exposure to the asset class. Right now, there is no place in Europe with more US equity bulls than Geneva. While Pan-European sentiment to the asset class is now net negative, Geneva counts three times more bulls than bears (see graph 1).

Our researcher found that the large interest in US equity funds was for a large part driven by the abundance of sector-specific funds on the US market. About half of the fund selectors who said they are going to increase their exposure to US equities said they were going to do so by stepping up their investments in such theme funds. Besides sector funds, socially responsible investing (SRI) is a hot topic with Geneva’s asset allocators. A considerable amount of interviewees showed interest in it.

EU equities

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Cards on Greece
European stocks remain the most popular asset class with Geneva’s fund buyers, with two thirds of interviewees increasing their exposure and just one third decreasing it. While local fund selectors planned to increase their allocations to mid- and small cap funds last year, there was no preference for a specific sector or category within European equities. One country was mentioned by three different fund selectors though, as offering opportunities in the equity space: Greece. According to these fund buyers, it is exactly the right time to invest in Greek equities now as they stand to profit from the beginning of a nascent recovery in the country. Greece was the only peripheral euro country mentioned, as the investor momentum in other crisis-ridden countries like Portugal, Spain and Italy seems to have passed already.

Emerging market equities

Preference for boutiques

Stocks from the emerging markets have always been relatively popular with Geneva’s fund selectors, and thisalt='' year is no exception. Half of the fund selectors our researcher spoke to will increase their exposure over the coming 12 months, while another third hold it stable. Considering the recent spike in EM fund selector sentiment across Europe, appetite for the asset class is now around the European average. But Geneva’s fund selectors have their specialties: they usually prefer boutiques and are quite outspoken in their preferences, which is often fuelled by their clients. Three respondents specifically mentioned they are looking for opportunities in Latin America, and specifically on the Colombian and Venezuelan equity markets, for their South American clients.

Most interviewees are also interested in increasing their allocation to frontier markets, but are hesitant to do so due to a lack of information on the asset class. As most wealth management companies in Geneva are small, they do not have the capacity to dig deeper into it. As a consequence, roughly 6 in ten fund selectors keep their allocation unchanged. More than 80% of interviewees invest in the asset class, but they tend to own only one frontier market fund and have a very small proportion of their assets under management allocated to it.

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The lesser of evils

The popularity of high yield bonds in Geneva may look like the biggest surprise finding of our research trip, considering the rapid drop in sentiment regarding the asset class this year we have been witnessing across Europe. Some 42% of interviewees said they will increase their weighting, more than three times the Pan-European reading, while only 25% said they will decrease their exposure or are not using the asset class. But statistics do not always tell the whole story, as it turned out that most fund buyers who favour the asset class do not do so because they love it. They are either underweight after they sold much of their positions last year, or they see high yield as only slightly less unattractive than other bond classes. For example, our researcher couldn’t find any buyers of investment grade bonds at all in the whole of Geneva.

Emerging market debt is the only other bond asset class some of Geneva’s fund selectors are increasing their weightings in. A quarter of interviewees say they will step up their allocation to both government and corporate emerging market bonds. Exactly the same number of people plan to scale down their weightings, while 8% do not use either of the two emerging market bond categories, slightly below the Pan-European average.  

 

Part of the Bonhill Group.