Imagine you graduated from university with a degree in finance just 10 years ago. Now, at only 32 years of age, you are monitoring €2.3bn worth of assets. Doesn’t that sound like a dream come true?
Since 2012, Tim Peeters has been working for Portolani, a multi-family office based in Antwerp, home to Europe’s second-largest port. The name of the company, which manages the assets of 15 wealthy Belgian families and two institutional clients, is derived from a type of medieval naval map used by sailors for their navigation.
Portolani is obviously a metaphor for the service Peeters’ company gives to its clients. But the young Belgian probably needs a portolanum for himself at times too, and he might sometimes long for the days he was in charge of just a couple of thousands of euros when involved in an investment union for students 10 years ago.
Like a true seafarer, Tim finds himself navigating between several roles in the company. He is responsible for selecting the funds which have to put this €2.3bn to work, and this means all fund managers in the world want to meet him.
“In a year, I see about 60 to 80 managers. We are usually already invested in about 15 of those, and on top of that I meet 30 to 60 new managers,” he explains. “They all come to our office. I have never experienced any of them refusing to do so.”
Peeters is also in charge of analysing the performance of all of his clients’ portfolios. He has about 25 client meetings a year to discuss their investments with them. On top of all that, Tim is a highly valued member of EIE’s editorial panel and in this capacity he even occasionally writes an article for us, like the one about the disrupting effects of global QE in the October 2014 edition.
Preparing for a storm
In the aforementioned opinion piece, Peeters braces himself for a period of increased volatility. As a consequence, he demands equity fund managers to show him a track record which goes back to at least 2008, the last time we saw an extended period of falling prices.
“This is an absolute requirement for us. I’m quite sure a new crisis is imminent and that is the reason I find it so important for a manager to show me he can handle a downward market,” he says.
On top of that, the fact is that making up losses without taking on excess risk is very challenging. “Besides that, clients are absolutely not amused if they get a negative return. So you should try to avoid this at all costs.”
So managers without a record of crisis management stand very little change with him. “We regularly get phone calls from fund managers but, if they don’t have at least a seven-year track record, we tell them they can come but that the chance we will introduce their funds into our portfolios is very
small,” Peeters explains.
Only occasionally Peeters makes exceptions. “If Francisco Parames [who recently left Bestinver], who we’ve been invested with for a long time, starts a new fund, we might well invest in it. On the other hand, we did not sell our entire holdings in Parames’ former fund immediately, because the stocks that Parames had selected for the fund and its strategy haven’t changed overnight (see chart above for Parames’ previous fund).
“However, we have started to reduce our holdings in that fund now and are currently looking for
another European equity fund as a consequence.” So how is Peeters preparing for this crisis, apart from making sure he has an experienced crew in the form of managers who know what it is like to weather a storm? “Low-risk clients have about 75% invested in bonds and 25% in equities. But taking current market conditions into account, we prefer to increase their equity holdings to 30%-35% of the portfolios, mainly because the risk-return profile of fixed income is just not attractive,” he explains.
“While we have decreased our overall exposure to fixed income, we now invest more in absolute return bonds, and we also allocate some 20% of the portfolio to cash. I avoid any form of duration because the low return potential simply isn’t worth the risk. I’m waiting for a period of volatility when
interest rates jump 1%, before building positions again.”
As far as equities are concerned, Peeters prefers Europe, just like most of his counterparts in Belgium and the rest of Europe. The sort of investment he prefers here is a European equity fund with a bias towards eurozone companies with relatively high dollar exposure.
Base currency risk
“Traditionally people have an aversion against allocating towards other currencies, because it increases the volatility of your portfolio,” he says. But these people make a costly mis-judgement. “In the past, it was usually foreign currencies that were volatile and posed a threat to our returns, because they were devaluing against our base currency. But this is quickly changing now and it’s the base currency [the euro] which is losing value because of the actions of the ECB.”
People who keep avoiding exposure to foreign currency therefore risk losing purchasing power. “Entrepreneurs [an important segment of Portolani’s clients] who, for example, invest in the US especially need to prepare themselves for this. Some of our clients stick to a 100% allocation to the euro but the majority follow our advice.”
An absolute safeguard
Apart from shaking up his equity and fixed income exposure, Peeters has also aggressively added absolute return to his portfolio, which he sees as an essential lifebuoy as investors have entered unchartered waters created by excessive money creation by central banks. For this territory, no
maps, or portolani, are yet available.
“We have started to buy absolute return fixed income and multi-strategy funds at the start of last year, and now they make up a total of 20% to 30% of our portfolios,” he says. “I swapped my fixed income exposure for flexible absolute return bond funds and replaced part of the allocation to mixed asset funds by using multi-strategy funds such as GARS.”
The sole purpose of Peeters’ absolute return allocation is to have a cushion when it all goes wrong. After the market correction, he expects sooner rather than later he will again replace his absolute return exposure by traditional long-only funds. “Absolute return funds are a big support when markets are volatile, but I rather see them as a lifebuoy. When the seas are calm again, you don’t need them that much.”
But even more than asset allocation, the correlation of performance and risk between various funds and asset classes is the cornerstone of Peeters’ selection process. “Most advisers fill a client portfolio with star managers and well-known funds, but don’t always take into account the combined risk of the selection they make,” he says. “In my view, it’s more important to select the right combination of funds than to simply select the best managers in each asset class.”
This very point is hugely underestimated by investors, according to Peeters. “One can fill a library with books about financial analysis and stock selection, but you may have to look for a while before you find a book titled ‘The combined behaviour of the fund basket’.”
So, if the fund selector cum client adviser ever enters quieter waters, he has already laid out his next task.