He is convinced of active management. In the current environment, with many assets “adulterated” by the actions of the last years of the central banks, what is the recipe you recommend? With what type of assets are they more positive?
In the equity section, we are more positive with defensive assets and, in fixed income, with medium-term government bonds and high-quality corporate bonds. The country in which we have more weight in the debt part is the US, but we also have positions in countries such as Australia or Canada. In the latter we like bonds from their provinces because they have the same rating as the State but with a higher return. We also have debt from some countries such as Chile, Hungary, Romania and, recently and after a long time without doing so, we have entered Italian bonds after the improvement of the political situation after the August crisis.
In equities, Lazard's biggest exposure (NYSE 🙂 Asset Management is also in the US? Is the American stock market now expensive?
It is clearly expensive, but the US It is also the country to which we have the highest exposure in equities. Then there would be Japan and thirdly the whole area of developed Europe. Us we look more in more defensive sectors such as health although, in reality, we have a different way of categorizing equities. We do it in four groups: defensive sectors (Stable Growth), cyclical sectors, sectors sensitive to interest rates (such as real estate) and sectors sensitive to inflation.
Should conservative investors assume more risk or, otherwise, assume that their profitability will be zero?
Clearly you have to go to areas where there is greater profitability. The problem facing a European investor is that if he invests in US debt. You will lose much of that profitability due to the currency effect. Emerging market debt has helped a lot lately in that search for profitability but what is needed here is a very active management to try not to lose the extra performance that can be achieved because of the exchange rate. We, for example, use the Danish krona and the Norwegian krona a lot as a proxy for the euro because trading is much more favorable and the rate differential with those countries is smaller. This is only a practical case of how to actively increase the profitability that can be achieved, given that fixed income in Europe and Japan are negative.
Does the alley where the central banks have gotten out?
It's hard. The truth is that we do not know because it is the first time we are in this situation and there is no historical precedent. At the moment, it is showing that the exit is very complicated. Without going any further, the Fed has had to stop its strategy of gradually exiting its stimuli. Nobody knows how to get out of the current situation, we have to go exploring because we are in an uncertain territory. In any case, I think that central banks are too demanding, I think they have already done a lot and now it must be the governments (Germany in the European case with an infrastructure plan, for example) who should do their part.
What do you think of the rise of passive management? In Spain more and more talk about it …
For us, passive management is not the answer for investors, it does not protect you from falls in the market, nor does it guarantee you to capture all the rebound when there are increases. If you invest, for example, with ETFs, you have to know that there is a strong impact on market flows. A few months ago we did a study with ETFs for a client who wanted to invest through passive management because he believed that the tracking error (ratio that measures the profitability differential between an investment fund and its benchmark) would be very low and when analyzing it we found with which the tracking error was much higher in a medium term period than the client estimated. The solution was to invest in a quantitative strategy with a low tracking error but with a higher alpha, which proved to be superior to any ETF in the market.
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