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Eric Syz: ‘80% of active managers are index huggers’

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When Swiss financier Eric Syz was growing up, his textile industrialist father whose family business dated back to the 1850s, gave him an unexpected piece of advice.

“He said you can do anything you want but don’t go into textiles,” recalls the now 63-year-old. “He believed there was no future in European textiles and he was right.”

Unlike his father, Mr Syz, who presides over Syz Group, the private bank and asset manager he co-founded in 1996, did not discourage his sons from following in his footsteps. But in an echo of the headwinds that struck the old family business, he and his future heirs face an uncertain path.

Syz, which has assets under management of SFr27.4bn, is at a turning point. After making its name as a private bank specialising in high-performing asset management — a feature that marked it out from other Swiss banks at the time which relied heavily on tax and banking secrecy — its fund unit has suffered years of poor performance and declining assets.

In addition, private banks are grappling with rising costs and weaker margins. At Syz, group profits have declined every year since 2016, culminating in a SFr25m loss in 2019 mainly driven by outflows from asset management.

This prompted an overhaul at the group in 2020, with the decision taken to offload Oyster, its retail asset management business, and focus instead on the more lucrative area of private assets.

Speaking via video call from his Geneva office, Mr Syz says seismic changes in the investment industry over the past decade justified the decision. “Retail asset management is a scale business, [and] competition is getting fiercer and fiercer,” he says, pointing to the relentless growth of cheap passive funds.

Mr Syz retains faith in active management: the private bank still runs global diversified funds and will continue to use some Oyster funds in its client portfolios. Syz also operates a SFr10bn institutional asset management business, mainly concentrated in fixed income.

However, he says it is harder today to generate consistent good returns. Ultra-low interest rates and the growing efficiency of markets have deterred managers from taking high-conviction bets. “The risk of diverging too much from the index is so large that 80 per cent of active managers are forced to be index huggers,” he says referring to those active funds that typically perform like and track an index.

Syz’s recent fund performance is a world apart from the golden era of the Oyster range, which had €6bn in assets at its peak in 2007, compared with €2bn at the time of the sale.

Mr Syz is proud of the unit’s legacy. “[We were] fertile ground for great talent,” he reflects, referring to managers such as Eric Bendahan and Nicolas Walewski, who went on to set up their own boutiques.

But funds such as the flagship European equity fund Mr Bendahan used to run have faltered recently, lagging their benchmarks over three and five years. Other key investment staff have also departed, such as chief investment officer Fabrizio Quirighetti, while managers including head of European equities Michael Clements, left after the Oyster range was sold.

The challenges of delivering standout performance via listed equity investing led Syz to private assets.

“[Private assets] are where we can add value to our clients,” he says. “Rather than advising them to buy this or that fund and make 12-13 per cent return, we’d rather do more work and be able to make 20-25 per cent.”

Overseen by Marc Syz, the founder’s elder son, the private assets division takes direct stakes in companies with valuations of between SFr100m and SFr200m.

The Syz family invests its own money alongside its clients, targeting “hidden gems”, such as small companies in fragmented industries or family-owned businesses that need expansion capital.

Mr Syz believes family businesses are often the best-run companies thanks to the way they take “rational” rather than “political” decisions, have good control of costs and “don’t spend a penny more than needed on tax”. The fact that Syz is family-owned gives it credibility when providing financing to these companies, he says.

As with any family business, speculation is rife as to who will succeed Mr Syz. His withdrawal in 2019 from day-to-day management of the bank and the promotion of both his sons, Marc and Nicolas, to key roles was widely seen as the first step in the group’s succession plan.

But Mr Syz gives little away, noting that both sons enjoy their current roles. “[They] might decide that they don’t want to run the shop [ . . . ] I think they are both leadership material but time will tell.”

He chose a non-family member, Yvan Gaillard, to take over when he stepped back as CEO of Syz’s bank unit. And he distances himself from claims of nepotism, pointing out both sons cut their teeth outside of the group.

Though Mr Syz insists the dynamic is nothing like the one portrayed in Succession, the hit HBO TV series about feuding siblings battling to take control of the family business, he admits his sons are competitive. They once had ambitions to become professional skeleton riders, having picked up the winter sliding sport in the Alpine resort of St Moritz.

Not that the energetic Mr Syz, who practices skeleton in his spare time too, has any imminent plans to retire. “I feel pretty young and can keep doing this for another few years.”

Mr Syz started his finance career at London-based investment bank SG Warburg, where he worked under industry veteran Consuelo Brooke in the asset management division. He says Ms Brooke, one of the few female faces at the bank, convinced him to stick with finance.

“I learnt so much from her and have the utmost respect for the way she was able to position herself in what at the time was an entirely male-dominated industry,” he says.

In 2019 he appointed his wife Suzanne, a high-end jewellery designer, to Syz’s board to bring a greater female perspective to the company. He adds it was necessary to choose a family member to make sure the group’s main shareholder was represented in the event that anything happened to him.

He and Suzanne are quite the power couple. They own a vast art collection that they display in their Geneva home and lend to museums, including pieces they acquired when part of the 1980s New York art scene.

He leaps at the chance to reminisce about mixing with Andy Warhol and Jean-Michel Basquiat. “Studio 54 with Andy Warhol was something else,” he says, his eyes lighting up.

Mr Syz’s socialite tendencies fit well with his job looking after clients and sounding out family businesses to invest in. With the coronavirus pandemic having brought in-person meetings to a standstill, he is eager to get back on the road in 2021.

But he says the digital interactions that became the norm in 2020 will continue. “[During the pandemic] we actually got closer to clients because the frequency with which we interacted with them increased. Once that change has happened, it’s very hard to go back to what you did before.”

Syz Group

Established 1996

Assets under management SFr27.4bn (as at 31/12/2019)

Headquarters Geneva

Employees 200+

Ownership Main shareholder Eric Syz

CV

Born 1957, New York

Education

1972-77 Lyceum Alpinum, Zuoz, Switzerland

Total pay Not disclosed

Career

1979-81 Asset management and merchant banking, SG Warburg, London

1981-84 Institutional stock broker responsible for international relations, Paine Webber, New York

1984-96 Launched merchant banking company for Lombard Odier; member of the management board

1996-present Co-founder and chief executive, Syz Group



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Markets

European stocks stabilise ahead of US inflation data

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European equities stabilised on Wednesday after a US central banker soothed concerns about inflation and an eventual tightening of monetary policy that had driven global stock markets lower in the previous session.

The Stoxx 600 index gained 0.4 per cent and the UK’s FTSE 100 rose 0.6 per cent. Asian bourses mostly dropped, with Japan’s Nikkei 225 and South Korea’s Kospi 200 each losing more than 1.5 per cent for the second consecutive session.

The yield on the 10-year US Treasury bond, which has dropped in price this year as traders anticipated higher inflation that erodes the returns from the fixed interest securities, added 0.01 percentage points to 1.613 per cent.

Global markets had ended Tuesday in the red as concerns mounted that US inflation data released later on Wednesday could pressure the Federal Reserve to start reducing its $120bn of monthly bond purchases that have boosted asset prices throughout the Covid-19 pandemic.

Analysts expect headline consumer prices in the US to have risen 3.6 per cent in April over the same month last year, which would be the biggest increase since 2011. Core CPI is expected to advance 2.3 per cent. Data on Tuesday also showed Chinese factory gate prices rose at their strongest level in three years last month.

Late on Tuesday, however, Fed governor Lael Brainard stepped in to urge a “patient” approach that looks through price rises as economies emerge from lockdown restrictions.

The world’s most powerful central bank has regularly repeated that it will wait for several months or more of persistent inflation before withdrawing its monetary support programmes, which have been followed by most other major global rate setters since last March. Investors are increasingly speculating about when the Fed will step on the brake pedal.

“Markets are intensely focused on inflation because if it really does accelerate into this time near year, that will force central banks into removing accommodation,” said David Stubbs, global head of market strategy at JPMorgan Private Bank.

Stubbs added that investors should look more closely at the month-by-month inflation figure instead of the comparison with April last year, which was “distorted” by pandemic effects such as the price of international oil benchmark Brent crude falling briefly below zero. Brent on Wednesday gained 0.5 per cent to $69.06 a barrel.

“If you get two or three back-to-back inflation reports that are very high and above expectations” that would show “we are later into the economic recovery cycle,” said Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management.

He added that the pandemic had sped up deflationary forces that would moderate cost pressures over time, such as the growth of online shopping that economists believe constrains retailers’ abilities to raise prices. Widespread working from home would also encourage more parents and carers into full-time work, he said, “increasing the labour supply” and keeping a lid on wage growth.

In currency markets on Wednesday, sterling was flat against the dollar, purchasing $1.141. The euro was also steady at $1.214. The dollar index, which measures the greenback against a group of trading partners’ currencies, dipped 0.1 per cent to stay around its lowest since late February.



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Potash/grains: prices out of sync with fundamentals

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The rising tide of commodity prices is lifting the ricketiest of boats. High prices for fertiliser mean that heavily indebted potash producer K+S was able to report an unusually strong first quarter on Tuesday. Some €60m has been added to the German group’s full year ebitda expectations to reach €600m. Its share price has gone back above pre-pandemic levels.

Demand for agricultural commodities has pushed prices for corn and soyabeans from decade lows to near decade highs in less than a year. Chinese grain consumption is at a record as the country rebuilds its pork herd. Meanwhile, the slowest Brazilian soyabean harvest in a decade, according to S&P Global, has led to supply disruptions. Fertiliser prices have risen sharply as a result.

But commodity traders have positioned themselves for the rally to continue for some time to come. Record speculative positions in agricultural commodities appear out of sync even with a bullish supply and demand outlook. US commodity traders have not held so much corn since at least 1994. There are $48bn worth of net speculative long positions in agricultural commodities, according to Saxo Bank.

Agricultural suppliers may continue to benefit in the short term but fundamentals for fertiliser producers suggest high product prices cannot last long. The debt overhang at K+S, almost eight times forward ebitda, has swelled in recent years after hefty capacity additions in 2017. Meanwhile, utilisation rates for potash producers are expected to fall towards 75 per cent over the next five years as new supply arrives, partly from Russia. 

Yet K+S’s debt swollen enterprise value is still nine times the most bullish analyst’s ebitda estimate, and 12 times consensus, this year. Both are a substantial premium to its North American rivals Mosaic and Nutrien, and OCI of the Netherlands, even after their own share prices have rallied.

Any further price rises in agricultural commodities will depend on the success of harvests being planted in the US and Europe. Beyond restocking there is little that supports sustained demand.

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Amazon sets records in $18.5bn bond issue

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Amazon set a record in the corporate bond market on Monday, getting closer to the level of interest paid by the US government than any US company has previously managed in a fundraising. 

The ecommerce group raised $18.5bn of debt across bonds of eight different maturities, ranging from two to 40 years, according to people familiar with the deal. On its $1bn two-year bond, it paid just 0.1 percentage points more than the yield on equivalent US Treasury debt, a record according to data from Refinitiv.

The additional yield above Treasuries paid by companies, or spread, is an indication of investors’ perception of the risk of lending to a company versus the supposedly risk-free rate on US government debt.

Amazon, one of the pandemic’s runaway winners, last week posted its second consecutive quarter of $100bn-plus revenue and said its net income tripled in the first quarter from the same period a year ago, to $8.1bn.

The company had $33.8bn in cash and cash equivalents on hand at the end of March, according to a recent filing, a high for the period.

“They don’t need the cash but money is cheap,” said Monica Erickson, head of the investment-grade corporate team at DoubleLine Capital in Los Angeles.

Spreads have fallen dramatically since the Federal Reserve stepped in to shore up the corporate bond market in the face of a severe sell-off caused by the pandemic, and now average levels below those from before coronavirus struck.

That means it is a very attractive time for companies to borrow cash from investors, even if they do not have an urgent need to.

Amazon also set a record for the lowest spread on a 20-year corporate bond, 0.7 percentage points, breaking through Alphabet’s borrowing cost record from last year, according to Refinitiv data. It also matched the 0.2 percentage point spread first paid by Apple for a three-year bond in 2013 and fell just shy of the 0.47 percentage points paid by Procter & Gamble for a 10-year bond last year.

Investor orders for Amazon’s fundraising fell just short of $50bn, according to the people, in a sign of the rampant demand from investors for US corporate debt, even as rising interest rates have eroded the value of higher-quality fixed-rate bonds.

Highly rated US corporate bonds still offer interest rates above much of the rest of the world.

Amazon’s two-year bond also carried a sustainability label that has become increasingly attractive to investors. The company said the money would be used to fund projects in five areas, including renewable energy, clean transport and sustainable housing. 

It listed a number of other potential uses for the rest of the debt including buying back stock, acquisitions and capital expenditure. 

In a recent investor call, Brian Olsavsky, chief financial officer, said the company would be “investing heavily” in the “middle mile” of delivery, which includes air cargo and road haulage, on top of expanding its “last mile” network of vans and home delivery drivers.



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