What goes into becoming a great CIO?

From Citywire

Anyone who has ever read a book on body language will know how quickly you can become aware of every tiny physical action you make. From the firmness of your handshake to where you point your feet, each social interaction rests on an unspoken code of behaviour.

One man with a passion for these hidden social cues is Jean-Jacques Friedman, who says that understanding behavioural biases and subtle changes in mannerisms is a crucial part of being a chief investment officer.

The CIO at Natixis Wealth Management and its subsidiary, Vega Investment Managers, says sociology is incredibly relevant to his job as it gives him a more complete understanding of markets and also helps him to engage with clients, private bankers and fund selectors. ‘Behavioural biases explain the world today,’ he says.

In overseeing teams that manage €8 billion in assets under management, and having an influence on an even larger sum at Natixis, the 54-year-old says understanding behavioural finance is a huge advantage when managing a lot of private clients.

‘What you learn when you’re CIO is that in meetings between a relationship manager and a client, you need someone who can understand both sides.’

Friedman says his job requires him to wear a number of hats, as he has to play a part in all stages of the process from helping to create the monthly house view to managing the selection team and speaking to clients. All of these interactions depend upon understanding the thought processes of different groups of people.

‘Having a lot of experience in human sciences is very important, as it allows you to better judge fund selection and to communicate better with clients,’ he says.

Being a CIO is all about bridging the gap between a specialised fund manager’s isolated expertise and a client who is asking simple but important questions the specialist may struggle to answer.

Referring to a recent meeting, Friedman says a client wanted to know what was going to happen to the US dollar. Understandably, the fund manager didn’t want to bind himself to a decisive forecast, but nonetheless it was essential to explain the overall house strategy. That’s where Friedman steps in.

The brain’s trust

This strategy is carefully constructed by an army of committees. Every week, various teams in the investment group rotate between individual committees, covering stocks, bonds and funds to pool the group’s collective brainpower in the allocation committee. This then becomes the basis of the overall monthly view.

‘The role of the allocation committee is to determine the focal point, and it helps us decide what we want to play week after week.’

Asked about the most challenging part of his day-to-day job, Friedman says it is being completely clear when explaining the bank’s house view and its risks. It’s essential to present both the positive and negative elements to the internal bankers who represent the group and the clients alike.

Decision to reintroduce risk to portfolios

The most recent meeting was headlined by plans to re-introduce risk to portfolios, a change in direction from the group’s stance over the first half of the year. Until January 2018, the group had been over-invested in stocks because the team believed the stock market was not expensive at the time.

However, at the beginning of this year, the decision was made by the allocation committee to reduce risk, selling out of the European small and mid-cap segment as well as reducing exposure to high yield markets.

This has been reversed over the past month, particularly in relation to the Italian bond market, where Friedman believes the pressure applied by investors may bring some resolution.

The idea is to gain exposure to the Italian peripheral debt market by choosing funds that can arbitrate peripheral debt against German debt, Friedman says, positioning in anticipation of a rates rise in core European economies.

‘We see a window of a few more quarters to take a little bit more risk. This is because the Trump stimulus will provide more growth and visibility for the next few months.’

When it comes to emerging markets, the appreciation of the US dollar no longer has strength and may run out of steam, Friedman says.

‘The future fall in the dollar we anticipate due to twin American deficits forces us to cover against the change in US positioning. This move in the dollar will increase the potential in emerging market equities. We are over-exposed to emerging market Asian equities because there is potential they will benefit from the fall of the dollar.’

Plays in value strategies for equities, including the automobile and banking sectors, are also being reintroduced into portfolios after having been excluded for some time.

This decision was made as the allocation team found they wanted to play sectors that aren’t traditionally pure growth sectors, with a rotation towards sectors that have been left out of portfolio this year.

The strategy formed by the committee is then fed down through the relevant teams, including the fund-selection unit. This particular change in positioning was reflected in the buy list as the selectors added the Exor fund to the mix.

Exor is the fund vehicle of the Italian Agnelli family, which founded Fiat and owns football club Juventus. This fund is designed to outperform the MSCI World index over the longer term and focuses mainly on European and US stocks.

Elsewhere, the team has reversed some of its strong underweight to bonds, which it held because of concerns of significant inflation risks in the US.

Absolutely right?

One market segment that has developed over several years and earned a lot more backing from investors in recent times is absolute return and risk premia strategies, Friedman says.

That said, some of these have found themselves into hot water, getting a lot of scrutiny as of late. ‘In my experience, absolute return funds have been disappointing at times. But in fact, indirectly, when we look for example at risk premia funds, we can see allocation towards these funds needs to be based on whether we are in a risk-on or a risk-off environment.’

These funds tend to perform in line with the type of market we are in, he explains, doing better in risk-on periods. Like father like son, Friedman’s eldest manages money in the absolute return space, giving him even more of an insight into this specific type of strategy.

‘When the market is risk-on and confident, these strategies perform well. But when the market is in difficulty, the premia on the risk don’t work as well, and you may as well be in cash.

‘Historically, alternative management has been under fire because it was very expensive – it took high fees for mediocre results. I think it has progressed a lot over the last couple of years, and today we have fee structures that leave a margin.’

However, Vega’s real strength lies in growth stocks in France and Europe, which often form the heart of a client portfolio. ‘It’s often an important part of our clients’ portfolios to have investments that are not too risky, so we often start from this

basis and then add some other sources of risk. A key advantage we have is the in-house knowledge and the strengths across Natixis, which we make use of.’

Given these big reversals in allocation trends, it is very important for him to question a lot when building the bank’s house view, Friedman says.

‘It is important to be critical in my job. That’s not to say contrarian, but for what is said at one point, the opposite can be often said one month later. It’s like being up to date: you must anticipate what the situation could be in a month.’

However, that can often be tricky. ‘It is one of the most challenging parts of the job, because when there is a trend, the trend is your friend, and you must be in it.’

When you’ve eliminated the impossible…

One lesson that Friedman has learned from the social sciences is that it can be helpful to probe a view through an elimination process called the ‘via negativa’.

‘It’s easier to reason in negative terms. So take a product: it’s easier to say a fund will disappear due to strong competition. It’s through eliminative reasoning that we can see what will last.’

As a general rule, Friedman follows the assumption that something that has been around for a long time has a higher probability of lasting than a newer version.

Take the Bible or Balzac: there’s more chance that those will still be read in 2,000 years than a new book. The same thinking can be applied to markets and funds, he says.

The fund selection team for Natixis WM sits within Vega and consists of 12 people split into three sub-teams, which are collectively responsible for all open-architecture enquiries. Led by Sandrine Vincelot, the first is a three-person unit that acts as an advisory unit. Another four selectors oversee funds of funds and five focus on mandates.

Within each of these teams, fund selectors are dedicated to specific asset classes, which rotate every couple of years. It is important they are in small groups of two or three to do the Ucits and funds of funds selection, he says.

As part of the process, the unit also produces regular studies into various asset classes, such as convertibles or Chinese bonds. Following that, fund selectors will be in charge of picking several funds to back that complement each other in that particular asset class.

For instance, in the US market Friedman says selectors are charged with finding strong funds across a range of different types of strategies. While they back growth and tech stocks in particular, it is also important to pick small-cap funds.

‘For a long time we have been underweight the US market, all the while using extremely growth-oriented and tech-geared funds because we think tech valuations are not yet in bubble territory. Then in the portfolios we decide on the selection of funds that correspond the best based on the scenario we have.’

Each fund is added to a short list, which can have 300 funds, but each strategy is then rotated in and out of portfolios depending on the company’s allocation line. ‘The selection is much broader and prepares for the future with very differentiated funds,’ he explains.

While the fund selection unit reports into Friedman, they also report to the CEO at Vega, Marc Riez.

A selector’s mission

There are two key objectives for fund selectors at Vega IM, Friedman says. The first of which is to follow the allocation prescribed to them by the bank’s house view.

The second key role they play is to be open to ideas put forward by fund managers and to understand exactly how they are invested and where the flows are headed.

‘Sometimes, for example, the fund may opt to largely shun a particular country or sector, which could give us a new idea of how to invest.’

That said, it is crucial that the fund selector is able to have their own independent idea of the markets.

‘There are no good funds if you are not able to discuss the market scenario and to really understand the outlook of the manager you choose. It’s important for the fund selector to really perceive the intelligence of the manager; it’s important to have one who shares the same job.’

In this respect, the selectors are at a huge advantage if they themselves use the funds for their own portfolios so as to not be disconnected with the interests of the client.

Lifelong learning

Now a decade into his time at Vega, Friedman has only worked at one other company during his career, Société Générale. Starting in 1988 as a broker before becoming a bond manager, working on futures and being a manager for private clients, Friedman says he has always worked on the open-architecture side of the industry and in markets. He spent 20 years at the group before joining Vega in 2008.

The multi-faceted nature of being a CIO and being in constant interaction with different types of people is the best part of the job, Friedman says, and he enjoys the chance it gives him to learn about a wide range of topics.

‘There are certain meetings with specialists where you learn so much – everything from geopolitics and financial markets to psychology.

‘When you meet someone and they teach you things that you will keep forever, that’s my favourite part. The real satisfaction is knowing you are learning something that has a long lifespan.’


CV – Jean-Jacques Friedman 

Jean-Jacques Friedman joined Natixis Wealth Management in April 2018. He first joined the group in 2008, working to integrate the Vega Investment Managers team, where he had worked as head of mandate management and CIO.

Prior to that, he worked at Société Générale Asset Management and served as head of customised mandate management. He has a degree in finance from Paris Dauphine University.

 


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