This publication recently interviewed the CIO of the Geneva-based wealth management house.

This publication recently caught up with Switzerland-based investment figure, Francois Savary, chief investment officer of Prime Partners. Savary has a lot of views about the forces driving markets, economics and politics. He sat down recently with this publication to delve into some of the details.

What is your current asset allocation positioning with regards to equities, bonds, cash, real estate, hedge funds, private equity, gold, other? 
We currently hold 5 per cent cash, 25 per cent of liquid alternative investments (gold is 6.5 per cent of those), 45 per cent equities and the rest 25 per cent in bonds (convertible bonds included); we have a strong position in emerging market debts in our bond allocation and we favour tactical products in fixed income assets.

What has shaped your decisions regarding such asset allocation in the past year or so and what sort of expectations shape what they are now? 
Our 2019 strategy was based on two axes: be tactical and manage the risk of our portfolios after a difficult 2018. Markets are clearly under the influence of erratic moves in sentiment as geopolitical and trade issues have made the economic outlook difficult to assess. For 2020, we have to take into consideration that expected returns must be contained as the fixed income portion of an allocation is not attractive; moreover, the soft landing scenario for the economy does not imply double digits return for equities; therefore, we need to accept that 2020 will bring smaller total return and we have to accept more volatility in the performance. 

In this regard, there are many risks that we need to assess on a daily base in order to define if we want to bear the volatility we are going to face. The US election is one factor that we will watch carefully but I can name quite a few others: is the dollar heading for a significant depreciation, what about social movements? Are they going to increase the risk of a recession? Is an earnings recession looming event if an economic recession should be avoided?

The Swiss banking sector recently complained about negative interest rates; the Fed has cut rates again and there must be a risk that central banks have run out of bullets if or when another big market shock hits. What can investors do about it, or how should they think about it?
The low rates environment is here to stay and investors have to adapt to that! Investors must accept the fact that 2020 is going to bring less return for more volatility to our point of view. Maintain a strong focus on de-correlating alternative investments is a key ingredient in this regard in order to face the rise in equity volatility we expect, as long as an economic recession won’t become a reality.

Predicting the future is a waste of time in many ways so it arguably makes more sense to think of scenarios and put money into the areas where they overlap, like in a Venn diagram. What sort of scenarios are you thinking about when you decide where to put clients’ money?
We are asset allocators and at they end of the day what we try to assess is the developments we can expect on the economic cycle; we based our assumption of possible market developments on a constant reassessment of the possible economic developments that we can imagine looking 12-18 months ahead. The probabilities defined for different outcomes allow us to determine the allocations that suit our client needs (risk profiles). In this regard, all our strategies have tactical bands that allow us to position the portfolios in line with our macro views. 

What do you see as the main risks to client money and where could there be positive forces at work that people aren’t fully understanding? 
An economic recession is a major risk for any portfolio today. We believe that the world economy is stabilising but we nevertheless consider that the recession risk is far from nil (30 per cent). China developments of late prove that you need to look through the Chinese model with some "open" eyes. The deceleration in the growth rate, the health of the financial system and the debt burden have to be observed carefully. The financial repression is a drug that produces moral hazard for financial markets, never a good point. 

The dollar has benefited from significant flows of late, supporting the currency despite some deteriorating fundamentals (budget deficit); it is maybe wrong to consider that should the dollar depreciate it would be a positive for financial markets as it was the case in the past; this time could be different in the sense that a loss of confidence towards the dollar, induced by a Trump policy to depreciate the greenback could produce significant volatility on financial markets.   

There is a lot of pessimism and uncertainty around today, but in some ways humanity has never “had it so good” in terms of living standards, etc. To what extent is there a disconnect between much political/media/popular culture commentary and the underlying fundamentals? Is part of this disconnect a function of social media and modern communications, etc?
Very good point! People have lost sight of the fact that capitalism and economic liberalism have produced the best living standards ever for humanity. However, one cannot escape the fact that income distribution is increasing among developed countries.

Populists are very good at playing the game to bring forward this fact without telling the full story, i.e hundreds of millions of people around the world are much better off - ask the Chinese, for example!

Developed economies are facing a double challenge: there is a rapid catch up happening from "emerging countries" in terms of wealth accumulation on the one side and the philosophy of egalitarianism that flourished over the last 50 years has not produced the expected results on the other.

Equality in rights does not mean egalitarianism. Populists are good at telling people that it is because of other parties’ failure that the latter is under threat but at the end of the day it is not a philosophy that can prevail! As a matter of fact closing borders, building walls, being protectionist, all those attitudes are going to impede wealth creation! Is it better to be equal in poverty or is some inequality inherent to any society? I have my opinion. Social media and the (wrong) principle that there is no absolute truth are just helping the populists to mobilize people who have legitimate frustrations.

There are various themes out there that can be investable (longer lifespans, health changes, security threats, global warming, remote learning/education “bubbles”, water irrigation/supply, rising emerging market middle class). Do you see these as fruitful ways to think about investing, given the distortions that can occur by investing by geography, or where firms are listed, etc?
We like the thematic investment philosophy when it comes to equity allocation. As a matter of fact, we allocate 25 per cent of our equity allocation to thematic investments. The world is changing and daily developments prove that the challenges of today are global and not regional or national. Moreover, global growth is much more dependent on “emerging economies” than [before]. The world economy faces disruptions and changes. In today’s world solar energy is a development which Chinese companies can’t ignore, for example. The same way innovation in robotics and digitisation is no more a purely US play. Global thematic investment has to be integrated in the way you allocate your money in equities.

There has been this big shift to so-called “passive investing” for all kinds of well-rehearsed reasons. Do you see this as having run its course, has further to go, or bringing certain new risks, opportunities for arbitrageurs, etc?
We do not consider that there is a passive/active argument. We consider that both styles have a place in an allocation. The point is about where you put emphasis, depending on the economic and financial cycle. There is room to favour passive investments when the markets are driven by flows; active investments are interesting when you are in the mature phase of the cycle as discretionary decisions can produce alpha. All that said, we remain cautious with the fixed income ETF, which in our point of view exhibits characteristics that justify not falling in love with such instruments. Moreover, we try to stay away from derivative based ETFs as much as possible.

The recent Neil Woodford fund debacle, issues at GAM, etc, have reminded investors about liquidity risk, over-confidence in some “star” managers, etc. What’s your approach to these issues – do you think investors should insist on a specific discipline about liquidity?
Investors should always have in mind the liquidity issue when it comes to investing! Never invest in illiquidity that your cannot bear, should market developments turn against you. We are very cautious with liquidity when it comes to our advisors and investments. We do not hold any investments with more than a one-month redemption in our allocation. Moreover, when it comes to the selection of investment products, we are very careful with the liquidity conditions. It is essential that clients and investors are 100 per cent aware of the liquidity conditions and the liquidity nature of the assets they are holding directly or through a fund.

Behavioural investment ideas (understanding the biases that humans are prone to) have become more widespread recently. Are you a fan of this approach? Can it produce tangible results on the ground and can there be any risks to the ideas themselves?
I am a fan of Callas, Stendhal, Rothko, Benjamin Constant, John Kennedy and a few other people, but when it comes to investment I refrain to fall in love with any theory or investment style. Behavioural finance is fascinating and it is certainly worth considering. However, nearly 30 years of experience have taught me - the hard way sometimes - that there is not a single solution to being right about markets. In a way trying to identify “fixed rules” to build a portfolio and believe that you have found the “perfect” solution is not the way in which I envision my activity. 

Factual: what is the firm’s current AuM, any info you can give about performance, etc? 
Prime Partners manage about SFr4 billion ($4.02 billion). Performances for a balanced account range from 9 to 11.5 per cent depending on the reference currency in 2019.