Getting quick and accurate data that shows if a portfolio is out of line with its objectives can, if acted upon rapidly, cement client relationships and build trust, a figure in the Swiss investment industry says.

The “open source” movement in computer software upended how people thought about the business of IT, the control of intellectual property and how to charge for business. And an investment industry entrepreneur in Switzerland wants his own firm to have a similar impact.

Nicholas Hochstadter, founder of Investment By Objectives, a company created more than 10 years ago, is, he says, an evangelist. His business, located in the Morges area of Switzerland, gathers daily price and related data from banks and other financial organisations in return for giving these contributors information showing if their portfolios are in line with, or drifting away from, stated objectives. (Information is given on condition of anonymity, to protect privacy.) Such data can provide users with an early warning that something might be going wrong. Because the original data is gathered without paying a fee, it is not massaged to suit commercial considerations. IBO earns a living by licensing its software (known as PerformanceWatcher), consulting and certification.

With financial markets getting off to a turbulent start this year, and regulators breathing down wealth managers’ necks to ensure investment products and services pass suitability requirements, the need for objective data on investment returns and risk is as urgent as ever. Hochstadter’s business is growing – it has added Liechtenstein to its network of offices and is looking to branch out across the Continent, and beyond. 

“There is no real boundary for what we can do,” he told this publication in a recent interview. 

One crucial benefit of his business model, Hochstadter said, is that because its information gives banks and others an early indication of potential problems, rather than fear that data would be used by clients to sack them, financial organisations can quickly put problems right and actually deepen client links. IBO’s web-based outlets include its Performance Network channel. 

“We can prove to the client that a bank is doing a fair job. They [banks] saw that we were not against them but making their links with clients stronger,” Hochstadter continued. 

It is easy to see how style drift and other problems can arise in a banking industry that, because of pressure from banks’ shareholders, tries to maximise returns for clients and can take on excessive risk. It is not the bankers’ fault – it is a fact of life, said Hochstadter, who takes a philosophical rather than moralistic attitude to some of the problems of finance.

There are a number of firms tracking performance of funds, of course, such as Lipper and Morningstar, and private client portfolios are also tracked and analysed by the likes of Asset Risk Consultants, or Stamford Associates (a London-based business). Hochstadter reckons that his firm is unusual in its “open-source” model, and its daily price data (and having 10 years of it).

As the firm now sells its information to institutions and professionals, and is growing, it is taking on staff and looking to expand geographically. As well as the recently-opened office in Liechtenstein, it is to open operations in Monaco. There is interest from clients in Belgium and the Netherlands and the firm has had “some very interesting discussions in Austria”, Hochstadter said.

A change of scene
The development of such a business might have appeared odd to the younger Hochstadter, a son of a Swiss banker. In his 20s he was more interested in music or the outdoors than toiling away in a bank. For a while Hochstadter ran a club in Verbier, and managed an open-air cinema. He is an accomplished horseman; when this publication did a news search on Hochstadter, it found plenty of news items about his equestrian skills. Getting the most out of all parts of life means a lot to him. 

A point came where Hochstadter said he needed to spend a bit of time at least learning about finance because of his family’s wealth and the responsibilities that went with it. As a result, he went to work for Credit Suisse in the early 1990s and seized the opportunity presented to “be an entrepreneur within the bank”.

No lover of repetitive tasks, Hochstadter developed an automated portfolio management system and, over time, he ended up moving to work in the portfolio management business of the bank, based mostly in Zurich. At the end of 2002, however, now married and with a child, Hochstadter wanted a different life and to be closer to his family, so he moved to Geneva and worked with a smaller private bank, Ferrier Lullin & Cie, which was soon to be acquired by UBS. “They [Ferrier] had to reorganise portfolio management and do this quickly because they were being acquired by UBS,” he said.

He performed in this role for a year and decided, in around 2005, to get out of the banking industry and take a different career path. Deciding that there was a need for independent, non-conflicted data on the investment world, he set up Investment By Objectives. “The idea was to propose to clients to set their financial objectives, compare them to their real portfolio, discuss with their banker and then to supervise the situation by following their performance and volatility (relatively to the Libor and world equity market). It was a very simple idea, really.”

Over time, IBO developed more ways of examining whether a bank or other organisation’s portfolios and risk characteristics matched their stated objectives, or deviated from them, especially because many people joined the network and shared their results, he said. 

The volatility of the 2008 crisis and the current bout of turbulence have been strong proving grounds for the value of having such performance and risk data, Hochstadter said.

Hochstadter is keen to expand his network and extend the business. At present, 10 people work at Investment By Objectives. 

“You cannot be successful alone and I am looking for people who share my mentality [and] this movement towards transparency,” he says.

Besides the Continent, Hochstadter is certainly keen on the idea of doing business in the UK, he said when asked about the idea. As far as this businessman is concerned, the whole world is his target.