Credit Suisse’s Keitel Hangs Tough on Stocks in Hunt for Returns
When the MSCI World index fell 16 percent in two weeks in August last year, Credit Suisse Group AG (CSGN) Chief Investment Officer Stefan Keitel kept his overweight recommendation on equities.
Keitel, a German national who took on the newly created role of the CIO for both the Zurich-based company’s private bank and asset management unit in 2009, stuck by his call until markets rallied in January and February.
“This was a tough time,” Keitel, 43, said in an interview at his office in Zurich. “I had so many conversations with clients and relationship managers and it wasn’t easy to convince them that maybe the markets are completely irrational. This discipline and anti-cyclical behavior not to lock-in losses paid out pretty well since then.”
Keitel, who joined Credit Suisse in 2001 after working as a portfolio manager at Prudential Securities Group in New York and Frankfurt, is setting strategy for about 1.21 trillion francs ($1.29 trillion) of funds as the erosion of bank secrecy makes investment returns a key benchmark for Swiss wealth managers. That pits Keitel against Alexander Friedman, his opposite number at UBS AG (UBSN), as profitability declines across the industry.
“Since the financial crisis, revenue margins in private banking have fallen by 20 percent and profit margins have dropped by over a third,” Credit Suisse Chairman Urs Rohner told a conference in Zurich Sept. 3. “Asset inflows from mature markets remain challenging and the cost of doing business will increase further as a result of implementation of regulation both domestic and foreign.”
The wealth business of Switzerland’s second-biggest bank attracted 11 billion francs of net new money in the first half of this year. Outflows from “mature” offshore markets totaled 5 billion francs.
Gross margins, or the amount of revenue Credit Suisse makes on assets under management, fell to 115 basis points in the second quarter from 135 basis points in 2009. A basis point is one hundredth of a percentage point.
Keitel, who co-manages 103 billion francs in discretionary mandates with Andreas Russenberger, has accelerated the implementation of investment decisions to five days from several weeks. He is chairman of a global investment committee that meets every two weeks and liaises with about 25 people from different units of Credit Suisse on decision-making.
There has also been a shift in focus to the analysis of fundamental trends from quantitative models to better explain recommendations to clients, said Keitel, who rides a Harley Davidson in his spare time.
Transparency and clear communication with customers are “crucial, in particular in the aftermath of the financial crisis,” said Keitel, who gets support from analysts, regional CIOs and sub-committees that can conduct more detailed analysis of areas such as alternative investments and emerging markets.
Larger rival UBS has reorganized under Friedman, who is masterminding the management of 1.54 trillion francs of assets for wealthy clients. Performance should replace the “moat” of secrecy that guarded Swiss banks’ business and attracted clients, he said last month.
“Swiss private banks have rediscovered the importance of investments performance,” said Christian Staub, head of Pacific Investment Management Co.’s Swiss unit. “It’s great for the whole market place that this is happening.”
In the first eight months of this year, returns on so-called balanced mandates, which invest 40 percent in stocks, 35 percent in bonds and 20 percent in alternative investments at neutral asset allocation, ranged from 6 percent to 10 percent depending on the currency, according to Credit Suisse. Those returns are before fees.
The return in Swiss franc balanced portfolios for clients that invest a minimum of 500,000 francs was 7 percent, compared with a negative 5.4 percent in 2011 when stock markets fell, contrary to Keitel’s expectations.
That compares with the MSCI World Index’s 8.2 percent gain this year through August and a 3.6 percent advance in the 10-year Treasury future. The Pimco Total Return Fund (PTTRX), the world’s biggest mutual fund with at least 65 percent of its $270 billion of assets allocated to investment-grade fixed-income instruments, climbed 5.8 percent and the Vanguard Balanced Index fund, which tracks U.S. stocks with 60 percent of its assets and bonds with the rest, rose 8.4 percent in the period. Those returns are after fees.
Credit Suisse moved to a neutral stance on equities after MSCI World Index rallied 9.8 percent over January and February, following its 7.6 percent drop in 2011. The bank went back to overweight stocks in early June just as stock markets started to rise again and returned to neutral in August, said Keitel, who has a degree in business management from the University of Mainz in Germany.
Keitel has kept his June overweight call on European equities as the Stoxx Europe 600 Index gained 13 percent since the end of May. With euro-zone markets still a consensus underweight, there is plenty of room for upgrades, he said.
“European equities should outperform,” Keitel said. That will be driven in the coming months “by more compelling valuations, visible improvements regarding the management of the euro-zone crisis and the currency stimulus.”
Keitel, who regularly commutes between his family home near Frankfurt and Zurich, said his call on short duration has been the least successful over the past three years and limited returns made from fixed-income investments this year. Duration is a measure of a bond’s price sensitivity to changes in interest rates.
Still, as with his call on equities, Keitel is prepared to wait.
“You come to a point where you say now you’ve been wrong for a pretty long time so it would be anything but sensible to turn around at really stretched levels,” he said. “If we’re right with the scenario that in 2013 macro-economic trends will stabilize, inflation picks up and then bond yields have to rise and we’d be rightly positioned.”
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