Welcome to the podcast that shares the views of high-level leaders in the European and global financial services industry.
Nicolas Mackel . – «Welcome to Shaping Finance, a podcast which offers a platform to high-level decision makers and shapers in international finance. My name is Nicolas Mackel. I’m the CEO of Luxembourg for Finance and the host of this podcast.
I’m joined today by Cynthia Tobiano, the Deputy CEO of the Edmond de Rothschild Group, and she’s also the CFO and a member of the group executive committee since April 2019. Cynthia began her career in investment banking at Goldman Sachs. First as an M&A analyst in London, and then as a partner in Paris, before being named Vice Chair of the Paris – London mergers and acquisitions team. She joined Edmond de Rothschilds in 2011 as Head of Finance and Development and a member of the management committee, and the executive committee of Edmond de Rothschild France. Cynthia holds an MBA from ESSEC Paris, one of France’s finest business schools. Thank you very much, Cynthia, for taking the time to share your views with our audience.
Cynthia Tobiano. – «Thank you. Nicolas Mackel:
The Rothschild family has a long history and has played a particularly prominent role in shaping finance across Europe since the 18th century. The group follows a number of particular business lines, but is perhaps most well known for private banking. Can you give a brief explainer to our listeners regarding the various business lines in which your group is active? Which types of clients you serve and what geographic markets you are active in?
«So our group has, I would say, a unique place in the financial landscape for various reasons. One, we have this mix of 250 years of history, a mythical name and a strong name, where we are fully family-owned, and we are therefore totally independent. We have roughly speaking 170 billion under management in terms of assets under management in two very complimentary businesses, which are private banking for around 75 billion and asset management for the remaining. We really position ourselves as a conviction-driven investment house, which we believe is an echo to our shareholder family history and the tradition of long-term investment. We have effectively three major hubs which are France, Switzerland, and Luxembourg, based on which we offer a broad range of coverage and abilities.
Going back to our strategy and the conviction in how we do the investment, we favor strategies that are rooted in the ‘real economy’, and that really combine on one hand, the financial long-term performance, and on the other hand, the impact on what we call the ‘real economy’. We do that through active management of concentrated portfolio or thematic investments, and we aim to present it, and offer to our client, I would say, a broad range of solutions from liquid to illiquid assets, whether it be private equity, real estate or infrastructure. We are therefore able to respond, in agile way to our client needs. The markets we are, I would say, in our core we are a European wealth manager. Having said that, obviously we have that anchor has the weight of our business. Obviously we also, from that base, we address Middle East and Africa.
We have developed a very targeted approach in Asia, because we are small enough to be agile, but small, it also means that you need to be focused. We’ve targeted our approach in Asia through partnerships, notably in asset management, specifically in Japan and Korea. As I said before, one of our three hubs and three co-markets is Luxembourg. We celebrated last year, our 50 years presence in Luxembourg. Luxembourg is also the registration platform for most of our UCITS funds and our private equity funds. We are very excited because we are just moving all our employees in Luxembourg into one new premises in the Cloche d’Or. So we’re happy about putting people all together in the same location in Luxembourg.
Thank you very much for that trust in Luxembourg. Coming back to the real economy, the last couple of years were marked by ultra-low interest rates. This has certainly posed a challenge to the wealth management and investment industry. How did your bank adapt to this environment and where did you look for yield? How will the current crisis impact your strategy?
«I would say three things. First of all, I think our conviction is that the interest rates are lower for the long run, and it’s one of the main challenges facing the financial industry for certain. What is clearly striking is that effectively, what we’re saying today is that time has no value anymore, which is in itself a concept. The state bonds should not be any longer considered as a safe haven. In a way, the COVID crisis has not created this trend. It has more, I would say, strengthened this trend. Therefore, this is the first point just to put our conviction in the context, and how do we address this? In this context, I think what is particularly striking and where we feel confident is the fact that, as I said before, we position ourselves and what we have been developing is long-term solutions for investments for our clients, and bridging with a conviction that you can bring long-term value and real economy impact, meaning that we’ve have developed over the last, I would say decade, three key expertise, private equity,, real estate, and infrastructure debt.
Now these three expertise, they support entrepreneurs. With them we have a very strong focus on ESG and on impact on the real economy. In a way, we’ve seen client appetite for those kinds of solutions, given the environment of the low interest rate, but the yield is clearly more attractive than what they could found in alternatives on the markets. At the same time, it is something that we are profoundly convinced that this is a long-term solution that can bring a lot of value both to our clients and to the companies and the project we can invest in. We also believe that the polarisation between active and passive managers is emerging trend in the industry. There is space alongside with a large passive and mainstream management for conviction driven with long-term investment and a concentrated portfolio. We keep developing those solutions.
If you take that on board, going maybe to the last point of your question, the post-COVID convictions, along the same lines, the new normal would be: 1 China watered the crisis better than the other economies. One of our pillar investment conviction today is the importance to have an exposure to that region and a country in a diversified portfolio. 2: the Western government bond, we remain low, to service the additional debt from stimulus measures. So there is need to find new sources of yields in the corporate credit and emerging debt. 3, obviously and you mentioned it earlier, the lockdown and everything that we’ve experienced in 2020 highlighted the need forall industries to digitalize, one, and two, the use of technology in general. So we see and we are convinced that inter technology and digitalisation are key factors to be reckoned with, and are obviously sectors that we are particularly attracted to, and that would typically include smart healthcare, everything related to digital consumption.
Obviously, all that linked to as a consequence, cyber security has surged and that, again, the conviction that this is not conjectural. It’s a structural move, so there’s structural demand for that. The development obviously of logistics centers. We’ve radically seen the booming of the new revolution of the e-commerce. I would say finally, the ESG theme. Again, given what I said before, this is not something that we as Edmond de Rothschild see as something new, because this is one of the fundamental pillars on how we construct our solution to our clients, but is clearly a key theme for 2021 and beyond. Especially as you see that most stimulus program, having common green tech and sustainability. If another point on that is when you look at the recent election of John Kerry. Who after four or five years of skepticism from the Trump administration on the Paris Agreement, what we expect is to have a big move forward from the U.S. in this fields, going back to infrastructure and sustainability and green project outlook.
Good. Thank you very much for this very in depth explanation of your activities and how they’re impacted by the current crisis. Before we get to dig a little bit deeper on ESG and on the digitalisation of the industry, let me ask one more question on the impact of the current COVID crisis. It has prompted a collapse of economic growth overall. However, world equity markets are up year to date. For instance, the technology-heavy NASDAQ has surged more than 40% in 2020. How are investors reconciling this year’s terrible economic data with the market’s exuberance?
«I would say obviously, it’s shocking when you put those two references together. I think there are effectively two things. One, you’ve never seen before, even in 2008, so much injection of liquidity from the central banks in the system. The market takes also that into account. To give an example, the amount that was injected and redeployed in the market in the last six months is more than what was done in six years after 2008. Just to give you a note of magnitude of liquidity injected in the system. So at some point in time, that caution support the valuation level and explain part of it. Obviously, the second reason on the technology, etc, the 2020 year has really clicked a new step in terms of the usage of technology, what it was possible.
Think about home office. Home office doing the level, and again, maybe we’re in the middle of it. So it’s very difficult to take what is going to be structural, what is probably an emotional discussion that we’re all having. But imagining that people could be four days a week on home office has huge implication for technology and cybersecurity, ect, impact. Therefore, the future outlook for those kind of technology-driven companies is clearly different from a food and beverage, I would say, classical retail chain. Just to give to, I would say, to end of the spectrum.
Then let’s get to sustainable finance, which has certainly been one of the phenomena that preexisted the crisis, and you mentioned that before. But it has been accelerated by this crisis. Is the belief in the need to build back better, to use that slogan, already felt in the demand of your clients and what is needed in order to boost sustainable finance products?
«So I would say obviously, as I said before, we’ve been involved in sustainable finance for the last 15 years, just given that our DNA and the conviction of our shareholders and responsible investment criterias are becoming as natural as financial analysis in our investment decisions. They go hand in hand, without one opposing the other, using our proprietary models. What we have seen is, I would say, on the institutional side of our platform, the interest, requests and necessity to have at that kind of sustainable approach, I would say, is not 2020 related. It started few, I would say, 24, 26 months ago. On the private banking side, it is more recent and we see more and more our clients with the willingness to give back to the society or part of their wealth, and are much more sensitive to the environmental impact of the company they invest in. We see large players entering the market.
Private banking is very much seen as a business built on trust and personal relations between clients and their advisors. How is the role of private banks shifting, given new technologies and the digitalisation of financial services? Do you see younger clients, newer generations changing this inherent aspect of private banking?
«I would say, more we see at this moment because of the life cycle of our clients. We see more, I would say, the younger generation using more naturally the mobile apps and the internet and the different digital tools, than an older population. But I would say obviously we believe one, the personal relationship between the client and our relationship managers is key. Our conviction is that you don’t substitute technology to the human touch. At the same time, you need to have all the digital tools possible to facilitate the client life, the client experience, the smoothness of the onboarding and of the ongoing administrative process, because it’s … you know how cumbersome it can be to open an account and the number of statements, etc. So you need to have those tools and you need to have those tools, state of the art. They are not at all for us, a replacement of the human touch, of the human analysis to deliver the best quality investment advice that we do, but they are really a compliment to our offer.
I would say, what has changed in COVID during the 2020 year effectively is what was – and we see it in our French business where we’re really at the hands of the digitalisation there – what was a nice to have not long ago, around 2019, is today a much more of a prerequisite and that’s what we’ve reallocated, I think like a lot of other West wealth management players, reallocate a lot of our investment towards a group wide objective of putting as much as digital tools as possible in all our businesses. Whether it’d be corporate finance, private banking or asset management, because this is something that at the end of the day, improve the client experience, facilitate the life of the client, but also our employees.
Looking into the future, where does an institution such as yours look for growth? Are you exploring new geographies? You mentioned China before, or the Middle East. Does growth lie in new service lines or serving new clients? We often hear about the need to grow through consolidation, and we’ve seen some large deals made in recent years. You as an M&A experts do M&A deals from part of Edmond de Rothschild thinking for long-term growth?
«Absolutely. I would say there are three pillars in how we look at it. One, is to recognise that we are small. We are mid-sized player, and therefore you cannot compete on all the fronts and you need at all time to remain focused. It is extremely difficult for us, for example, although very appealing to buy something, for example, in the U.S., but you need to have the global reach and the scale sufficient, to be able to properly manage if it was the case, such an acquisition. So that’s one, stay focused. Acquisitions need to be complimentary to what we are doing and we should be able to have the bandwidth sufficient to really absorb it. Two, I think we are very strong – our tipicity is relatively strong, as we say internally. We developed this English word, which is not tipicity, on the real assets front, and we’ve built over the last, I would say, five years what is close to 20 billion of assets under management in the real assets.
That is something where I believe opportunities to consolidate that space further will be presented if only, because of the generational change that will happen in this space. Obviously, the SRR and impact angle is for us very important and the entrepreneurial spirit. So we have, I would say, a relatively narrow and well-defined set of objectives when we look at acquisition, and obviously on the private banking side, that would be my third pillar. The private banking side is scalable and it’s more and more a game of scale in the private banking business and to do that and again, this has to be something that is close to our roots, our culture and our platform. We have the capabilities. We have about a billion and a half for acquisition. So we are looking at all opportunities and we are effectively very stringent in applying those three pillars.
As we come to the end of the podcast, I would like to ask you a question that has become a bit of a tradition to end on, and that is if there has been a book that you have read recently and that you would like to recommend to our listeners.
«So I’ve already offered one book, which I read – ctually, I’m cheating a little bit because it’s probably the third time that I read it – but I thought instantly of it. It’s ‘Lettres béninoises, by Nicolas Baverez’. It’s a fascinating book, especially… I think it was written, I want to say five years, but I might be wrong, ago. It’s 2040. The head of the FMI (IMF) is at that time in the fiction, someone from Benin, so they are from Africa. And is on the last mission of the FMI (IMF) to save the French economy with a subsidy, I guess would say, from the FMI (IMF).
It really is a description of the country that is very hard to read because it’s very hard. It’s torn. It’s more it’s a concept of nation, of country has disappeared to the benefit ‘of more isolated regions of wealth’, surrounded by regions of obviously all the usual challenges, unemployment, poverty and violence. I think of it’s very tough reading because it gives you a picture of an European country that at the same time is as a European, you feel unease by reading this and at the same time can become so real, when you think about what the economy and the prospect could look like by 2040 in our continent.»
«Certainly, it’s true that our economies are fragile goods and we need to nurture them and make sure that they will be able to continue in a sustainable way, because that is what keeps people employed. Thank you very much Cynthia Tobiano, for sharing your insights with our audience. Thanks also to our listeners who have tuned in again to our podcast. In our next episode, I will be speaking to Julie Becker, the founder of the Luxembourg Green Exchange and designated CEO of the Luxembourg Stock Exchange. To stay up to date with our podcast, please feel free to subscribe on iTunes, Spotify, or Google. You can also find more information on our website, luxembourgforfinance.com.»