“An investor should have the strategy right”

Mr. Wille, you recently said at an event that “Money should work.” What exactly did you mean by that?

Thomas Wille Money or capital is a factor of production, just like labor, knowledge or land. The goal is to create value with money. Anyone who makes money available to a company or the state through stocks or bonds, or in other words, anyone who invests capital, therefore rightly expects this to generate a return or have a positive impact on their assets.

So what are your department’s responsibilities in this context?
Our most important task is to develop an investment strategy and provide analyses, recommendations and investment ideas that help our clients make well-informed investment decisions and achieve attractive, risk-adjusted investment returns. Our second responsibility, and one that is becoming increasingly important, is to show our clients how sustainable their investments are in a way that is transparent. In particular, this includes our stock recommendations, each of which contains a well-founded sustainability assessment. Our third responsibility is to give our clients an indication of what kind of returns are realistic for the amount of risk they are taking.

So what do you mean when you talk about attractive, risk-adjusted returns?
Investors sometimes forget that returns and risk are closely linked: strong returns can only be achieved with higher risk. From the investor’s point of view, a return is attractive if they are adequately compensated for the risk they have taken. Of course, the absolute level of return depends to a large extent on the investment environment. At the turn of the millennium, achieving an investment return of five to six percent, even with a low level of risk, was still realistic. In the current low or even negative interest rate environment, investors have to massively adjust their expectations downward because they are not getting the returns on the interest side. In the early 2000s, in contrast, it was still possible to generate yields of over 6 percent with ten-year US government bonds. Today, that yield is 1 to 2 percent. In Germany and Switzerland yields are actually negative.

What does that mean in concrete terms? What kind of returns are realistic these days?
For a low-risk investor with a conservative investment strategy consisting of equities, bonds and perhaps a small share of alternative investments, the minimum goal for the medium to long term over an economic cycle should be real capital preservation. In other words, given the central banks’ inflation target of two percent, the absolute achievable return should also be at least two percent. Ideally, especially if the stock markets and alternative asset classes play along, this should, of course, be higher.

You make recommendations to clients about how they should invest their assets. How do you go about doing that?
Our investment strategy is based on an analysis of the global macroeconomic environment. For example, we look at variables such as growth or inflation and identify scenarios for how these could develop in individual countries or economic regions. To do this, we also have to examine factors and players that influence these variables, such as central bank policies, the fiscal policies of certain governments, corporate investment levels or consumer sentiment.

And how do investors benefit from this analysis?
The macroeconomic analysis enables us to forecast expectations about the return prospects and risks of the various asset classes in individual countries, regions and sectors. These, in turn, serve as the basis for defining the investment strategy, i.e. the optimal allocation of assets to individual asset classes, countries and currencies. Many investors mistakenly believe that good returns depend on “hot stock tips”. Numerous studies show, however, that the investment strategy is responsible for around 70 to 80 percent of long-term investment returns. In other words: if an investor has gotten the investment strategy right, they’ve taken a big step towards achieving good performance.

So individual stock picking doesn’t play an important role?
No, it does, of course. Ultimately, a portfolio doesn’t consist of an investment strategy, but of individual securities or investment funds. And we are convinced that an active investment strategy can bring added value. That’s why stock/bond selection is important. It can be the deciding factor in terms of whether the right strategy achieves just an average or an above-average return. It is therefore very important to us that our financial analysts develop attractive investment ideas for individual securities or funds as a way for our clients to generate returns.

What skills does a good financial analyst require?
The most important thing is to have the typical analytical skills, like a flair for math, as well as in-depth knowledge of economics and business. After all, a large part of our work involves collecting, modeling and interpreting data. They should have experience in financial markets, and with bubbles and crashes. But they also need soft skills such as good gut instincts, and should be in touch with their emotions. The purely rational investor only exists in a laboratory. And finally, they must have a calm demeanor and enough stamina to withstand the headwinds that can arise when markets go crazy or develop contrary to their expectations for a period of time.

Are analysts lone wolves?
No, definitely not. Working as a team is key both in investment research and investment strategy. That’s why when we hire a new analyst, the most important requirement is that they are a good fit with the team. In a complex world where almost everything is interrelated, a research team should be as diverse as possible. We therefore need a mix of specialists with a wide variety of backgrounds and expertise who can contribute their specific knowledge and complement each other, but also challenge each other.

What role do you play in that?
Although I am responsible for formulating the investment strategy and by extension also the house view, I see myself primarily as a member of the overall Research and Investment Strategy team. I’m not that actively engaged in the day-to-day analysis work and I’m not a specialist in every single area. Instead, my role is to take an overarching perspective and define the big picture with the Strategy team, which is responsible for our investment policy house view. But, I’m not the “mastermind”, I’m more of a moderator who is also allowed to ask unpleasant or challenging questions once in a while.

At what point do you feel satisfied with yourself and the team?
When our clients achieve a good return on their investment as a result of our recommendations. For our clients to sleep well at night, our error rate has to be low. That means we should be right at least two out of three times, and when the third time materializes, the damage should be limited. Financial analyses are often very technical and peppered with technical terms. That’s why it always gives me great satisfaction when our analyses and recommendations are clear and easy to understand for our clients and relationship managers. One of the nicest compliments I received from a client was: “I understood what you said and what it meant for me.” That’s exactly what we want to achieve with our work.