Investor Dialogue

Investor Dialogue: David Pinkerton

The chief investment officer of Zurich-based Falcon Private Bank talks about how the private bank intends to grow and why Asia is the focus.
David Pinkerton
David Pinkerton

What is your background?
I spent 25 years at AIG and started both the private equity (PE) and hedge fund investing businesses. I left in 2005 to start a wealth management consultancy business advising a small group of single family offices.

After AIG had its problems the private bank was one of the first assets put on the block. It was spun out and sold to Aabar Investments, which is ultimately controlled by the government of Abu Dhabi. I rejoined as CIO last year.

How was the private bank you returned to different from the one you left?
Like, AIG the private bank had an emerging market DNA.

AIG sold it through an auction process and a list of a dozen buyers ultimately dwindled to one serious bidder, who are the current owners. The assets under management (AUM) dwindled more than at other private banks during the sale process, given the image loss of AIG.

PINKERTON'S TOP THEMES

1
Being client-centric and the ability to customise are critical

2
Emerging-markets bonds will yield returns

3
Developed and emerging markets equities as well as gold could represent value

Who have you raised your AUM from? How do you intend to grow it?
Our current AUM is in excess of $12 billion, with the majority of this from the Middle East and Europe and North African investors. In the Middle East our AUM is growing quickly. In Asia we've had a slower start but have recently enhanced focus. We've defined an emerging markets and frontier-markets strategy for capital origination. Our branches and representative offices are in Abu Dhabi, Dubai, Hong Kong, Singapore, Zurich and Geneva.

In Asia private banking is crowded with new entrants offering similar services. Why will clients come to Falcon?
At Falcon we emphasise building long-term relationships with clients -- not short-term trading oriented accounts but more on the side of advising clients on optimal asset allocation, diversification tools around single, large equity positions and hedging strategies around the typical, long emerging-market asset class bias that is inherent in our target client base.

Entrepreneurs in Asia have been earning a return on equity between 20% and 30%.

Until now not many were interested in diversification tools to mitigate volatility and emphasise wealth preservation. The economic slowdown is showing them the need to diversify their assets. In addition to diversification, wealth storage needs are attracting clients to us. The financial crisis has validated the concept of being client centric rather than product centric. We believe there is a disconnect between the quality of products offered to institutions and those available to ultra-high-net worth clients. We aim to bridge that gap. At Falcon we believe that to generate superior returns, we have to hire the best managers but do not have to own them.

But your competitors boast that they can customise solutions in-house?
We also offer in-house solutions where we believe the investment strategy demands this, for example, fixed income or focused equity. But by virtue of their nature some strategies require scale.

What is your prognosis on the global economy?
The current imbalances in the capital markets are a result of over-leveraged and aged populations in the developed markets and under-leveraged, young consumer profiles in the emerging and frontier markets. Deflation is the structural headwind in the developed markets and policy makers are doing everything in their powers to stimulate inflation. In the emerging markets it is the opposite. Structural inflationary forces in certain industries and policy motives seek to contain this risk factor. As the world attempts to rebalance due to these imbalances there will be spasms of fear and deflation coupled with periodic inflation and growth anxieties.

This will create a challenging time for capital allocation and for the near term we see it as a trading oriented environment for equities and also an opportunistic environment for emerging market fixed income. At the moment there is a bubble building in safety assets (US treasuries, the US dollar, etc) while the European crisis remains unresolved of a long-term solution.

I compare the current world situation to a lake. In autumn the water at the top of the lake cools and falls to the bottom. The inversion process creates turbulence.

This is what is happening to the world. The population in the northern hemisphere in North America, Europe and Japan is an aged one. These markets have witnessed a structural shift in demand.

Old people do not spend money on new homes. That's why the housing market is -- and will remain -- weak.

That's also why emerging market sovereign debt quality is improving while in developed markets it is falling. Policy intervention is distorting the cost of capital and creating further volatility.

Printing money cannot solve these problems. Indeed, excess liquidity is causing inflation and the prices of food, gold and various other items to increase.

How will the eurozone’s problems affect Asia?
Asia is still dependent on two primary customer blocs, one in the US and the other in Europe. Asia needs to stimulate its own domestic consumption and focus on newer emerging markets such as sub-Saharan Africa and Pakistan. China has recognised this. Its lending to some of these countries for strategic infrastructure development is a first step to exports. For example, only after a port has been built can shipments of goods be delivered.

What about all the talk about Asia decoupling from the rest of the world?
There is a theoretical hope that global economies will decouple from each other. But it is important to distinguish between financial markets decoupling and economic decoupling. Fear and greed know no boundaries so financial markets are still closely intertwined. The volatility facing emerging and frontier markets will not disappear in a hurry but these extreme swings create strategic long-term buying opportunities for investors

What is your view on the US dollar?
At the moment the US dollar is the recipient of huge global safety flows: it is still the most liquid currency and represents the deepest capital market in the world. China is interested in increasing its share of global currency reserves but must overcome some accounting quality issues and liquidity issues in its capital markets if it wants to achieve this position. China can never be a viable alternative while it has significant issues related to transparency and quality.

Most global asset allocators are still too fearful of events like what happened with companies like Sino Forest.

John Paulson took a black eye on Sino Forest. How would someone without his resources be able to avoid those issues?

What is your asset allocation strategy?
We are defensively allocated. We are recognising opportunities in emerging market bonds and see exceptional value in the long-term in some emerging market credits. At some point of time we'll allocate more money to emerging market equities but not yet and before that we will be long developed market equities. But as I said our view is that these markets are highly volatile, not subject to a bull trend and many equity markets are either in a bear market or in a sideways range-bound pattern. As such we remain highly tactical in asset allocation. We are invested in emerging markets equities on behalf of some clients. We remain bullish on gold and expect it to perform similarly to 2008. If the sovereign debt crisis is resolved by printing more money gold will increase in value. However, there is some risk in gold. If the crisis is resolved through restructuring liabilities, a la Brady bonds (ie, a solution which does not just push the issues into the future) then equities might yield better returns.

What is your view on alternative investments?
For private equity the action is currently in the secondary market in taking listed companies private. The bid-ask spread on leverage is too wide for LBO-type deals to get done. In the longer term emerging markets private equity investments will yield returns but this is dependent on the country, the region and the manager. Hedge funds have been a disappointing asset class for many years and this will hopefully force a further accelerated consolidation of that industry.

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