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issue three | may 2010 the family: governance and investment

Bill emmott The road ahead: geopolitical and macroeconomic prospects, p4 russell Napier Some lessons from financial history, p6 Lisa Gray Integrated wealth management employing all forms of family capital, p9 stephen a.schwarzman Reflections on family life and choosing money managers, p15 rolf Banz Lessons for wealth preservation from the past decade, p18 simon de Pury and other specialists The opportunities within asset classes, p20 yves Bonzon Pictets strategy, p28 meir statman Behavioural finance and goal-based asset allocation, p30 Jean Brunel Goal-based allocation in practice, p32 matthieu ricard Postscript, p34

Foreword

We have great pleasure in introducing this third Pictet Report, which focuses on family governance and investment markets in the post-crisis era. These themes were discussed at a twoday informal symposium in the Swiss Alps which brought together families from around the world in late March this year. The following pages summarise a unique discussion of the particular challenges that face families in portfolio organisation and governance. They also offer a variety of perspectives on the global investment environment and the impact of the great credit crisis on a range of asset classes. The events in the markets over the past three years have tested the resolve of almost every investor, but the tensions can be more difficult to resolve in the context of a family. Informing the discussions at the symposium was a presentation that emphasised the importance of the individual talents of family members. These assetstheir capacitiesare too often overlooked, weakening the ability of a family to preserve wealth through the generations. Participants offered their own experiences of how they discovered the importance of such assets in their family portfolio. The symposium also analysed the macroeconomic impact of the crisis and its consequences for a range of asset classes. The presentations of the distinguished speakers and experts who led the discussions are summarised in the following pages, along with the insights of Pictets strategic thinkers on the lessons from the past decade and the Banks own investment approach for the post-crisis world. Finally, the symposium considered what can be learnt from the relatively new discipline of behavioural finance, and how it can be applied in managing family portfolios. Of particular interest was the idea that the exceptional stresses suffered by investors as the crisis unfolded were easier to handle when investment strategies combined an understanding of how humans actually behaved, rather than simply the rational model assumed by classical economics. Pictet & Cie May 2010

Pictet & Cie editorial teamStephen Barber, Olivier Capt and Ninja Struye de Swielande Design & editorial consultancyWinkreative | RapporteurJohn Willman | PhotographyBrje Mller

coNteNts

introductory analysis Bill emmott The road ahead: geopolitical and macroeconomic prospects, p4 russell Napier Some lessons from financial history, p6 Family Governance Lisa Gray Integrated wealth management employing all forms of family capital, p9 the Family Panel Investment organisation and management within the family, p11 stephen a.schwarzman Reflections on family life and choosing money managers, p15

investment markets rolf Banz Lessons for wealth preservation from the past decade, p18 The opportunities within asset classes simon de Pury Art, p20 Karl-erbo Kageneck Real estate, p21 william callanan Commodities, p22 Ken Jones Agriculture, p23 John Garcia Private equity, p24 henry swieca Hedge funds, p25 richard oldfield Equities, p27

Investment conclusions yves Bonzon Pictets strategy, p28 Asset allocation meir statman Behavioural finance and goal-based asset allocation, p30 Jean Brunel Goal-based allocation in practice, p32 Postscript matthieu ricard Can altruism be compatible with modern economic systems? p34

symposium moderators Gideon rachman Jean Brunel

pictet report | may 2010 the family: governance and investment

iNtroductory aNaLysis

The road ahead: geopolitical and macroeconomic prospects


The next decade will be shaped by global divergences in economics and politics that will have unpredictable consequences
BiLL emmott FORMER EdITOR-In-CHIEF THE ECOnOMIST

It is important to analyse the consequences of the financial crisis with a sense of humility. There is still a sense of shock, not at the fact of the financial crisis, but at its magnitude and extentat its fundamentally game-changing nature. Plenty of people predicted that something was going to happen, but Im not sure theres anyone who can honestly say that they predicted its magnitude. So, suitably humble, let us look at what is happening now in major parts of the world. In the USA and Europe, there is a battle underway against deflation. With deleveraging in the private sector, public sector leverage is growing in the form of government debt. We will now see, however, a period of public deleveraging amid fears of a reaction in the bond markets that could start a sovereign debt crisis. Is there going to be inflation? In Europe, it is Germany that will determine the answer, because it is the only country that could leave the euro and can thus dictate the terms of its survival. The next president of the European Central Bank next year is likely to be Axel Weber, the president of the Bundesbank, and I would place a bet that there will be no monetary policy relaxation under a German-led European Central Bank. A feasible scenario for Europe is deflation for a euro zone anchored by Germany, in which the southern European countries are forced to accept cuts in wages and prices to reestablish competitiveness with German unit labour costs. Until the political consequences of that approach become too dramatic for Germany to tolerate, we should expect deflation to be the rule. On the other side of the Atlantic, the Federal Reserve is less politically independent than the European Central Bank, the tolerance of inflation in the United States is higher and US has a more flexible economy. If US growth is 2.53.5 per cent or more, if there is the sort of innovation and corporate restructuring we associate with the US, and if the demographic structure continues to be

introductory analysis

pictet report | may 2010 the family: governance and investment

reinvigorated by immigration, the US authorities are likely to allow higher inflation than their European counterparts. Chinas parallel with 70s Japan In Asia and the emerging markets, inflation is coming through quite rapidly. Chinas response to the financial crisis has basically consisted of a huge boost in credit. China is the sort of society and economy that can absorb booms and busts in asset markets, but it cannot live with doubledigit inflation for very long and nor will the authorities want to do so. In this, a good analogy is the Japan of the 1970s, after Bretton Woods came to an end and the country faced rapid inflation owing to the oil crisis. Japan went through a significant move upmarket and then had another 15 to 20 years of strong economic growth based around the microchip, the compact car, consumer electronics. Historical parallels are never perfect but the challenge facing the Chinese authorities is similar: to get back control over inflation through currency revaluation. The capital resources released would allow Chinese companies to move upmarket and to become genuinely global. So although China faces an awkward adjustment, I think there will be some form of substantial currency reform within the next couple of years. There will be political and social difficulties, but I would place my bet on it managing to re-emerge as a stronger countryjust as Japan did in the latter part of the 1970s to enter its global heyday of the early 1980s. Oil and commodities may not be that scarce Turning to oil and commodity prices, one surprise at this stage of the financial crisis is that oil is at USd80 a barrel. After the Lehman shock and the drop in global GdP, it should be much lower. The reason why it has held up is that OPEC has been successful in production restraint and supply control. Forecasting the price of oil is always dangerous, but I think demand will not be as strong as previously expected. The high prices of recent years have encouraged substitution, with investment in electric cars, a surge of government money into renewable energy and intensified government regulation of emissions and of energy use. On the supply side, Iraq is handing out contracts, expecting to get its output back from 3 million barrels a day to 12 million. There is new investment in Brazil, a big expansion in Africa and Chinese investment pouring into countries with new reserves. These supply responses may weaken the position of OPEC. So I doubt whether its right to assume that peak oil production and the inexorable rise of urbanisation in China and India mean that oil and commodities are going to be scarce for the foreseeable future. I would place a modest and humble bet against that prospect.

A qualified shift in power towards China Finally, geopoliticswhether there is a shift in the balance of power between the USA and China. There is undoubtedly a shift underway, but there are three reasons to doubt whether it is quite so predictable as is often suggested. First, the USA is in relative decline, just as it has been since its peak in terms of the global balance of power in 1950. It is also on the defensive, with huge public debt, a major war in Afghanistan, the fall-out from Iraq and continuing global responsibilities. But while it is under great strain it has strong enough characteristics demographically, politically and psychologically to be the first among unequals in 2015 or 2020. Second, while China will increase its global influence, it will find it harder to keep its head down and avoid controversial situations as it did during the 1990s. Inexorably, it will find itself in positions where it has to make choices and decide how to conduct itself in multilateral organisations.

America may surprise on the upside, with Europe and Japan having deflationary problems, and China and other emerging markets forced into adjustment
Third, other countries will also be increasing in power and capabilitiesIndia, Brazil, many smaller Asian countries and even, perhaps, some southern African countries. A strong India and a strong Brazil restrict Chinas ability to become a dominating power in the 21st century. There will be rivalries between some of the rising powers and political tensions, particularly between China and India, and potentially between China and other countries. So my expectationladen with humilityis that America may well surprise on the upside, with Europe and probably Japan facing severe problems due to deflation, and China and other emerging markets themselves forced into an adjustment. It will be a world in which oil and commodities cannot be depended upon to produce continued price rises, thanks to the workings of supply and demand. And it will be a world in which politics, the internal politics of government and geopolitical tensions, will have some unpredictable consequences.

Bill Emmott spent 26 years at The Economist, 13 of them as Editor-in-Chief, during which time its circulation more than doubled to over 1 million copies a week. He is the author of several well-received books, including 20:21 Vision and most recently, Rivals: How the Power Struggle Between China, India and Japan Will Shape Our Next Decade. He has won several prestigious awards, including the 2009 Gerald Loeb Lifetime Achievement Award and a special award from the UKs Wincott Foundation.

pictet report | may 2010 the family: governance and investment

introductory analysis

Some lessons from financial history


The widespread fiscal crisis will eventually lead to inflation, because democracies rarely choose deflation, and governments will force people to buy their debt
russeLL NaPier COnSULTAnT GLOBAL MACRO STRATEGIST CLSA ASIA-PACIFIC MARKETS

The lesson of financial history is that government will be the most influential force in investment over the next few years. The way that governments see markets has changed since the start of the financial crisis, as can be seen from the changing views of the leaders of the British Conservative party. In 1989, Margaret Thatcher said, You cant buck the market. Todays Conservative party leader, david Cameron, took a different view in davos last year, when he said: Its time to assert a fundamental truth: that markets are a means to an end, not an end in themselves. Markets are there to serve our society, not to suck the joy out of it or trample over its values. So we must shape capitalism to suit the needs of society; not shape society to suit the needs of capitalism. History shows that financial crises evolve into fiscal crises and then what Ill call financial suppression. In plain English, that means governments will be forcing private sector capital where they want it to go over the next couple of decades, after 20 years in which governments freed up capital to go where it wanted to go.

us public debt/gdp ratio


% 140 120 100 80 60 40 20 0 1790 1805 1820 1835 1850 1865 1880 1895 1910 1925 1940 1955 1970 1985 2000 2015 2010 CLSA Asia-Pacific Markets (CLSA)

America cannot borrow its own currency forever Top of the list will be government bonds. Foreign ownership of US treasuries has now reached 54 per cent these are foreigners who are lending to Americans in dollars. In the 1970s, when roughly 20 per cent of US debt was owned by foreigners, Charles de Gaulle said it was an exorbitant privilege that this country and no other could borrow in its own currency. This is the most unsustainable thing in finance and it will end in this business cycle. The cause is that China and around 70 other countries have refused to allow their currencies to appreciate. They are funding the US government debt, holding down interest rates and subsidising the borrowing of private businesses mispricing debt for a generation. This has caused several bubbles in recent years, but the big one is the mispricing of US government debt. What will bring this to an end is inflation in China and other emerging markets, because holding down exchange rates means giving up control of monetary policy. Historically this always leads to inflation. At some point in this business cycle, rising inflation in emerging markets will force them to revalue their currencies and that will end the unsustainable mispricing of debt. This is not imminent: inflation in emerging markets is rising, but not at extreme levels. They can quite happily live with it until it reaches double digits. It will be a government decision to end it, not a decision by the market. This will be driven by bureaucratsAsian central bankers. Governments will force banks to buy their debt The historical precedents can be seen in the Chart on the left, which shows the ratio of US federal debt to gross domestic product since 1792, projected forward by the Congressional Budget Office to 2019. Throughout much of American history, the ratio rose for one reason: to kill peoplethat is, to fight wars. But in the 1930s, it changed with Keynesian

introductory analysis

pictet report | may 2010 the family: governance and investment

economics, which raised the ratio to keep people alive. The Western world has promised to pay pensions to people who have not saved for them and to pay for their healthcare. despite 3 per cent GdP growth, governments have run fiscal deficits year after year. The last time public debt reached 100 per cent of GdP, the world of capitalism and finance was marked by capital controls, price controls and credit controls. These were necessary to sustain such levels of debt: by the end of the second world war, about 80 per cent of the credit provided by the commercial banks was provided to the government. Capital controls were the most important factor in forcing bankers to buy public debt. now, to honour their commitments to their people, governments will again have to force the banks to buy their debt. That will require capital controls since savers will prefer to invest in the faster growing emerging markets than in their own government debt if they are free to do so. It will be the banking system that ends up owning lots of these government securities. The proportion of US bank total assets that are Treasury and agency securities is at around 10 per centan all-time low. To take it back to the 1993 level would mean buying about USd1.5 trillion of US government debt. With USd1 trillion of US debt to be issued, it would make sense to buy it because short-term interest rates are very low. I see no threat to financial markets today, because banks around the world will buy their government debt. So will foreign central banks in order to hold their currencies down as western investment flows in. As a result, the yield on treasuries is likely to rise slowly, and other financial markets can copeparticularly the equity market.

equitiesin every post-war situation where inflation has risen, that has been good for equities until it reaches around 4 per cent. Above that level, central banks react and try to rein in inflation through higher short-term interest rates which means lower growth. Turning to the equity market, the cyclically adjusted price-earnings ratio in the USthe measure preferred by Robert Shiller and Warren Buffetthas seen extreme swings since 1861, from below 10 to above 40 times over as little as nine years. My research into what makes equities cheap on the four occasions I have studied1921, 1932, 1974, 1982shows that it is deflationwhen assets drop faster than liabilities. As long as deflation is held off, equities will hold upwhich is why they have risen over the past year as Remember, equities are not an governments acted to avoid deflation. asset: they are that fine sliver of hope In the long run, however, I believe there will be a between assets and liabilities sovereign debt crisis in the West which could lead to rising interest rates that would threaten deflation. In previous bubbles, it was possible to use monetary policy and then Democracies opt for inflation, not deflation fiscal policy to avoid deflation. But with high government The big decision for people managing money now is debt to GdP levels, there is no leeway to repeat this strategy whether the future is inflation or deflation. Financial if government bond yields have to rise. history tells us that it will be inflation, because democracies I believe the government response will be to close rarely opt for deflation. Hong Kong was able to hold its peg markets through capital controls and force people to buy to the dollar during its crisis by deflation, because it is not government debtfor example by raising bank capital a democracy. In similar circumstances, Argentina had to adequacy ratios. The game has changed, and it is politics devalue its currency because as a democracy it could not that will be the most important factor in the future. cope with deflation. The attempt now to force deflation on Portugal, Ireland, Greece and Spain could destroy Russell napier is a consultant global macro strategist with CLSA Asia-Pacific a democracy in Europe. Markets, the independent brokerage and investment group based in Hong There is potential for inflation in the level of bank Kong. He was Asian equity analyst for CLSA between 1995 and 1999, and reserves which have reached USd1.2 trillion in the US. If was ranked number one for Asian equity strategy in major polls of money managers in three of those years. His first book, Anatomy of a BearLessons from the banks start to use these reserves to increase credit, we Wall Streets Four Great Bottomswas named Investment Read of the Year by will see very high levels of inflation. That will be good for the Financial Times in 2006.

pictet report | may 2010 the family: governance and investment

introductory analysis

family governance

pictet report | may 2010 the family: governance and investment

FamiLy GoverNaNce

Integrated wealth management employing all forms of family capital


The capacities of family members are valuable assets whose recognition can set investment goals that help preserve wealth through the generations
Lisa Gray FOUndER And MAnAGInG MEMBER GRAYMATTER STRATEGIES LLC

When thinking about managing family wealth over the long term, there are many types of wealth other than financial and material assets. The most important of these are the capacities of family members, which are often neglected in planning wealth management strategies. The enterprise that creates wealth begins with an idea, which springs from the intellectual capacities of the creator. The creator also has social capacitiesthe network of connections to raise financing and the ability to get the business off the ground. Finally, there are the human capacities, the personal abilities and power to implement the idea. Financial and material assets are a result of much more important types of wealth the intellectual, social and human capacities of individuals. Sometimes these capacities are referred to as a form of capital, but I prefer the word capacities, because capacities are limitless. We have no idea how far these capacities can go and we have no idea exactly what types of such assets we have in our family unless we find out what they are. A study by The Williams Group of 3,250 families over 20 years up to 2003 put the failure rate of the intergenerational transfer of wealth at 70 per cent. discussions with colleagues suggests that the figure is closer to 85-95 per cent. In other words, fewer than a third of families succeed in transferring their wealth down through the generations. So how can we use these capacities to improve the success rate?

authentic family assets

John and Marge want to step down and ski every slope they have not so far visited
First, I suggest that these types of wealth should be treated as another part of the portfolio. They are assets of the family, but they often go unrecognised and are not factored

into wealth management planning. The portfolio of the family might be much larger than its members are currently aware. Second, while traditional finance for institutions sets one investment goal, with behavioural finance there are multiple goals for the familyand every family member has multiple goals for their lives. We have to understand those goals, which may differ between the generations. In managing wealth, it is easy to assign a role to family members especially childrenwhich may not be appropriate for them. It may not reflect their innate capacities which could help regenerate the family wealth. So a family governance system must begin by identifying the needs and capacities of the family members and then setting appropriate goals to plug into the wealth management planning process. This can be illustrated by looking at a case study which is not reflective of real life, but which has two possible outcomes. The outcomes are both very extreme and real life is somewhere in the middle, but they illustrate the power of this approach. I would therefore like to introduce you to the Skee family, which owns a USd1.2 billion business. The parents, John and Marge, own a portfolio of investments, and want to step down in five years to ski every slope in the world they have not so far visited. They intend to pass the business on to

pictet report | may 2010 the family: governance and investment

family governance

their son Mike, who has a high profile in the companynot least through his attractive fiance Zia, who is invited to all the best parties, where he meets people and brings in business. They think he has the natural acumen to take on the business. Their older daughter Susan manages the Middle Eastern region with her husbandvery successfully. They hope to show that they are worthy to run the business because they have the talent and the passion for it. The much younger daughter Anna is an afterthought who spends a lot of time jet-setting around the world to see her friends and appears in the media for different reasons than Mike. Almost a member of a different generation to her siblings, she is seen by the family as a black sheep.

What might have happened if they had talked to each other and come up with a different set of goals?
So the Skees, not having talked to the children and assuming they understand where the real talents are, have set the goal of passing the business on to Mike. They see Susan and her husband as a support team who will still

manage their regionthey acknowledge they have done a good job, but not much has been made of it. They do not know what to do about Anna, apart from trying to protect the wealth from her depredations. And they are uncertain about what to do about Zias request for shares in the company as a marriage gift. What they have not found out are the goals of the family members. Anna really wants to be a microbiologist and a philanthropist. Zia, who knows her beauty will not last, asked for shares in the company to finance a design company. Mike loves being in the spotlight but does not feel up to the task of running the company; he is not about to confess this to his father, however, since he thinks he would lose everythingincluding Zia. In the absence of communication, the Skees have the wrong set of goals. So Susan and her husband become frustrated and break away to form a rival company which takes market share. The shares start to fall, and Mike proves totally inept at running the company. Anna becomes clinically depressed, thinking no-one cares about her. John and Marge have to liquidate their investments to put more money into the company to save it. The two of them divorce, John takes his share to start another company which fails miserably and he becomes homeless. What might have happened if they had talked to each other and come up with a different set of goals? They would have learned of Annas ambitions in microbiology. Talking to Mike might have found out that he loves the company, but does not have the talent to run it. Then a talk with Susan and her husband would have shown how much they cared for the business and had the talent to run it. So there could have been different goals that recognised the capacities of each family member. Suppose that instead of handing the business to Mike, it is taken over by Susan and her husband who have the capacities to run it. Mike is paid an allowance and becomes company spokesperson,

where he is in his element. Anna goes to a good school and gets her Phd in microbiology. Zias ambitions are recognised. now Susan and her husband redesign the product successfully, adding to the success of the company. Anna teams up with Zia who has become a fashion designer and they develop eco-friendly ski apparel which creates a new source of income for the company. The family wealth grows because the Skees have recognised the assets in their portfoliothe capacities of the family members.

The family can fulfill its dream through educating family members and helping them contribute to the family wealth
Even if the outcome is not so perfect, the family can still fulfil its dreams through the richness of experience in educating family members and helping them to contribute to the family wealth. And John and Marge are able to step down and achieve their goal of skiing all the slopes around the world. The lessons for family governance are that the perspectives of different generations shape the way members see and treat each other. These family dynamics must in turn shape the governance structure: the goals must be identified so that appropriate decisions can be taken. These goals in turn will shape asset allocation, so that different risk profiles can be chosen to achieve them.
Lisa Gray founded Graymatter Strategies LLC in 2002, after 21 years in the wealth management industry. She consults with US-based and international families and their advisers on the direct influence of generational perspectives, family dynamics and governance on wealth management decisions. She has written several books, including The New Family Office: Innovative Strategies for Consulting to the Affluent, and Generational Wealth Management: A Guide for Fostering Global Family Wealth. She is a regular contributor to the Journal of Wealth Management.

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family governance

pictet report | may 2010 the family: governance and investment

The Family Panel

Investment organisation and management within the family


Families discuss governance issues and the challenges faced in generational succession
moderators JeaN BruNeL MAnAGInG PRInCIPAL BRUnEL ASSOCIATES Lisa Gray FOUndER And MAnAGInG MEMBER GRAYMATTER STRATEGIES LLC

Questions of family governance are critical to the enhancement of wealth and its transmission through the generations. This section draws on the wisdom and experience of a panel of families to analyse the challenges of organisation and management within a family. Their real-life examples suggest solutions to the problems that families wrestle with in creating financial management structures that reflect the needs of all their family members. Among the issues faced by many families is the right way to organise the investment process in ways that reconcile the views of family members. As Jean Brunel, one of the moderators, said, there is much to learn about how to avoid cognitive errors and emotional responses from behavioural finance, which is discussed in a later contribution from Professor Meir Statman. Structures are needed that reduce the

risk of making the bad decisions that can destroy family wealth. There are also the human relationships familiar to every family around the world, which become more complex as families expand through the generations. Lisa Gray, the other moderator, pointed out in the previous contribution the importance of recognising the talents and capacities that are part of a familys authentic wealth. Communication and governance structures are essential in setting investment goals, making investment decisions and working with advisers. The pages that follow summarise the replies given by the panel members to the issues raised by the participants. While some disagreements came to light, there was remarkable unanimity on some of the questions tabled for discussion.

pictet report | may 2010 the family: governance and investment

family governance

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Unlocking the familys assets


As one of the two moderators of the Family Panel discussion, Lisa Gray encouraged participants to talk about how they had identified assets among the members of their families. One second-generation family member spoke of his experience with his daughter, and how she was now helping manage the family wealth. Our philosophy was that we wanted our kids to do the best at whatever they wanted to be, so she graduated from art college. She followed that up with a Masters, but when that was finished, she returned home with no apparent aim. We said she needed now to take responsibility for her destiny, and within 48 hours it had clicked. She approached a gallery for an internship, and she is working there now. Had I thought 23 years It suddenly occurred to me that ago that our daughter she could help with art investments. I could do this, I would opened a fund for her and asked her to have said No way manage it. If she is successful, she will be able to do more. Had I thought 23 years ago that She was not doing well at high school, our daughter would have been able to and I was concerned that she didnt like do this for us, Id have said no way. mathematics. We discussed what she My wife and I consider it a great gift wanted to do at college, and she said that she is able to pursue her interests she wanted to do art, which she loved. and help the family.

Who should join the family


In an era of greater equality between the sexes, should spouses become fully participating members of the family in managing its wealth? Should trusted employees who have performed exceptionally be rewarded with membership? Family governance structures often limit participation to direct descendants of the founderin some cases only to those born in wedlock. While this rule was questioned in the panel discussion, involving spouses was seen as a potentially dangerous move. We brought spouses onto our board and into operating companies, said one participant. But their involvement in decisions led to conflicts with members of the family and hurt relationships. It was not worth the pain.

We brought spouses on board, but that led to conflicts with family members
Lisa Gray, one of the moderators, said she had seen examples of families that had brought in spouses and made it work. However, another participant said that where spouses had expertise, the better option was to involve them in committees below board level. none of the families present had offered membership to trusted employees, though some said they gave managers profit shares and even stock options in operating companies. Investment managers could be given remuneration structures similar to the carried interest incentives in private equity, where a 2 per cent management fee and 20 per cent profit share is commonplace. You can even pay morethree and fifty, said one participant whose family still operated several companies. In the end, this is very similar to a stock option plan.

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family governance

pictet report | may 2010 the family: governance and investment

Managing the family


As families grow through the generations, managing relationships between members and branches becomes important. Several panel members said that robust governance arrangements were needed to regulate these relationships. One Latin American participant said his family foundation, now involving the third generation, had 17 shareholders. While his father and an uncle had run its affairs since his grandfather died, each branch of the family was personally represented on the board. We have a very strong family should follow a period of preparation assembly two or three times a year so to give the child the tools to handle that people can be informed and their the responsibility, with training, frustrations given attention. A smaller practical experience and involvement group, the family council, represents their thoughts to the board. in philanthropy.

How to involve the children

Of all the issues raised with the Family Panel, the one that dominated much of the discussion was when and how to involve the younger members. There were two broad groups of answers though they were not mutually A third-generation family member exclusive and both focused on teaching in his thirties still to have children children about the responsibilities set a very strict timetable for the they faced. succession. Ideally they should become beneficiaries at 25, sit on a board at 30, take more roles at 35 and assume full responsibility by 40. I have cousins over But another panel member that age that I wouldnt questioned whether some family give a credit card to members were ready for responsibility even at 40. I have cousins over that age that I wouldnt give a credit card to, The firstapparently the majority he commented, to laughter. viewwas that while preparation could The alternative view, perhaps more begin earlier, the right time to begin relevant when there is still a family to take on responsibilities was in the business to run, was to begin as early childs twenties. We told our daughter as possible. As one third-generation she had some money a year before she family member put it, My father graduated, said one second-generation started taking me into the office when I family member. But we added that she was very young, just to listenperhaps would not have access to it until she because he had been thrown in at the had shown she could be responsible in deep end by his own father. managing it. He conceded, however, that the Two of the panel members had children could not be thrown in established independent careers in without any preparation. They must be banking before returning to involve- taught to understand the importance ment with their families. of working hard and carrying out their One participant said that 26 was social responsibilities... Bring them in a good age for a child to become an early, but do not give them too much adult beneficiary and take on genuine responsibility too early. responsibility. But she added that this

Keeping the family together


Several questions in the Family Panel discussion centred on what to do about family members who wanted to cash in their share of the business. The general view was that they should be allowed to do sothough one European family member pointed out that cashing in could be difficult if the wealth was still tied up in the family business. However, a Latin American participant said that his grandfather had foreseen the need for family liquidity and had created a fund that could also be used to expand the business. Another panel member said that it was important to continue to have a relationship with such individuals. If the business does well, they will be upset and it will create tensions in the family. Some in my family who had taken their shares and invested it did badly in 2008. It has been important to keep them involved with the foundation.

pictet report | may 2010 the family: governance and investment

family governance

13

Working with trustees


Trusts often provide an effective structure for managing family wealth, but many families struggle with the idea of handing over decision-making to independent trustees. Several families asked panel members questions about how it worked in practice. There is always a danger that the trustees become a self-perpetuating oligarchy, said one second-generation family representative. The family should at least be able to fire them. Another panel member said his family could not appoint trustees but could fire them. Its like a loaded gun, he added. You have one, but the idea is not to use it.

Managing the business


Many of the families wondered how much they should be involved in the enterprise. The panel discussion showed a clear consensus from families in favour of appointing professional managers and letting them manage. The family should make the strategic decisions and leave the day-today management to the professionals, said one panel member. Another said the main job of the board was to hire, support and fire the chief executive, who should work with a clearly defined mandate. She added: The chief executive would be wise to listen to the board. A third family member stressed the need to keep the family from interfering with investments decisions. When our fund fell 36 per cent in 2008, the family freaked out and most of the portfolio was liquidated. We hadnt built the appropriate structures and given them the right information to understand the strategy.

Its like a loaded gun, you have one, but the idea is not to use it
Trust deeds drawn up in an earlier generation also need to be reviewed as circumstances change or new developments emerge. Redrafting the trust deeds is elaborate, said one panellist. In practice what happens is the leading family members have a discussion with the trustees. A very high level of trust is needed to produce good co-operation, she added. The formal decision has to be taken by the trustees.

Family members in the business


What should be the role of family members in the business? directing, but not managing, was the shared view during the Family Panel discussion. Our family always wants to find the best management, said one member. We felt wed lose great managers if they had to compete against a shareholder. But you can still sit on the board and be involved in an operating company.

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family governance

pictet report | may 2010 the family: governance and investment

Reflections on family life and choosing money managers


Blackstones co-founder shares insights from a successful career in business
stePheN a. schwarzmaN CHAIRMAn And CEO THE BLACKSTOnE GROUP

Being a manager is different. Managers are made, not born. It is an experiencebased job, involving complex systems called human beings. They dont always do rational things and something that should take a week can take a year and a half. When you are young and experienced, you think you think you can just tell people what to do. But you have to coax them, manipulate them and give them incentivesyoure playing chess with all these people. Making people do what you want them to do while believing it is their idea is an artas many families have learnt. Choosing the right people in money management is really important. I talk to them about anything they are interested in to hear how their minds work. do they oversell? Are they selfconfident? How do they deal with uncertainty? do they respond to a challenge? Are they out of control? How much will they press against the limits of what is permissible?

Ive always wanted to be successful. I remember looking at my little suburban lawn as a child and thinking, I dont want to be here
I only work with the best people the 9.5 to 10s. People who are 8s are serviceable, and people below that are useless. Its like a good marriage: hang in there for the right person. I never compromise. deep in your heart, you know when youre picking the wrong person, but you think you can make it work. But over time, the flaw you first see will eventually nail you. It is important to understand when change is coming. Every so often, you observe something that makes no sense. Look around and see if theres another piece of data that doesnt make sense. Putting the two together helps in seeing when cycles are changing.

Most people do the wrong thing they buy at the top and sell at the bottom. This is because they want to be psychologically comfortable, and invest when prices are rising. One way you know youre at the top of a cycle is that all your stupid friends are making a lot of money. Ive always wanted to be successful. I remember as a child looking at my little suburban lawn in Philadelphia and thinking: I dont want to be here. I want to be somewhere where I can really do something. When I set the firm up, I gave my two children a percentage of my interest. But I never told them: I wanted them to think they were nice middle-class people. When my daughter graduated from Harvard Business School at 25, I took her to the student canteen and told her what she had. But I asked her not to tell her younger brother who was still a disagreeable teenager. I asked him about his plans, since he was not doing too well at school. As I was 46 and hoping to live another 40 years, he would be 56 when he inherited from me. How would he live for 40 years on what he was able to do? You must have a secret plan, I told him. He didnt have one, he replied, but said that I wouldnt let him starve. I said the difference between not starving and a quality life was huge. He eventually went to duke Law School and got a job at a leading law firmand I told him about his inheritance at 25 also. now we have planning sessions with my brother who is a money manager. And it is important to discuss with your children how to use wealth to make an impact on peoples livesto learn how to get pleasure from charitable activity.
Stephen A.Schwarzman is Chairman and Chief Executive Officer of The Blackstone Group, which he co-founded in 1985. He began his career at Lehman Brothers, where he was elected Managing director in 1978 at the age of 31, serving as Chairman of its Mergers & Acquisitions Committee in 1983 and 1984. Mr Schwarzman holds a BA from Yale University and an MBA from Harvard Business School.

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family governance

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family governance

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pictet report | may 2010 the family: governance and investment

family governance

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iNvestmeNt marKets

Lessons for wealth preservation from the past decade


The best way to preserve wealth is to create it, but the financial crisis has shown how hard that is without some sort of edge
roLF BaNz CHIEF InVESTMEnT ARCHITECT PICTET ASSET MAnAGEMEnT

A JP Morgan study based on the Forbes list of the 400 richest Americans published in 1982 found that by 2004 only 15 per cent of the people were still on the list. Now, being dropped off the Forbes 400 list does not exactly condemn a family to a life of abject poverty, given that the lower limit of the Forbes 400 list in 2009 was USD950 million. Nevertheless, the question of whether the wealth of a family will last beyond a generation, or even several generations, is one of critical interest. One reason why 85 per cent of those families were no longer in the list was not that they were overtaken by those just behind them, but that the period from 1982 to 2004 was exceptional

in terms of wealth creation. It was a period when globalisation allowed those entrepreneurs who had truly innovative services or goods on offer to generate amazing amounts of wealth. At the same time, the rearrangement of certain socialist economies also provided the basis for great wealth creation. So the enemy of wealth preservation is wealth creation. All families need an edge For a family wanting to preserve wealth, therefore, it is a good idea to remain in wealth creation. And despite some of the advertisements that certain private banks put outthe suggestion that if you give me your money

we can make you richinvestment in a broadly diversified portfolio of financial assets cannot generate wealth. Even if you outperform the market by a few per cent, the value added isnt substantial. Wealth creation has to be based on some kind of an edgethe ability to generate abnormal returns, returns that are higher than those available in the capital markets.

For a family wanting to preserve wealth, it is a good idea to remain in wealth creation
Those abnormal returns can come from a family business with intellectual property rights, or artistic skills, or even the outrageous luck of winning the lottery. They can come from extraordinary criminal activity and from privilege, such as a monopoly conferred by a monarch or leader. Wealth in itself is also an edge, if it provides access to opportunities not available to other investors and allows families with long time horizons to be patient investors. Edge will generally be limited to a certain area of activity, so it will require a certain amount of concentration: diversification is an admission of insufficient edge that necessitates spreading risk.

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To add value beyond what is available in the market requires some kind of a skill, some kind of an advantage. It can be tempting to sell an asset that has given a family edge, but entrepreneurs who sell are often disappointed with the returns on their wealth they earn in the markets. If a family has an edge, it will be easier to preserve their wealth if they retain the strategic asset. But if the strategic asset has gone, how can the value of a portfolio of financial assets be preserved? Its expensive to live extremely well The preservation of wealth requires the generation of a real returnafter costs, after withdrawals, after tax that allows the owner to maintain purchasing power. But the inflation rate that is relevant in measuring real returns is not the consumer price index, because the increase in prices of the goods and services consumed by wealthy families is much greater than that of commodities and the basic things in life. The things that are most desired are in finite supply, yet demand is rising because of the increasing wealth in the world. As the Cost Of Living Extremely Well Index, measured by Forbes since 1976, shows, the inflation rate for such families is about 3 per cent higher than CPI (see Chart above). Then if there are withdrawals, whether for consumption or philanthropy, the return has to be even higher to preserve wealth. If 4 per cent of the wealth is withdrawn each year and there are 1 per cent friction costs such as taxes, that adds another 5 percentage points to the return needed to maintain wealth. now CPI+8 per cent is not available from money market funds. Preserving wealth requires taking some risk. Moreover, while families have the advantage of being long-term investors who can invest in relatively risky portfolios, pursuit of CPI+8 per cent may not be sustainable. Suppose you invest USd100 in a 50/50 portfolio of US equities and fixed income stocks that is supposed to yield 6 per cent a

cost of living extremely well index


1976=100 700 600 500 400 Overall consumer price index (CPI) 300 200 100 1976 1980 1985 1990 1995 2000 2005 Source: Forbes

Cost Of Living Extremely Well Index (CLEWI)

year with a volatility of 9 per cent, but you cannot stand the idea of losing more than 10 per cent. If you are a longterm investor, you have a less than 1 per cent chance of falling below that barrier after ten years. But you have an almost 20 per cent chance that some time over the next three years the 10 per cent loss barrier will be hit. And if you hit the barrier and you sell, it turns out that in 95 per cent of cases your portfolio would have recovered by the end of the ten years.

The investment horizon for families may be very long, but it is hard to avoid looking at short-term returns
Finding a survivable strategy The investment horizon for families may be very long, but it is hard to avoid looking at the returnsespecially in years like 2008 when markets are in turmoil. It can be particularly difficult to hold to long-term strategies in such times for families that are very extended or where wealth is unevenly distributed. One of the lessons of 2008 has been that some strategies that looked good in bull markets turned out to be unsustainable in periods of stress. So without the additional return

derived from some kind of edge, it is very difficult to preserve wealth over the very long term. What can be done, then, to reduce or eliminate the erosion? One is to avoid the eight investment threats identified in a JP Morgan study: concentration of wealth, spending, leverage, tax, family dynamics, liabilities such as lawsuits, currency fluctuations and government action. Another is to create a governance structure that preserves wealth, rather than dissipating it. In the end, however, families must choose a survivable strategy and only they can decide what sort of strategy they can stick with through thick and thin. directional bets on equities, bonds or balanced portfolios that looked as if they would produce double-digit returns ten years ago do not look so attractive with hindsight. Whether you can live with such outcomes and with the drawdowns associated with more aggressive strategies is for you to decide. One way to reduce reliance on such directional bets is to have an edge, whether it is a strategic asset or access to successful investments such as private equity, hedge funds or property. But, in order to make a success of those investments, you still need the edge conferred by access to genuine skill.

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The opportunities within asset classes


Industry specialists review investment opportunities after the financial crisis.

Art
Confidence is returning in the international art market after sales flagged during the financial crisis
simoN de Pury CHAIRMAn And CHIEF AUCTIOnEER PHILLIPS dE PURY & COMPAnY

The art market has gone through an extraordinary transformation over the last few years. Five to ten years ago, it was mainly Western European and North American collectors buying art by Western European and North American artists. Today you have artists from all over the world whose works are also bought by collectors from all over the world. It has become so much easier to get an overview of the global art market through the remarkable technological innovations of the past twenty years. All the information you need to value a work of art is accessible on the internet, where you can find the prices realised on works by artists going back to 1850.

The combination of technological advance and the worldwide interest in collecting has created a much stronger and more transparent market. Most Old Masters, Impressionists and Modern Art are lost to the market. The best collections can now be made in Contemporary Art. The information that is available shows that the market has always risen. There are periods of readjustment, such as happened when Japanese buyers, who had dominated auctions of Impressionists and Modern Art in the late 1980s, stopped buying in June 1990. The sold rate at the main auctions in London and new York suddenly fell from 85-90 per cent to

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around 50 per cent. The number of works being offered for sale dropped sharply because owners did not feel that it was a good time to sell. Something similar happened in October 2008. The art market at first seemed totally immune to the credit crunch, but after the collapse of Lehman Brothers, the sold percentage fell sharply again and far fewer works came on to the market. But this lasted just one year, and when Andy Warhols 200 One Dollar Bills was auctioned by Sothebys in new York in november 2009, it was sold for USd43.8 millioncompared with the estimate of USd8-12 million. In this years sales, volumes have been rising sharply. The most notable sale in 2010 has been Alberto Giacomettis sculpture, LHomme qui marche, which sold in London for USd104 million in February. This sale established a new world record for a work of art sold at auctiona sign that confidence is once again returning to the market.
Factors that enhance the value of a work of art

Real estate
Real estate prices have risen strongly in recent decades, but investors need to watch for the pitfalls
KarL-erBo KaGeNecK FOUndER JARGOnnAnT PARTnERS

Qualitya subjective judgement; every artist


has good days and bad days. The better the quality, the higher the value. nor too common. If too rare, a market cannot develop. state. Ask for a condition report on its physical state.

Raritya work should be neither too rare, Conservationthe work must be in good Internationally collected artists will be Marketing is important to reach every
potential client.

worth more than those whose following is locally based.

Taste is evolvingthere are great shifts in

taste, which can affect the value of works of art in the future. restrict exports of works of art, which sharply diminishes their value.

Local lawssome countries have laws that Sizesomething which is too large or too The auctioneerdifferent auctioneers
will attract different prices.

bulky has a limited marketnot everyone has a large place to display them.

There are some fundamental truths about landlords and get regulatory incentives real estate that are easy to overlook when from the legislators. Real estate needs good manassessing investment opportunities. agementwithout it, yields will The first truth is that real estate prices fall. And transaction costs are an kept pace with gold prices over many issue: buying or selling real estate centuries, even though the supply of anywhere in the world costs about goldunlike landwas rising. But in 6 per cent on average. The real estate cycle lasts about 14 the past 150 years the price of land in cities has risen much faster. We years on average, and has done so for analysed the sale prices of land in centuries. It is hardly ever a V-shaped cities like Munich, Zurich and Paris recoverythe down-cycle and bottom over the past 150 years and found that last around eight years before the real estate prices are now much higher upswing. People do not want to sell in gold terms. While the amount of at the bottom, and transaction costs gold has risen around four times over make sales slower. Bottom-feeders are that period, land prices have gone up often too early: the trick is to buy a few years into the bottom and sell three or ten times. House prices in the US and UK four years after the recovery begins. Real estate is one of the least have risen much faster than population growth. The US population has risen by correlated assets globally, largely 1.4 per cent a year over recent decades, because the market is driven by local but prices have risen four times faster. sentiment and local law. In the last The UK population has risen much cycle, however, we saw the highest less, but house prices are almost four correlations ever, with prices driven by times higher than in 1995 and eight the securitisation desks in London and times those in 1975. While the bubble new Yorkit was driven by liquidity has burst, there is a worldwide flight rather than fundamental demand. to quality by people with enough liquidity to buy prime properties. There are disadvantages to owning real estate. It is an illiquid asset, especially when the market turns. However, The five commandments of real estate this can be an advantage if it is harder There are times not to buy anything; there to sell at the wrong point in the cycle. are times to sell (almost) everything. Many of Europes wealthiest families A ruin in the centre of town is always better have owned land for generations. than a palace in the countryside. You are also a prisoner of local laws. Walk the neighbourhoodbecause you will Governments treat most capital well not be able to change it. these days to attract foreign investors, Always ask yourself this question: would but when they need to raise money, they I like to work or live in this building myself? turn to real estate taxes. There are also And dont forget: trust your gut instinct. regulations such as rent controls, labour If you did not like a property at first sight there was a reason for it. laws, fire codestenants outnumber

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Commodities
Slow growth in supplies and continuing increases in demand make hard assets attractive investments in a period of economic uncertainty
wiLLiam caLLaNaN CHIEF InVESTMEnT OFFICER FORTRESS SECURITIES

There has been a shift in the commodity cycle in recent years, which means that commodities begin to rise in price at lower rates of global economic growth than in previous cycles. Between 2002 and 2008, global GDP growth of 2 per cent triggered commodity price inflation, compared with a 4 per cent threshold between 1980 and 2001. This phenomenon reflects several factors. One is the growing importance of China as a consumer of commoditiesits intensity of commodities use is three times that of developed countries. Meanwhile, supply is becoming more difficult, with new sources found in smaller deposits that are geologically more complexand often in countries where they are state-controlled. The financial crisis increased the supply issues by leading to the cancellation and delay of USd250-USd300

billion of investment after a period when Chinese growth demanded new supplies. It also disrupted the supply chain, with small suppliers unable to get creditleading to a lot of destocking. That destocking means that stocks must now be replenished, setting the scene for a period of rising commodity prices.

I expect to see bi-flation, with raw materials rising but no wage price spiral
As for oil, supply is more or less capped at 85 million barrels a day. Incremental supply is showing very little net increase, with low growth in nonOPEC supply and Saudi cancellation of large oil projects. When oil reached USd145 a barrel, biofuels were able

how rising oil demand raises the price


Marginal production cost per barrel (USD)
90 80 70 60 50 40 30 20 10 0 0 5 10

Low Cost Middle East


15 20 25 30

Medium Cost Conventional US, Gulf of Mexico, Alaska, North Sea, Caspian, most Latin America, Africa, Far East
35 40 45 50 55 60 65 70

High Cost Conventional Enhanced Oil Recovery, Oil Sands, Orinoco, Coal to Liquids Russia, US Stripper Wells
75 80 85 90

World oil supply, MMB/day, 2009


Source: Petroleum Industry Research Association

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to add only about 500,000 barrels a dayand proved controversial. There was demand destruction in OECd countries, but the greatest potential is in emerging markets where oil is often sold below global prices. In the coming period, I expect to see bi-flation, where raw materials rise but there will not be the wageprice spiral that traditionally drove inflation. At the same time, there will be a lot of volatility in prices caused by feast and famine inventory cycles, which makes it harder to sustain investment and will lead to continuing low supply growth. Turning to gold, investors now see it as hedge against inflation, with

fears of inflation as deficits rise and demography puts pressure on government budgets. Corporates, meanwhile, will face margin squeezes if they have no pricing power, and growth may be sluggish. This will make commodities such as gold attractive in comparison with stocks. In this coming period of likely inflation and volatility, defensive investments may be attractive if a sovereign debt crisis creates dramatic fluctuations in securities markets. While there will be a case for tactical allocations to protect against volatility, there could be a place for longer-term investments in hard assets to hedge durational liabilities.

Agriculture
Agricultural land has emerged as an asset class which attracts the interest of investors worldwide
KeN JoNes HEAd OF AGRICULTURAL InVESTMEnT And RURAL PORTFOLIO VALUATIOnS, SAVILLS

Marc Faber, the investment adviser often known as Dr Doom, advised investors in February 2010 to buy farmland and gold. He saw agricultural land as a defensive investment, but there are positive factors that make it an interesting asset class, especially for those with historic ties to the land. The first factor is world population growth, and with it the demand for food. There are fears that there is simply not enough productive land to feed the world, especially given the tendency in emerging markets to upgrade from a rice-based diet to wheat and meat. Another factor is fuel security, especially after the last oil price spike. The US is going into bioethanol in a big way, and while extracting it from corn or wheat is not an efficient conversion process, the plants that have been built must be suppliedputting

upward pressure on food prices. Meanwhile, conversion from sugar cane in Brazil is the most efficient way to produce bioethanol, with the waste burned to produce renewable energy. Land is a finite resource: as Mark Twain said: Buy land: theyre not making it anymore. Agricultural land is being lost dramatically all over the world80,000 hectares a year to development in the UK alone. Large areas of the world are at risk from rising sea levels, while other areas that could produce food lie unused because of political problems or wars. Agricultural land is the base point for investors: anything done to it for development will add to its value. Land is understood and valued, especially by wealthy investors. And in most countries, ownership of agricultural land is treated very sympathetically when it comes to inheritance taxes.

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Investors can invest through funds in commodities, or in companies that make agrochemicals or farm machinery. But the real play is in the raw material: freeholds give investors flexibility and capital growth, even if revenues are usually modest in developed countries. Countries where freeholds cannot be bought by foreign investors offer leaseholds with the possible opportunity of future legal changes to allow them to be converted to freehold.

Private equity
Consistent investment through the cycle is necessary to reap the excess returns of this asset class
JohN Garcia CHIEF ExECUTIVE OFFICER AEA InVESTORS InC

Mark Twain said, Buy land: theyre not making it anymore.


I believe there has been a paradigm shift. Land may be seen as a defensive investment, but it is proving attractive to investors such as George Soros who has a massive land holding in Brazil that continues to grow. Sovereign wealth funds are investing in agricultural production in Africa and Latin America. Farmland is a traditional hedge against inflation, and there are major opportunities. Remember too, that there are important risks, which makes trusted local partners absolutely essential.

We define private equity as leveraged buy-outs, and it is interesting than an asset class that has leveraged in the title has fared very well through the financial crisis. One would think that if it had leverage as one of the drivers of its business model, it would have been very badly hurt. Perhaps it is because we do not mark to market every day, unlike the stock market. But looking through the 20-30 companies we own, we saw a very sharp decline and we have seen a very sharp rebound. This asset class outperforms public markets because of competitive advantage, knowledge, differentiation, discipline and control. It is simple, but not easyit is very hard to consistently return two times the money to

investors, which is our target. But investors can wipe out all that excess return by timing investments badly or picking the wrong managers. The latter is true for every asset class, but it is compounded with private equity because you are in it for ten years. The Chart below shows data for all leveraged buy-outs in north America and Europe between 1997 and 2009. The average purchase price over the first few years was between seven and eight times earnings, with leverage quite high. But median returns for the funds invested in those years were in single digitsthe line on the chart is for the top quartile where returns were in the mid-teens. Companies bought in the dotcom boom years were sold in 2001-03 in the economic downturn.

What to look for when investing in agricultural land

leverage/purchase multiples vs private equity returns


(Debt + Equity)/EBITDA 12.0x Net IRR* % 40 35 8.3x 7.1x 30 25 20 15 3.0 10 5 0.0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0

Water availabilityshortage is the

biggest risk, with climate change affecting established farmland at a reasonable price

Economic downturn

Top quartile Net IRR

Economic downturn

Infrastructure to get products to market Able in-country managers and agronomists


to manage the farmland
9.0 7.9x

Debt Equity

9.8x 8.2x
Average Purchase Multiple 7.5x

8.1x

8.6x

7.7x 6.3x

The availability of freehold investments, Political stabilityland is a long-term


investment

which offer the greatest flexibility and the chance of a capital gain

6.1x

6.5x

7.1x

7.4x

6.0

A welcome for overseas investors, not


a threat of nationalisation

Tax ratesand whether there are reciprocal


arrangements with your domicile dont put it in.

Repatriation of capitalif you cant get it out,

*Internal rate of return

Source: Standard & Poors Q4 2009 Leveraged Buyout Review

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Hedge funds
The best hedge fund managers can still use the tools at their disposal to outperform other asset classes
heNry swieca FOUndER TALPIOn LLC

Hedge funds have done well over recent years, as the Chart overleaf shows. They have returned a little over 9 per cent a year since the start of 1994 and 6.6 per cent over the past 10 years. Returns have fallen over the past two years, but they have outperformed stocks during the financial crisis. There is wide dispersion in the spread of hedge fund returns, and the funds that have outperformed are those that used the available tools to best effect leverage, using derivatives, going short and concentrating positions, combined with good risk management. These

Funds that invested during the dotcom bust paid lower prices in terms of earnings, and their returns were much highereven median performers did well. When the recovery followed, purchase prices rose again, with much higher leverageand it is hard to see the 2004-07 vintages performing well if they sell in the downturn caused by the financial crisis. The right way to invest in private equity is to do so consistently over the cycle, to get the excess returns that a ten-year commitment to this asset class can provide. Yet investors tend to see it as an opportunistic investment, jumping in and outusually at the wrong time. More was invested in 2006-08 than in the 20 years before that, and the returns are likely to be poor when those investments are realised over the coming years. In the years before the financial crisis, there was too much money with too much leverage chasing too few assets. now that firms are stressed, with funds hard to raise, the limited partners are in a much stronger position vis--vis the general partners. now is a good time to get back into private equity as it returns to the basics of what made it successful after a radically dysfunctional period.

allow the best hedge fund managers to outperform a passive equity portfolio. High quality medium- and long-term bonds have also performed well over the past few years, as the Chart overleaf also shows. Looking back to the 1970s, however, long-term government bonds performed very poorly in a decade of high interest rates and inflation, while stocks performed fine and gold and commodities very well. In the 1980s, the reverse was the case: government bonds did extremely well, gold and commodities did badly and stocks did very well as the long bull market gathered strength.

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So timing is everythingand the environment now could hardly be more different from the 1980s: then interest rates were very high, but fell; now they are low and likely to rise. Investors in bonds in the 1980s had fabulous yields, plus capital gains as yields fell. If yields rise with interest rates over the next few years, there will be very poor returns on bonds. With equities, P/E ratios are now double what they were in the 1980s as are valuations of publicly traded stocks. Corporate taxes were falling in the 1980s and will be rising now. Unionisation fell in the 1980s, giving more power to corporate owners: that is reversing. Equity prices will not perform as they did in the 1980s. Investors make the wrong decisions in these markets. In March 2000 at the top of the bull market, bond yields

usd annualised returns to end jan 2010

Hedge Funds Credit Suisse/ Tremont % Since inception 10 years 5 years 3 years 2 years 1 year 9.3 6.6 5.9 2.2 -1.2 17.5

Equities MSCI World NR % 5.7 -0.1 1.6 -7.3 -10.6 36.6

Bonds JP Morgan Global GBI TR % 6.4 7.0 5.0 8.8 5.2 6.6

Balanced Global Lipper Mixed Asset % 4.1 1.7 1.7 -3.3 -5.9 25.2

Source: Pictet Alternative Investments, Lipper, MPI Stylus

were high, but money flowed into stocks. In October 2002, investors took money out of stocks at the bottom of the bear market and put it into bonds. Today, the public are investing in bonds but not stocks. The message is to be very careful of bonds. Hedge funds were sold in recent

years as providing equity-like returns with bond-like volatility, but that was a mirage. Many funds suffered and the industry has learned a lesson. The future lies with managers who offer transparency on their strategies, who understand volatility and have good risk management.

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Equities
Investors with a long-term perspective and a contrarian approach can benefit from substantial real returns
richard oLdFieLd CHIEF ExECUTIVE OLdFIELd PARTnERS

My first boss, a veteran equities investor, took me aside on my first day with the advice: Equities are life, bonds are death! Im not sure Id go quite that far, but equities are certainly back on the agenda in the last 12 months, after being overshadowed in recent years by bonds and alternative investments. And as the Chart below shows, they have provided a reliable real return averaging 6.2 per cent a year over 160 years. Looked at over this very long perspective, every upset in between even the 1929 Crashlooks like a minor blip. That long-term trend is reassuring to many families. The Chart also demonstrates the volatility of equities, and shows that it is usually not a good idea to buy when equities are at the top end of their performance range. However, even then, equities return to their trend within a few years.

volatility meanwhile will be irrelevant. But dealing with that volatility will depend on the circumstances and temperament of the investor. Unlike institutions, families do not have to worry about quarterly fluctuations in their wealth. Indeed, what I would call constructive indolencenot reacting to eventscan be a good strategy. The average period that institutions hold equities for has fallen from three years to ten months over my working life and for every trade there is a cost, which cumulatively reduces returns. One country where there have been two decades of zero returns on equities is Japan, which illustrates two important aspects of investment. First, the importance of diversification: while international equity markets now tend to move together over the short term, rates of return differentiate themselves over the medium and long term.

Second, two important attributes to look for in an investment are that it is cheap and hated. The most popular investments are not likely to do well, because everyone is in them already. A final point is on the difficulty of choosing asset managers. Research by Cambridge Associates shows that those asset managers that have just produced top quartile asset growth tend to underperform in the following three years. That is another example of the dangers of popularity: it should encourage investors to be different and look beyond those who are the talking point in the investor community. Immediate past performance is no guide to the future, so it pays to be unconventional and avoid following the crowd.

Constructive indolence can be a good strategy


When we look for advisers, we look at the people, assessing their qualities and common sense; their approach and whether it makes sense; their process, favouring a simple one; and the environment they are in, avoiding those working in an pressurised environment that encourages short-termism.

My first boss told me: Equities are life, bonds are death!
We have just had a decade of zero returns on equities, and it is very rare to have two such decades in succession. This does make it enormously more probable that there are decent returns ahead. But the volatility of equities speaks against 100 per cent allocation some cushion of comfort is sensible. Investors with such a cushion will feel less pressure to sell at the wrong time, and the optimal size of the cushion will depend on the individual. For families it will be the very longterm returns that matter, and the
Log index (returns per annum) 14 Panic Secular Bull
-7.3% 8yrs 11.1% 24yrs Aftermath Reflation 2.9% 9.5% 12yrs 13yrs

us long-term real equity returns

Inflation Bubble Deflation -2.5% 22.4% -1.3% 9yrs 14yrs 14yrs

Secular Bull 8.3% 27yrs

Stagflation Secular Bull Aftermath 2.8% 13.6% 14yrs 16yrs

12 10 US long-term real equity returns 8 6 4 2 0 1849 1869 1889 1909 1929 1949 1969

Trend = 6.2% Standard Deviation = 33.9%

1989

Source: Datastream, CS Global Strategy/IDC

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Investment conclusions

Pictets strategy
We dont believe in peak oil, we like large liquid stocks, gold and emerging market debt
yves BoNzoN CHIEF InVESTMEnT OFFICER WEALTH MAnAGEMEnT dIVISIOn

Most investors work on the assumption that the future performance of asset classes will be reasonably similar to the past. On this basis, most asset classes appear to be fairly close to fair value, with a few outliers. The US dollar looks cheap on any measure, especially as other currencies undergo structural realignments. So too do Japanese stocks, which trade close to book valuethough with no signs yet of improvement. Government bonds look expensive, but the slope of the yield curve is at a record high. US equities are a little above fair value, but not so much as to be seen as a major bubble.

All in all, nothing stands out as statistically significantif the future is like the past. However, US stocks are trading at roughly 2.2 times book value, after falling below the longterm norm of 1.8 times in 2008 as a consequence of financial sector writedowns. If there were another major de-rating in valuationsas happened in the 1930s and the late 1970s-early 1980sstocks could disappoint for a second decade in a row. That would happen if there were either severe deflation as in the former period, or entrenched inflation as in the second. Our view is that if policymakers in the developed world were to cut budget deficits to long-term

sustainable levels and raise interest rates back to more normal rates, there would be a textbook deflation spiral. But we think governments are aware of this danger, with coordination of accommodative policiesalbeit with tensions, divergences and recurring on-and-off stimulatory policies. So politics will be a key driver in markets, more through monetary policy than the slower transmission process of budgetary adjustment.

Politics will be a key driver in markets, more through monetary policy than budgetary adjustment
We are not believers in peak oil, but the increasing challenge of extraction means we believe we have seen peak cheap oil. Our reference price is between USd60 and USd90 a barrel, which we see as creating a mediumterm equilibrium between reductions in supply to keep the price above USd60, and reductions in demand if it rises above USd90. Our view on US stocks is that the S&P500 is likely to trade in a range of 800 to 1200. If it rises above 1200, the risk-reward ratio becomes unattractive. It will fall below the 800 level only if policy mistakes lead to deflation.

expected returns annualised in usdnext 10 years


Asset class Cash Government bonds Corporate bonds High yield bonds EM hard currency debt EM local currency debt World equities developed EM equities World equities small caps Real estate Private equity E(R)% 2.2 3.0 4.5 7.0 Avoid 8.5 5.5 7.5 6.5 Heterogenous 10+ E(alpha)% 0.0 0.0 1.0 1.0 1.0 2.0 1.5 2.0 E(TR)% 2.2 3.0 5.5 8.0 9.5 7.5 9.0 8.5 Heterogenous 10+

E (R) = expected return by Pictet Wealth Management (PWM) E (Alpha) = expected net outperformance by PWM E (TR) = expected total return (risk premium and alpha) by PWM

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In this market, you should choose large liquid stocks which you can move quickly and cheaply: oil services and renewable energy will be key themes.

Superior growth in emerging markets is a near certainty over the coming decade, but not a reason to be overweight
On gold, we re-entered that asset class in 2002perhaps our best ever asset allocation call. It is best valued as an alternative to paper assets, and its price is now at the long-term average in relation to the dow Jones Industrial Average. Our forecast is that it has further to run in the next five years, probably to USd2,000 an ounce. It would take severe deflation or high

inflation to justify prices substantially Five guiding principles... higher than that. Strategic asset allocation should be As another currency diversification, dynamic and forward-lookingthe we also like emerging market debt rear-view mirror can be misleading for its yield and capital appreciation Markets structures, drivers and potential against the dollar and the opportunities change a lotso investment euro. But it is worth remembering that processes must evolve there is no correlation between GdP Only macro investors survivethere is no growth and equity returns. Superior point in being an expert in a dead asset class growth in emerging markets is a near Relative valuations are useless and even certainty over the coming decade, but it dangerousits better to be approximately is not a reason to be overweight in their right than precisely wrong stocks relative to developing markets. Alpha (in public markets) is a zero sum Finally, the Chart opposite is our gamethough alpha opportunities can still summary of the expected nominal be identified through a top-down analysis. annual returns on the main asset classes over ten years, together with our ...and two misconceptions estimates of the excess performance to There is no correlation between GdP growth and equity returnsdespite the expect from a good manager.
strong consensus that emerging markets will outperform percentage returns used to measure the performance of investment managers do not always reflect alpha destruction.

We consume alpha in dollarsthe lower

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Asset allocation

Behavioural finance and goal-based asset allocation


Identifying investment goals can help investors to avoid the mistakes made by cognitive errors and emotional responses
meir statmaN PROFESSOR OF FInAnCE, LEAVEY SCHOOL OF BUSInESS SAnTA CLARA UnIVERSITY, CALIFORnIA

Over the past 18 months, it has sometimes felt that we are in an investment wara fierce war against the investment markets that we are losing. The quotation opposite from Sun Tzus The Art of War, a book that has nothing to do with investment, sounds as if it was written to describe what has been happening to investors. I want to set out a strategy, which has three elements, to protect investors against that feeling:

Make yourself an ally in the investment


war by knowing your goals, your emotions and your cognitive errors. the science of human behaviour.

Make science your ally, by understanding Make


your financial adviser your ally good ones take care of your health and your well-being.

The logic and psychology of behavioural finance can help us in this aim. With standard finance, investors are described as rational individuals who can handle all the inputslike a computer. Behavioural finance assumes that we are normal, which means not always rational. Sometimes we are normal smart and at other times normal stupid, and we can try to maximise the ratio of smart to stupid. That is the most we can get. The brains of rational investors are never full. The brains of normal investors cannot absorb all the information. And just as we use the tools of science to make eyeglasses that help us clarify our blurred vision, we need to use science to make sense of the complex world of investment. That science has identified a series of

do you think that now is a good time to invest in the financial markets? % of investors who agreed
%

90

10,938 Feb 00 78%

60 7,890 Mar 03 41%

13,366 Dec 07 55%

30

Feb 99

May 00

Aug 01

Nov 02

Feb 04

May 05

Aug 06

Nov 07

Source: UBS Index of Investor Optimism

cognitive errors which lead us to make bad investment decisions. One is the representativeness errorcaused by our tendency to identify patterns in data. This is the essence of intelligence, and it is generally important in everyday life that we do so. But sometimes we identify patterns that do not exist. Here are four common varieties of the representative error. Hindsight errorfinding patterns in hindsight that are not causal. Analysing data often helps produce trading rules that would have been successful in the past, but they do not work in the future because they just happened to work by chance. Availability errorbasing theory on the information that is available. After a decade of losses, we exaggerate the probability of losses. Promoters of trading advertise the winners, which leads us to exaggerate the probability of being winners. Confirmation errorwe look for evidence that confirms our claims and beliefs and discount the opposite. In looking back over the financial crisis, it now seems inevitable that it happened because some people predicted its severitybut many more did not. Over-confidencewe all think we are above average. You should ask yourself who is on the other side of a trade, and why he does not know what you know.

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In addition to cognitive errors such as these, we all bring our emotions into financial decisions. When making a purchaseof a house, a car or a stock the decision is affected by how we feel about that purchase. With the stock market, we move from exuberance to fear and jump to conclusions, which does not make sense. The Chart opposite shows a Gallup survey by UBS, which unfortunately ended in 2007, so we cannot follow it through the financial crisis. But it shows that in February 2000, around the top of the dotcom boom, 78 per cent of investors said it was a good time to investand we all know what happened after that. After the markets slumped, only 41 per cent said it was a good time in March 2003and that was equally wrong. We tend to be our own worst enemies.

goal-based asset allocation: the efficient frontier


Expected return % 30 25 20 15 10 5
Standard deviation %

Overall portfolio Bequest sub-portfolio Education sub-portfolio Retirement sub-portfolio

10

20

30

40

50
Source: Meir Statman

Draw them in with the prospect of gain. Take them by confusion. Use anger to throw them into disarray.
Sun TzuThe Art of War

now while we sometimes do these stupid things, we are very good at learning. The world looks pretty flat to us, yet there are very few people who think the earth is flat. We have been convinced by scientific evidence that the world is roundand that it revolves around the sun, rather than the other way round. If we can learn this, we can learn to avoid our cognitive errors and emotions when putting together portfolios. Behavioural portfolio theory tells us that we think about money in terms of goals. One of our goals is not to be poor, so we want a safe retirement. Another goal is to be rich and so the same people who buy pensions on occasion buy a lottery ticket. The same people are risk-averse, buying insurance, and risk-seeking, buying lottery tickets. The solution is goal-based asset allocation. One goal might be to retire

with a secure income, another is to pay for the childrens education and a third to bequeath money to the children. They have different time horizons, from the education goal a few years away, to retirement in 15 years and a bequest in 40 years. So you invest as if this money belongs to three different people: the retirement person, the education person and the bequest person. Each goal requires a different risk/reward ratio, but the three combine on an efficient frontier to create a single overall portfolio allocation that we can be comfortable withas the Chart above shows. If we can frame our goals and asset allocation this way, it matters. Suppose I run through my financial plan with a financial adviser and he says there is a 90 per cent chance that I will achieve all my financial goals, I go home to my wife and tell her there is a 10 per cent chance that we are going to live on the streets. But if he divides my money in two parts, one for retirement and one for the possibility that we can leave a lot of money to the kids, I tell my wife that the chance that we can have enough money for the rest of our lives is as close to 100 per cent as we can get, and there is also a 20 per cent chance that we cannot leave a big bequest and we feel much better. It is the same money, but I leave the financial advisers office feeling things are fine. And if there is damage, I know that it will be where I can sustain it.

Evolution has made us prone to cognitive errors because we learned to jump to conclusionsto recognise our mothers or to make snap judgements about an approaching predator. John nash, the brilliant mathematician and economist who also suffered from schizophrenia, was asked how it was that he could not understand that the images he saw were hallucinations. He replied that they came to him in the same way as did his insights in maths and economics.

Why is it hard to resist intuition, even when it is wrong?


John nashA Beautiful Mind
We just have one brainthere is no auxiliary brain to check our brain for what is real and what is a hallucination. We rely on science for that: this is why we measure the temperature of water not by sticking our finger in it but by using a thermometer. Investors must use the tools of science so they do not make mistakes in their investment strategies.
Meir Statman is Glenn Klimek Professor of Finance at the Leavey School of Business in Santa Clara University, California, and Visiting Professor at Tilburg University in the netherlands. Professor Statman has also received numerous awards, including a davis Ethics Award and a Moskowitz Prize for best paper on socially responsible investing.

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Goal-based allocation in practice


The insights of behavioural finance can help in accommodating risk, especially in times of financial crisis
JeaN BruNeL MAnAGInG PRInCIPAL BRUnEL ASSOCIATES

Most of us have a minimum of three fundamental goals in our lives that we need to think about in constructing a behavioural finance portfolio. They are personal, dynastic and philanthropic and while there are those who focus on only one of these goals, such people are rare. What I have learnt from the work of Meir Statman is the need to think of individual sub-portfolios associated with each of the goals. On personal goals, it seems inconceivable for most people to take risks with the money they need for shelter, food and life. They will, though, be prepared to take greater risks to meet dynastic goals of leaving money to the children and succeeding generations. If an individual is asked what return they are seeking on their wealth

and their level of risk tolerance, they are not threatened and to be prepared will usually answer that they want to wait for equities to recover so that the highest possible return at the longer-term goals can be met. lowest risk. But by focusing on goals, capital can be allocated to each with Behavioural finance an appropriate balance between risk and return. is not a magic bullet, Goal-based asset allocation should it just recognises that be a four-stage process:

Identify the goalsjust as in a restaurant

people are normal

we choose dishes rather than ingredients, the aim is to select goals that the investor is comfortable with. and if necessary prioritise those goals so as to live within the budget.

Quantify the goals to draw up a budget, Structure


the sub-portfolios for each of the goals, taking into account any constraints such as risk tolerance or liquidity preferences. the whole portfolio to ensure that there are no internal conflicts between the sub-portfolios and that the overall portfolio is prudent and diversified.

Optimise

In the current environment, there is a serious issue with decision risk changing horses at the wrong time. While people do not want more risk in their portfolios than they can stomach, it should be easier to live with an increase in risk when the portfolio is separated into high-risk and lowrisk buckets. So if equities fall, it is still possible to see that lifestyle goals

Varying the definitions of the buckets may also be an option. Some families have wanted a nightmare protection bucket over the last two years. That is a good idea if that is the way they thinkif they feel better for insuring themselves against a dumb decision. The important thing is to be able to relate to the portfolio when dealing with abnormal events. Behavioural finance is nothing more than the recognition that people are normal, rather than rational. This insight is not the absolute magic bullet, but it has helped people we work with to feel better about their investments and stay the course through the financial crisis.
Jean Brunel is the Managing Principal of Brunel Associates, a firm that provides wealth management consulting services to ultra affluent families. He spent most of his career in the investment management group of JP Morgan, becoming chief investment officer of its private bank in 1990. At JP Morgan, he worked in the US, Japan, Hong Kong, Singapore and Australia from 1976 until his retirement in 1999.

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PostscriPt

Can altruism be compatible with modern economic systems?


Since the pursuit of selfish happiness is bound to fail, we must create a more compassionate society
matthieu ricard BUddHIST MOnK RESEARCHER And AUTHOR

One of the big challenges of modern life is to deal with three very different timescales. If an elephant is running after us, evolution has equipped us to react very strongly. Then there is the medium term, which is experienced through the quality of life measured over some years. And finally there is the long term, which is hard to focus on. But it is altruism that brings together all three: thinking about others and over the generations means having consideration for people in every action. There is a continuing intellectual debate over the role of altruism, which is often seen as selfishness in disguise. Adam Smiths The Wealth of Nations appears to encourage people to pursue their own self-interest, but he also wrote The Theory of Moral Sentiments, which spoke of the importance of cooperation. darwins theory of evolution legitimised the notion of the survival of the fittest, but he also emphasised the role of cooperation in natural selection.

psychology, said that nobody could sustain attention on one thing for more than five seconds. But trained meditators can do it without distraction for 45 minutes. A trained meditator in this case may have done between 10,000 and 50,000 hours of meditation, which compares with the 10,000 hours of practice needed to become a concert pianist. Research has now established that there are enormous differences in the way the brain functions in those trained meditators. But even modest training can make changes: an experiment with employees from a US biotechnology company found that 20 minutes a day for eight weeks could be effective. Their anxiety fell and their stress levels became significantly lower compared with a control group. The same effect is not achieved with other pursuits that might be used to break into a busy schedule. Making pottery, for example, does not reduce anxiety or anger. And the research shows that meditation produces physiological changes, such as reducing elevated blood pressure and strengthening immune systems. Meditation is Trained meditators can sustain attention not simply like relaxing for a while from the pace of life: it brings deep change in physiology, as well as changing how without distraction for 45 minutes people see themselves in the world. So it is possible to train humans to be different. The Some psychologists see altruism as self-interesteda way to pursuit of selfish happiness is bound to fail. Pursuit of the win praise or avoid blame. Yet there are genuine examples happiness in others brings happiness to those who do it, of altruism that involve incredible acts of generosity carried so its a win-win. Altruism does have a future, and we out utterly anonymously: those who protected Jewish should all work together for a more compassionate and families or Romanies against the Holocaust, for example. altruistic society. Can we cultivate altruism and enhance it? We all accept that it takes 15 years to get a good education, and that noone learns to play Mozart by tapping with two fingers on the piano once every two months. So it doesnt make any Matthieu Ricard is the son of French philosopher Jean-Francois Revel and artist Yahne Le Toumelin. He obtained a Phd in cell genetics from the sense to believe that we can become good people without Institut Pasteur, but subsequently abandoned his scientific career to live any kind of training. in the Himalayas and study Buddhist contemplative practice. A Buddhist new collaboration between neuroscientists, psychol- monk, he has since 1979 acted as French interpreter for His Holiness the dalai Lama. He is the author of several books, including The Monk and the ogists and thinkers is showing that this training can be Philosopher, a dialogue with his philosopher father, which has been translated successful. William James, the founder of modern into 21 languages.

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postscript

pictet report | may 2010 the family: governance and investment

PICTET REPORT ISSUE THREE

PICTET & CIE

The preceding articles are an edited version of addresses and remarks made at a private symposium held in March 2010.

Founded in 1805 in Geneva, Pictet & Cie is today one of Switzerlands largest private banks, and the leading independent asset management specialist in Europe, with CHF388 billion (EUR261 SYMPOSIUM MOdERATORS billion) in assets under management and custody at 31 March 2010. Gideon Rachman is Chief Foreign Pictet & Cie is a partnership owned Affairs Commentator for the Financial and managed by seven general partners Times. Jean Brunel is the Managing with unlimited liability for the Banks Principal of Brunel Associates. commitments. The Pictet Group, which is based in Geneva, employs more than 3,000 staff. The Group has offices in the following centres: Barcelona, Basel, dubai, Florence, Frankfurt, Geneva, Hong Kong, Lausanne, London, Luxembourg, Madrid, Milan, Montreal, nassau, Paris, Rome, Singapore, Turin, Tokyo and Zurich.

disclaimer This report is issued and distributed by Pictet & Cie based in Geneva, Switzerland. It is not aimed at or intended for distribution to or use by retail clients, or any person or entity who is a citizen or resident of, or located in, any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. The information and material presented in this report are provided for information purposes only and are not to be used or considered as an offer or invitation to buy, sell or sub scribe to any securities or other financial instruments. Furthermore, the information, opinions and estimates expressed herein reflect a judgment as at the original date of publication and are subject to change without notice. The value and income of any of the securities or financial instruments mentioned in this document can go up as well as down. The market value may be affected by changes in economic, financial or political factors, time to maturity, market conditions and volatility, or the credit quality of any issuer or reference issuer. Moreover, currency exchange rates may have a positive or adverse effect on the value, price or income of any security or related investment mentioned in this report.

Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, expressed or implied, is made by Pictet & Cie regarding future performance. Instructions stipulated by the client as regard s trading, transactions and investment constraints shall take precedence over, and may diverge from, the Banks overall investment strategy and recommendations. This publication has also been approved by Pictet Asset Management SA in Switzerland and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Services Authority, for distribution to professional or institutional clients and is not intended for distribution to, or use by, retail customers or any person or entity who is a citizen or resident of, or located in, any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This publication and its contents may be quoted provided that the source is indicated, but it may not be reproduced or distributed, either in part or in full, without prior authorisation from Pictet & Cie. All rights reserved. Copyright 2010 Pictet & Cie.

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