“There are people in the market who trade on milliseconds, and there are people who are there for the long run, just like us,” explains Michel Munz, Head of our Swiss and International Portfolio Management unit. The longest standing member of Julius Baer’s Investment Committee lives in Coppet, fifteen kilometres outside of Geneva. “I studied in Geneva and love the city. In summer you can enjoy the lake. In winter I like splitboarding, ski touring and skiing with my children.” When Michel is not out and about or spending time with his three kids and two French bulldogs, his curiosity is directed towards the news. “I like to understand what is going on in the world and how it impacts the financial markets. It’s a 24-hour job. What is happening and what does this mean for portfolios?”

Working closely together with clients

Michel explains that in his 29 years of experience, clients tend to be emotional about their money. “They have spent their lifetime earning it and want to preserve it. What I see is that most of them focus on when is the next recession, when is the next crisis, when is the next market correction? But as a rule, it’s very important to capture the upside of the market. Typically, the best way to protect your portfolio from the next market correction is to have accumulated enough value to absorb that correction. If you’re always panicking about the next big thing, you’re always underinvested.”

How do Michel and his colleagues go about constructing portfolios? How do they manage risk? And what happens if a crisis hits after all? We explore these questions in our latest Wealth Architects portrait.

Defining your strategic asset allocation

It all starts with asset allocation. “Strategic asset allocation is the key element of every portfolio,” Michel says. “That’s how we define what the portfolio should look like over the long run. You can compare it to a lighthouse. If a lot of events happen in the markets, it keeps you on track.” Your portfolio’s strategic asset allocation will closely match your personal investment preferences. It’s based on your financial objectives, your time horizon, and your ‘appetite for risk’ (the level of risk you’re prepared to take on in exchange for higher returns). 

From there, Michel and his fellow portfolio managers look for a suitable balance of asset classes that can withstand external shocks or changes to market dynamics. “In a way, it’s art and science,” says Michel. “We need to incorporate everything that’s going on in the world, making projections of what’s going to happen in the next 12 months to 10 years.” These allocations will change over time, but the portfolio manager aims to keep the recipe fundamentally unchanged.

Diversify, diversify, diversify

Vital to any recipe is balance. That’s certainly true when putting together your discretionary portfolio. Diversification is a key element your manager will employ to ensure your portfolio isn’t over-dependent on one type of asset, as this equates to taking on excessive amounts of risk. “Taken alone, an ingredient might look interesting – it might taste good,” says Michel. “But it’s how it tastes with other ingredients that’s the overall objective. Risk management is paramount in putting a portfolio together.” Some clients are more risk-averse, so will be more likely to hold a larger amount of assets considered to have more stable, reliable returns, such as bonds. Other investors will favour assets that tend to deliver greater returns but are more volatile as a result – for example, certain kinds of equities.

Diversification is achieved in Julius Baer portfolios by allowing managers to case a wide net. “The bank’s approach and the Investment Committee’s approach is to be extremely holistic,” adds Michel.

Staying flexible

Michel is a member of Julius Baer’s Investment Committee, which meets weekly to assess what’s happening in the market and the wider economy. The group looks carefully at the events of the past 12 months, at what could happen in the next 12, and takes an even longer view – 10 years or more – to try to determine the trends likely to shape financial decisions in the future.  

The key is flexibility. Short-term tactical decisions can help a portfolio adjust to periods of volatility. For example, increasing exposure to traditional ‘safe havens’ like gold or US Treasuries could offer greater protection. The aim is to adapt without drastically changing the overall investment strategy. “Every time we want to add something, we ask ‘does it change the volatility of the portfolio? Does it meaningfully change the risk parameters of the portfolio?’” The weekly investment committee meetings and ability to adapt asset allocations allow Michel and his colleagues to quickly reduce risk if necessary. As Michel explains: “We cannot protect for every single small market fluctuation – that’s not the objective. But we can help counteract the big ones.”

The perfect recipe

“We tend to trade when it’s necessary, not to trade for trading,” explains Michel. “If your portfolio construction is the right one, you might switch maybe three, four times a year, not more. Overtrading usually destroys value. That said, you should never be happy about your recipe.”

An integral part of the Investment Committee is to challenge one another. “We are surrounded by all our research and advisory colleagues, our portfolio managers, …the list is long. The whole bank comes together to help us make and take the right decisions for our clients.”