[MUSIC] Hi again. Well, when talking about knowing yourself or your customer, that reminds me of when I was first interviewed to work in a Swiss bank. I was asked by the human resource director, whether I was a hunter or a farmer? And I thought what kind of question is this? I thought this was strange, and I asked him what he meant by that. And he told me, well, a hunter and you see here a picture, is someone who's quite extrovert. He spends his time outside the bank. He doesn't spend much of his time inside a bank. But his main duty is to go out and get customers, find out customers which he then brings into the bank. And gives in brackets, to the farmer. And what is the farmer? The farmer is a specialist. He works mostly within the bank. And he's mostly sitting at his office and managing the portfolios. So, when we talk about, in French we say en générale for a manager, portfolio manager, we have to differentiate whether this person is actually looking after customers. Or whether he's actually managing the portfolio, two different concepts. So, knowing whether you are a hunter or a farmer also applies to when you have take the decision. Of whether you want to be the person who actually manages on portfolio and spends most of his time behind the screens. And checking whether markets are going in the right way and there no problem. And you have to actively manage the portfolio. Or, if you want to spend more time outside doing other things than being directly involved in managing the portfolio. So, investment management is a lot about knowing, also, yourself and what you want to do with your wealth. Or that of your customer. Here I give you just some key takeaways when you invest with bonds. And we will go back in details, when we look at the various courses on bonds. The first of the key takeaways, is that you should be cautious about benchmarking. What we call benchmarking in bonds, in the bond market. What do we mean by that? Well, basically there's a problem if you look at indices, we find countries. And the problem is, that the more a country has a problem with debt, the public debt increases. Then the weight will increase in the benchmark. I'll give you one example, if Greece has a problem and if debt rises relative to GDP. Then there will be more the weight of Greece in the benchmark will increase. And so, if you follow the benchmark, you will allocate more money to Greece. So, if you're benchmarking in the bond market, then that means that you allocate your investment increasingly to the countries who have problems. Debt problems, so that is an issue that you should be aware of. Linked to that, is the fact that you should always consider, what is the quality of the borrower you are lending money to? For instance, if you don't believe that Greece is able, capable of giving back the money you're lending them when you purchase a bond, then be cautious. We've also seen details that there's a simple way to assess whether bonds are interesting or not. And that's to look at the initial yield. When the initial yield is low, then we will see that it's a very good indicator that the bond is expensive. And if that yield is prone to rise, then it will hurt your investment in bonds. So, the lower the initial yield, the poorer the return down the road when investing in bonds. And finally, we'll see when we talk about the link between financial markets and the macro economy, we'll see that the best time to buy bonds, is when you're expecting a slow down in economic activity. So much for bonds. Now, some key takeaways before we look at the conclusions in terms of when you're investing in equities. And, again, we come back in more details when we discuss about the various equity markets. Again here too, you should be cautious about benchmarking, also in the equity market. There's a link here when you have to decide, and we'll see that in the next slide, whether you want to be an active or a passive investor. A passive investor again, replicates an index. An active investor actually tries to beat that index, the benchmark. The problem here with benchmarking, is that sometimes people are buying the same kind of stocks. These stocks make them more expensive, the action of that everyone. What we call herd behavior, everyone buying the same stocks. So, the valuation of this stock rises and at some point, it becomes too expensive. But given that it's in an index, people keep on buying those stocks. And so, these stocks become increasingly over valued and at some point, a risk. I remember, for instance, at the peak of what we call the tech bubble in the 90s, the largest stock in the European index, was the company Nokia. The Finnish company, the telecom company, Nokia. It was the number one, so everyone was buying that stock,, even though it was trading at huge multiples of its earnings. More than 100 times earnings, we'll see what that means when we talk about valuation. So, it was incredibly over valued, but it was the largest stock. So, everyone benchmarking was buying the stock. So, be careful when you are following that kind of approach. Because you might end up chasing some really overvalued companies. We'll see also when we talk about the link, again here, between the economy and the equity market;. That what often people think that you should go, for instance, in emerging markets where growth is actually stronger, but that's not necessarily the case. Strong growth does not necessarily bring high returns on the stock market, and we'll see why. What else? That's something also very important. That is, you find in nice little prints everywhere, when you're buying a fund from a bank, investment fund, or from an asset manager, it says, it's compulsory, it's mandatory, they have to mention that past performance does not reflect future performance, it's not indicative of future returns. And this is a tendency that I found very, very, very often. Sometimes we look at investment funds or a share and we see that it's been rising phenomenally. And so we have a tendency to buy that, because it's been performing very well. But again, past performance is not indicative of future performance and the future can be sometimes very different from the past. And indeed, if you don't believe in efficient market, and you don't believe that the best way is just to be a passive investor, that's if, it's a debate actually, we'll have more on that. Then you should look for the truly active manager. Because you'll see that sometimes we get what we call some managers that actually are close to the benchmark, but ask for actively managed fees, so higher fees than if it was just a passive replication of the benchmark. Okay so, in conclusion, successful investment management is about knowing how each instruments works when we talk about asset allocation. So each bucket in the asset allocation whether equites whether bonds, whether cash, etc. You need to know what are the main characteristics. How they work, what is the liquidity, what are the risks implicit in each of these buckets of the asset allocation. But I would say even before going into the details of asset allocation, whether tactical or strategic. The first decision that you have to make is, whether you want to be part and parcel of the investment management process. Or if you want to delegate that decision to somebody else and just monitor the result. But, even if you delegate that decision, you want to know whether you are actually believing in active management. Whether you want to actually select some funds which will try to beat the market. Maybe because you are scared that at some point this benchmarking leads you to invest in overvalued companies. Or whether you are shooting for a more, I would say, traditional approach of being a passive investor. Because you want to pay less fees. Because obviously, active management is more expensive than passive management. The key in all this is risk. Knowing about the risk tolerance. How much you're prepared, you're ready to lose on a given investment or on your portfolio. And the various risk, we saw here a few examples, the market, currencies and so forth. And how you can hedge against those risks. [MUSIC]
