Actively Managed Certificates (AMCs) Podcast with Rico Blaser

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Nalu FM Finance Podcast: Insights into the Financial Markets.

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Stefan Wagner: In your opinion, what distinguishes investing from speculating and betting?

Rico Blaser: This may sound somewhat provocative, but I would actually say there is no difference.

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This podcast is powered by vestr, the engine behind active management. vestr is a Switzerland-based fintech startup that provides software for issuers of actively managed certificates to automate their value chain fully. Visit vestr at vestr.com to schedule a meeting with an expert and to learn more about vestr.

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Stefan Wagner: Good morning! I'm here with Rico Blaser, CEO of vestr, a Swiss fintech. Good morning, Rico, and thank you for coming on.

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Rico Blaser: Good morning, Stefan! Many thanks for having me on your podcast. Much appreciated!

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Stefan Wagner: It's been a long time coming! I'm very excited to have you on finally. So let's start, just with you a little bit. You know, what motivated you actually to establish vestr? And you know, what drives you? Um, and a little bit, maybe you can tell us something about yourself, you know, that maybe some people don't know.

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Rico Blaser: Yeah, sure! So, I grew up in Switzerland, but in the early 1990s, I moved to California, and I graduated from University in the middle of the dot-com boom. After a couple more years, I returned to Europe, and I moved to London. There, I worked for a very large US Investment Bank, both on the buy and the sell side, in various positions. It was a very rewarding time, and I spent a lot of it researching and implementing quantitative trading strategies.

Later on in the same company, I also traded exotic derivatives at the same bank, before finally returning to Switzerland. And only while working for a Swiss bank, I really discovered the potential for Actively Managed Certificates and related products. These were somewhat less prevalent in the Anglo-Saxon realm at the time. We did have a few in London, but mostly very complex structures that were managed basically completely manually by individual traders. So it became clear to me that this was actually a big market nobody properly addressed.

On the trading side, we were using spreadsheets to keep track of everything, and we're talking about billions in assets. It was successful as a business, but certainly not without operational challenges, and it wasn't unusual for us to have corrections or to do manual adjustments after the fact because something didn't go smoothly.

So that's when we realized, and when I say we, I mean myself and my co-founders, that this was happening at every bank. And we decided that it was time to leave and to start a technology company.

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Stefan Wagner: Who are your clients now, and how do you help them? Or maybe have a case that is the typical case that you can highlight?

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Rico Blaser: Yeah, we work with quite a range of customers. Some belong to the largest banks in the world, and then at the same time, we have some regional banks, but also small and medium-sized providers of special purpose vehicles, and even some crypto banks. So it's quite a range, and it's really interesting because many of them face similar challenges.

The two areas where we can definitely help is for them to have a modern, intuitive interface between the asset manager and the issuer and provider, including the ability for the asset manager to create very customized reports that are done in their own corporate identity. So that's one area, and then the other area is the infrastructure to actually manage the operational aspects of active investment products. This is about fees, corporate actions, rebalancing, and so on.

These are really the two key areas where we can help.

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Stefan Wagner: On an active investment strategy, you have hundreds and thousands of data points over its lifetime that you keep track of, and they all build on top of each other. You don't want to get that wrong.

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Rico Blaser: Yeah, that's right. I would say actively managed investments differ greatly from traditional static structured products in that you have a really large universe of underlyings that changes over time. So, you have a lot to deal with, a lot of events, as you call them, and it's not easy. And so, certainly managing them in a spreadsheet is a dead end.

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Stefan Wagner: And risky and could be very costly at one point. Now, I mean, you mentioned the product. We're going to go into exactly what an actively managed certificate is a little bit later in the conversation.

But obviously, active management, there's a lot of discussions always. Does it make sense? Can it outperform or not outperform? And then also, what is actually the difference between investing and betting?

And I always like to ask people, you know, this a bit of a philosophical question, but in your opinion, what distinguishes investing from speculating or betting?

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Rico Blaser: It's a good question. I mean, this may sound somewhat provocative, but I would actually say there is no difference.

So, in both cases, you first attempt to understand the range of possible outcomes and estimate their probabilities. And then, if the probability-weighted outcome is positive, that is if you're essentially dealing with a positive expectation bet, then you place a carefully sized wager. And of course, if the bet has a negative expectation, you don't play at all.

So, from that perspective, the two are very similar, actually.

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Stefan Wagner: Is there a sort of a common myth about your industry, the investment industry, that you want to debunk?

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Rico Blaser: Well, yeah, this is kind of related because consistently beating the market is difficult. I think most people would say it's easy, or many people would say it's easy, but from a quantitative point of view, this is just complete nonsense. I've spent enough time rigorously researching market inefficiencies to know that it's actually really, really hard. It's doable, and I know organizations that have done this, but it requires an outsized effort. Most claims simply don't hold up when you remove the unintended factor exposures or GAP risks and the like.

And I would actually claim that the biggest inefficiencies today are probably in areas that are best exploited by investors that have long lockup periods and don't get held accountable to the daily or even monthly losses and gains. So, for example, family offices or endowments, in theory, even pension funds, but they just have too many restrictions.

I read this once, and it made a lot of sense to me, and this is kind of a corollary to what I said, which is that organizations that spend their budgets on marketing will perform worse than organizations that spend their resources on market research.

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Stefan Wagner: That's a good one, if you're an investment company, you mean. I mean, we talked about it already, you mentioned it, actively managed certificates. Let's explain a little bit maybe to the listeners just what AMC's are. 

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Rico Blaser: So, basically, you know, if you have an investment expertise and you would like to make that expertise available to others for a fee, then the best way is to actually manage a portfolio and then place that portfolio into some kind of a legal wrapper that others can then buy. So, there are different kinds of wrappers around active portfolios.

Now, actively managed certificates, that's the question you ask. They are structured products, and of course, one of the bread and butter businesses of many banks is to issue and deal in structured products. So, the idea was that if you already issue structured products on a daily basis, then why not issue a product that lets an internal or external asset manager decide what goes into it? In effect, the asset manager leverages the bank's infrastructure. This is a win-win situation for both parties, and that's what AMC's are really all about.

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Stefan Wagner: Are there different styles of AMC's out there? I mean, I heard fund style versus certificate style, and how do they distinguish themselves?

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Rico Blaser: That's a good question. For certificate-style AMC's, inflows get automatically allocated in proportion to the current allocation.

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Stefan Wagner: So it's comparable to, like, an index?

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Rico Blaser: Yeah, exactly. So you can really think of it as an index. You invest into it, and your investment doesn't change the index; it just increases the size of the index tracker, if you will.

And if you contrast that with what is called fund style, there, what asset managers from traditional fund management backgrounds typically prefer, there the inflows into these instruments appear in the form of cash that the investment manager then later at a later time allocates at her discretion. I think overall fund style is a little bit more flexible, and you don't carry any market risk as an issuer. So I think there are definitely some advantages.

So I would say unless you focus on the specific indexing advantages, like having a third-party calculation agent, then I think probably fund style makes more sense.

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Stefan Wagner: You just spoke about risk. What risk do investors actually take when investing in AMC, and what steps can be taken to mitigate such risk?

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Rico Blaser: So, investors primarily carry the market risk but also the counterparty risk, the counterparty risk to the issuer. And I was in New York at the time when the people at Lehman Brothers walked out of the building with their boxes, and I was in the building right next door observing this.

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Stefan Wagner: Same here. I was looking down to the Lehman office in London. Yeah.

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Rico Blaser: And so, you know, what can happen. And so, the counterparty risk should not be ignored, right? Now, the market risk can be addressed by diversification and by including hedging elements into the portfolio, such as index puts or others.

The counterparty risk is a little bit more tricky. You can also partially address it by diversification. If you have multiple AMCs, you can issue them with different issuers, right? But in addition, there are some collateral schemes like TCM COSI in Switzerland that can eliminate the risk for a fee. Now, this is of course particularly interesting when working with issuers with lower credit ratings, so you won't see a lot of these at a AAA-rated issuer, for example, but it's good to have that instrument available.

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Stefan Wagner: When you keep that in mind, what question should actually an external asset manager or investment manager who wants to use one of these issuers, when he does his due diligence on the AMC issue, what question should they ask or look at?

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Rico Blaser: I think I would definitely start with the credit rating. I think that's an important one. But then I would also look at the issuance history to see what types of products that issuer has actually released in the past and is most likely to handle adequately, right?

I'll also make sure that the investment universe matches my needs. And one opinion that I have is that I think they should have a platform that I can access to monitor and manage my products. Not only is this more convenient over the life cycle of the product, but it's also an indication of the degree of automation the issuer has achieved, and this is positive for both pricing as well as a reduction in operational risks. And maybe I'm talking my own book here, but I have definitely observed a correlation between people who have a platform and the management of their risks.

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Stefan Wagner: Yeah, I think there's another important question for the external asset managers. A little bit—they're not only managing their own money, they're usually managing money for other people, you know? They need reporting for their clients. What kind of reporting and updates, sort of, should investors expect from issuers, you know, during the life of such a product?

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Rico Blaser: Yeah, that varies quite widely between different issuers. So at vestr, we take this topic very seriously, and we heavily promote transparency. On our platform, users can monitor their portfolios in real time from anywhere and at any time and can create highly customized reports in their own corporate colors and corporate identity at any time. This is in sharp contrast to issuers who do not have a technology platform because they often only provide you with monthly or periodic reports, and those you cannot turn around easily and pass them on to your customers.

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Stefan Wagner: Thank you for the really good information here for the listeners. If people want to learn a bit more about actively managed certificates and or how vestr can help with that product, where can they find something like this?

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Rico Blaser: We have quite a few resources on our webpage by now; it's kind of building up over time. We have a bunch of articles, we have podcasts like this one, and also white papers. Now, there's quite a bit of interest in these, and they explain very well how active management works, how our platform works, and so on. So also feel free to get in touch with us if you have any further questions.

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Stefan Wagner:  So that's vestr.com 

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Rico Blaser: Yes, correct. And you can also reach out directly to me via LinkedIn as well.

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Stefan Wagner: Okay, very insightful. I have two last questions left for you; they're probably more personal. I always try to get this: Is there something that you can tell us about yourself that probably most people don't know?

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Rico Blaser: Most people probably don't know that I used to be a competitive swimmer. So, in my first Junior Nationals, I placed second in the hundred-meter freestyle. And then, while I was in high school in the Midwest in the US, I actually broke six school records. Later, in university, I swam for an NCAA team in California that was coached by a well-known Olympic coach.

In total, I won more than a hundred medals, and I competed internationally, though I never attended the Olympics. But I think the sport did teach me a lot about persistence and what it takes to achieve the goals you have set for yourself. It wasn't unusual for me to get up before 5:00 a.m. most mornings or to swim 15 miles, it's about 20 to 25 kilometers, in a single day.

Looking back, that was quite an achievement. I think today I would struggle even to run that far, but certainly, the lessons have stayed with me.

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Stefan Wagner: Remind me never to enter into a swimming race with you!

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Rico Blaser: Some people have done so unsuccessfully. I had quite a few bets because I don't look like a swimmer anymore, but the technique is still there.

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Stefan Wagner: So unfortunately, this revenue source probably is now gone.

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Rico Blaser: With this podcast, yes.

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Stefan Wagner: And my last question is, what's your favorite music or album right now? What's the last song you enjoyed that you could recommend to the listeners?

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Rico Blaser: I really enjoy listening to music, and I am quite broadly interested in different styles, so it's difficult to narrow it down. But if you haven't listened to "The Köln Concert" by Keith Jarrett, then I would definitely recommend that you would.

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Stefan Wagner :I can only second that. Thank you very much, Rico. It's an absolute pleasure to have you on.

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Rico Blaser: Thank you very much, Stefan. Much appreciated!

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Stefan Wagner: Thank you! 

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Nalu FM Finance Podcast: Insights into the Financial Markets.

‍

This podcast is powered by vestr, the engine behind active management. vestr is a Switzerland-based fintech startup that provides software for issuers of actively managed certificates to automate their value chain fully. Visit vestr at vestr.com to schedule a meeting with an expert and to learn more about vestr.

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