ABC Arbitrage : Interview with Dominique Céolin

With earnings up 30% in 2015, I guess you can rest easy.
That's not our style! Everyone is already hard at work to make 2016 a successful year. We're pleased with our 2015 performance and things went well in first-quarter 2016, but I know that the financial world and geopolitical events will keep us from being over-confident. Of course that doesn't mean that I don't want to have another great year or that I don't believe we will!

We'll undoubtedly come back to 2016, but first-half 2015, when you were down almost 10% on 2014, didn't leave much hope for such fine full-year results.
The two halves of 2015 were indeed very different. The first followed on from 2014, with markets remaining very calm, abnormally calm except for a few, highly local blips. This type of situation is much more challenging for us than the one in the second half, when markets perked up and returned to normal.

Surely you don't mean that you made all your profit just off the 2015 Chinese stock market crash?
Not at all. I mean that volatility was, and remains, an important parameter in our earnings, so it's a good indicator of the potential growth in our business. All else being equal, we are still relatively dependent on this market parameter, which is beyond our control. This was once again demonstrated in 2015.

In other words, the more volatile the markets, the more money you make?
Yes and no. It's not exactly as simple as that. Yes - as I've said and I'll say again - our earnings capacity is highly correlated to market volatility. But at the same time, we have always been especially cautious during periods of extreme volatility and particularly when there's a sudden break in the normal pattern.

Wow….this is getting complicated!
(laughs) It is isn't it? But let's try anyway. Volatility is a measurement of the agitation in the markets, either right now or in the foreseeable future, as predicted by our indicators. It's not a constant; it changes all the time, so that volatility is itself volatile! In other words, volatility can suddenly spike from 15% to 40%, as when the Chinese bubble burst, and then fall back very quickly to 15%. So the question is to figure out how soon these events will occur and how long volatility will remain at a given level. For example, although 2008 is considered to have been a highly agitated year, the volatility events were not nearly as short-lasting as in 2015. Surprising, isn't it?

OK! So the longer volatility stays high and stable, the easier it is for you.
Yes, that's it in a nutshell, although obviously things are a bit more complicated than that.

So what about 2015?
In terms of volatility events, 2015 was very similar to prior years, even including the Chinese market crash in August. Since 2012, any market crashes have been brutal and very short-lived. I'd like to emphasize that markets returned to their normal trading patterns in the final quarter of 2015, before being roiled by new turbulence in the first quarter of 2016.

In the end, don't you just have to wait patiently for volatility to come back?
No… I'd even say fortunately no! Even before launching our 'Ambition 2016' programme, we realized that the market paradigm was probably shifting as central banks started to intervene. So we decided that we couldn't just stand idly by. We deployed a wide array of initiatives that together enabled us to produce very good results for our shareholders and take full advantage of the return to 'normal' market behaviour. Without this teamwork and our strategic plan, I'm convinced that we would never have been able to deliver such strong earnings in 2015.

And yet, ABC arbitrage hasn't changed that much, has it?
Are you kidding?! Our teams have achieved something remarkable by working together to successfully complete all of our transformation projects in just a few half-year periods, while continuing to generate significant returns for our shareholders. Some of our shareholders want more, more quickly - and I'm the first one to agree with them - but you have to keep a clear head. This is our 21st straight year of profit and we're going to pay a return of nearly 8%. Recognizing this performance doesn't make us any less committed to future results.

I can see that you're globalising, but that can't be the only reason?
You're right, that's not the only reason, but it's certainly a major driver. ABC arbitrage is now playing on the same field as its competitors, and that's nothing to be sneezed at! Also, we're now able to offer clients strategies that take advantage of opportunities on nearly every market 24/7.

But are there other reasons? That already seems like a pretty big change!
It is… and yet we've made significant progress in other areas as well. First, with a major recruitment drive that saw the hiring of more than 30 new employees in nearly three years, mainly in R&D.
Innovation is a cultural issue with us, and we've stepped up the pace to keep up with the shifts in our markets. To remain focused on our investments, we've launched an in-house 'added value' programme, which has prompted us to raise our standards and digitalize or outsource a variety of business functions. The entire hiring and onboarding process has been a big success. Also, changing some of our working practices and tools is another Everest our teams have climbed.

Has this enabled you to develop new strategies?
Several new ideas have been implemented since 'Ambition 2016' got underway and they're already paying off. To protect our expertise, I won't go into any more detail - because you know how paranoid I can sometimes get about that! However, I will say that we have leapfrogged several technological generations on both the mathematics and technical sides. We've added 'intelligence blocks' to capture the opportunities offered by these more complex, more competitive markets. We still have a ways to go but we should be able to build momentum in 2016 and 2017.

And yet, you haven't created any new funds for your clients?
It looks that way - we even eliminated some of the choices! As announced in 2014, we conducted an in-depth review of the right strategy to use in markets that have been unfavourable for us since 2012.
And especially in markets supported by the newly activist central banks. To put it simply, we chose to focus on our well-known, well-renowned expertise. That's why we first streamlined the product catalogue while retaining a flagship and then introduced a more dynamic allocation process in our multi-strategy fund. Clearly, the goal is to be able to respond more quickly and effectively to these sudden volatility events.

And is it working?
Fairly well! First, because the changes have reduced our costs, which means we're maximizing the net performance for our clients. And second, the dynamic reallocation process has increased our performance in a given volatility environment by nearly 20%. Recent market movements have offered us an opportunity to demonstrate our ability to safeguard investor capital and deliver a robust performance. The direct result was a nearly €100-million increase in new money in first-quarter 2016.

So, smoothing sailing to a rosy future?
I'm both very optimistic and very cautious! We've embarked on the journey of continuous improvement that we have to make, just like in any other industry. Nothing can be taken for granted, and we have to keep climbing, one step at a time. After going through these past few years with ABC, our managers know this only too well. That experience, that thirst for improvement, and our recent successes are already paving the way to a fun and exciting future. For the rest, we're advancing step by step in the firm belief that we're doing the best we can.

What does this mean for your teams?
In my new year's message to employees, I talked at length about what I call the '3Ps': 'People, Pleasure, Profits'.
'People' because I deeply believe that our project will be built by all of us, every day. We need every employee to be engaged and committed. We need our shareholders to have, in the words of St.Exupery, 'positive expectations' and it's up to us to fulfil them.
'Pleasure' as I've often said and written. I think it should be pervasive. It's the pleasure in working and succeeding together that will help us to get through the tough times and give us the strength to start over after our mistakes and disappointments, to continue growing and climbing to new heights.
'Profits' because I know, and you know, that a business can't exist without making money. That's selfevident, but profit also plays a critical role in making the first two 'Ps' a reality. It will enable us to invest to hire new people and to open new pathways and exciting new projects that all of us can embrace.

When you say it like that, it sounds like a cliché. So what's new?
Saying it is one thing, doing it is another! One day, during one of our meetings, one of our independent directors reminded me of the adage: 'some people see, some see and understand and then there are some who see, understand and act.' Although the initial observation is the same in each case, the difference is enormous and I want to be, I want our teams to be, part of the people who see, understand and act.
I'm counting on our teams and our managers to remind us of this every day… and I can tell you that they've not been shy about it since the 'Ambition 2016' programme began!

Speaking of which, you're coming to the end of that programme. Now what?
We're going to work on a new vision for the years ahead, that will build on everything we've accomplished over the past three years. I'm ready for any disruption as long as it helps to secure, to the greatest extent possible, our ability to deliver outstanding performance within the risk parameters set for our shareholders and clients. We've been at it for 21 years now, it's part of our DNA, even though we have to constantly challenge ourselves and keep moving forward.

How are you going to make that happen?
Some ideas are going to change by osmosis, but on other issues, we also need to learn to think and work more perpendicularly. But more than anything, we need to be responsive by changing our course to stay aligned with our environment. In that, we can take our example from the skippers in the Vendée Globe, the famous non-stop, solo, round-the-world race that will set sail late this year. In particular, my beliefs have been strengthened by Jean-Pierre Dick and his 'Absolute Dreamer' crew, which we will once again be supporting in this incredible adventure. I feel that, in an increasingly complex, often irrational world, being capable of quickly responding to change, of embracing that change as a positive, is undoubtedly one of the secrets of professional happiness and of ABC arbitrage's future success.