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Discretionary portfolios finding favour with Bank of Singapore clients

Number of BOS clients seeking discretionary portfolio management up 40% from 2016-2018

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Mr De Mello said uncertainty in the market is one factor behind clients turning over the investment reins to the private bank for more nimble tweaks in the vast universe of instruments.

Singapore

BANK of Singapore is seeing a surge in interest from clients in discretionary portfolio management (DPM) - with a 40 per cent jump among its Singapore clients seeking out the service between 2016 and 2018.

The gains reflect in part clients' uncertainty about the market, as they turn over the investment reins to the private bank for more nimble tweaks in the vast universe of bonds and exchange-traded funds (ETFs), said its chief investment officer Rajeev De Mello in an interview with The Business Times.

In discretionary portfolio management, a manager oversees a portfolio based on the client's broad wealth management strategy, and is able to shift positions nimbly on the client's behalf. In some sense, the proportion of discretionary portfolios held by a private banking business can indicate how close it is to a true-bred wealth management model, as opposed to being a high-end brokerage.

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The client typically pays a portfolio fee that is on top of underlying funds' annual management fees. Private banks seek to build recurring fee income via DPM as transactional revenue is volatile.

The assets managed under DPM by Bank of Singapore hit US$7.7 billion as at 2018, about 1.5 times that in 2016. The DPM assets represented 7.5 per cent of the bank's overall assets as at end of December last year. This penetration rate is up from 6.7 per cent in 2016, data from the private banking arm of OCBC showed.

As a comparison, private banks in Asia have discretionary portfolios that make up roughly between 5 and 10 per cent of all portfolios; in some independent Swiss private banks, the discretionary component is at least half.

Beyond the general skittishness in the markets, there is less familiarity from clients over fixed income portfolio, which drives them to seek out management from the bank in picking out a robust bond portfolio, said Mr De Mello.

The other area of interest is in investing in a basket of ETFs, where part of the conversation can include having the private bank look for similar US-equity ETFs to be bought in the UK rather than the US, saving Singapore clients 30 per cent in withholding tax on US-listed investments.

"Clients are more cautious, and they often start (a conversation) with, 'should we take profits'," added Mr De Mello on the broader investment climate.

But he pointed out that this period of rate cuts, amid modest growth, should prompt clients to take a more positive view on risks, with Bank of Singapore recommending longer term high-yield bonds from emerging markets, as well as equities out of the US and Asia ex-Japan.

With the Federal Reserve signalling a season of rate cuts ahead, Bank of Singapore expects a likely rate cut of 25 basis points (bps) in July, with another 25 bps cut likely in September, and possibly another 25 bps cut as early as December this year. The projection comes as such "insurance" rate cuts by the Fed have been around 75 bps in total, said Mr De Mello.

The rate cuts are deemed as "insurance", meaning that the Fed - which stands to manage inflationary pressures - is hedging against risks from uncertainties in the US economic outlook. Earlier this month, US Federal Reserve chairman Jerome Powell made no pushback against market expectations of a July rate cut during his congressional testimony.

"From a headline perspective, this will be the first rate cut in about 10 years, so it does have an additional symbolism to it," said Mr De Mello.

The rate cuts ahead come as the uncertainty around trade has weighed on business sentiment, crimping the growth outlook.

"The trade situation is unknown to us. We've lived in a time where generally, tariffs have come down, and it's all been about improving trade and improving globalisation. In the last 10 years, there's been a reversal. None of my economics professors told me that tariffs were a good thing," said Mr De Mello.

Inflation has remained under the Fed's target of 2 per cent, despite the US economy running at an unemployment rate of below 4 per cent, with economists typically eyeballing the correlation between employment and inflation.

To be clear, there are structural factors at play, in explaining the low inflation. Chiefly, technology has allowed services to be delivered more efficiently, while providing price transparency to consumers, said Mr De Mello.

Still, the uncertain climate for markets has brought into sharper focus the independence and credibility of central banks, as they fail to hit their inflation targets.

"Not that consumers like us want to see high inflation, but it just saps the credibility of the central banks, and us as investors, are saying...'we don't believe it'," said Mr De Mello. "Maybe they (central banks) are bending to political will."