Resilient, diversified portfolios will tough out rough markets
ROUNDTABLE PARTICIPANTS
- Benjamin Cavalli, head of wealth management in Asia-Pacific, Credit Suisse
- Philip Kunz, head of global private banking for South Asia, HSBC
- Jimmy Lee, Asia-Pacific head, Julius Baer
- Lee Lung-Nien, chairman and South Asia head, Citi Private Bank
- Vincent Magnenat, limited partner and Asia chief executive, Lombard Odier
- Patricia Quek, head of wealth management in Singapore, UBS Global Wealth Management
- Tee Fong Seng, chief executive of Pictet Wealth Management Asia
Moderator: Kelly Ng, The Business Times
AMID change and volatility lie opportunities. Top private bankers tell The Business Times (BT) how they are helping clients build resilience into their portfolios in these uncertain times, and how they are shoring up their services for the new generation of wealthy clients.
BT: What are the biggest headwinds for private banks amid the current inflationary environment, and how are you responding to them?
Philip Kunz: Concerns over rising inflation and slowing growth have hit both bond and equity markets, creating a double whammy in portfolios. The inflation spike has forced central banks to embark on a tightening path, and bonds have sold off sharply as a result. Equities were impacted by tightening of policies, worries about margin erosion from inflation, and the stalling of the economic cycle.
In such an uncertain environment, we are working with our clients to build resilience into their portfolios by focusing on quality, income, and diversification. This starts with picking quality companies that have a solid balance sheet and the margin power to generate strong earnings, even as costs rise and growth slows.
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The second element in our strategy is income, as it tends to be more stable than capital appreciation, and can help dampen portfolio volatility. There is a need to find income from multiple sources including infrastructure assets, private credit, dividends, and high-quality bonds.
The third element is diversification, which is the cornerstone of our investment philosophy. This involves a strategic allocation across asset classes, including a strong emphasis on alternatives.
Benjamin Cavalli: Financial markets look set to remain volatile during this adjustment to higher global interest rates. The good thing about the accelerated hiking path by central banks is that it is likely to keep the transition phase short.
Business costs have risen for many of our entrepreneurial clients, who have started to deleverage and de-risk their portfolios since last year. Interestingly, 75 per cent of our investment mandates, guided by our award-winning chief investment officer (CIO) house view, have outperformed self-directed portfolios. This shows how professional asset management adds value, especially during these volatile times.
We believe it would be a mistake to leave markets at this stage. The peak in the repricing of expectations might be close and once markets hit that peak, it is not only possible but likely that we will see a rebound in both equities and bonds. Outside traditional markets, we continue to see compelling opportunities and returns in alternative investments. Investors should continue to keep diversified portfolios.
Jimmy Lee: We believe that favouring real assets over nominal assets will be critical for capital preservation. A real asset class that should be considered in the context of a well-diversified portfolio, particularly in the current economic and geopolitical landscape, is private equity.
We also believe in the merits of holding a diversified portfolio of equities. The recent sell-off in equities has brought valuations to a more acceptable level, presenting opportunities to invest in companies with pricing power and strong balance sheets. In terms of investing strategy, we like defensives in the current environment, but not exclusively. We recommend a barbell strategy with exposure to both defensive and beaten-down but profitable growth stocks.
In fixed income, given that interest rates are likely to rise further, we prefer investment grade, moderate duration securities with maturities of 3-5 years and a floating rate exposure.
I believe the ongoing global uncertainty has only sharpened the need for investors to adopt a good wealth management strategy, emphasising our role as investment managers to offer the best possible advice to preserve and even grow wealth.
Patricia Quek: Whether we’re headed for stagflation, reflation, a soft landing, or a slump, we are staying agile and equipped in every situation. There is volatility, but we also see interesting longer-term opportunities for clients to invest now.
We work closely with our clients to position portfolios for resilience under various scenarios. Our clients’ portfolios are diversified with alternatives through hedge funds and endowment-style investing. We are tilting our equity exposure towards more defensive areas, such as in healthcare and quality-income stocks. We favour value stocks, which have outperformed historically when inflation is high.
Investors should also consider an adequate allocation to hedge funds, which have the potential to deliver performance even if bonds and equities both fall.
Lee Lung-Nien: Slowing loan demand will lead to slower consumer and business spending, ultimately dampening economic growth. This is where private banking clients face their greatest risks in their capacity as business owners, entrepreneurs, philanthropists, and investors. During periods of economic stress, these clients often need expert advice and innovative solutions across many of these categories simultaneously and quickly. This is often the strongest headwind with which private banks must contend, as it requires an added degree of flexibility and preparation.
Over the past 2 years, we have invested heavily in the growth of our Citi Global Wealth franchise to help bring the global resources of the entire firm to our clients in the most efficient way. We have also set up our family office advisory team to diversify our offering and be well-plugged into this rapidly growing segment. We also continue to invest in our technology and digital infrastructure to enhance the client experience.
Tee Fong Seng: We are unlikely to return to the same low inflation dynamics we saw before the pandemic. In Pictet Wealth Management’s recent Horizon report, we estimate structural inflation to reach a long-term annual average of 2.8 per cent in the US (versus 1.8 per cent in the years before Covid-19) and 1.9 per cent in Europe (versus 1.4 per cent in the pre-pandemic years).
This would have long-lasting implications for asset-class dynamics and strategic asset allocation. Inflation is a hidden tax on capital, eroding its real value. Investors relying on sources of fixed income or so-called ‘safe haven’ asset classes could be hit especially hard.
Investors have to reassess the profitability of assets in which they are invested, and build a strategic allocation around assets that protect against this erosion as much as possible. We believe real assets such as private equity, real estate, or private equity real estate fit the bill, but require a very precise definition of investor objectives, especially in terms of real profitability, as well as their investment horizon and risk tolerance.
Vincent Magnenat: We should almost speak about the inflationary environment in the past tense as the tide is rapidly turning, with markets increasingly concerned about growth prospects rather than by the change in future inflation regimes.
Over the last 12 months, the fear that a new regime of higher inflation could prevail in the future led many private investors to doubt the benefits of diversification, as traditional balanced portfolios suffered massive losses. Private banks have spent, and will probably continue to spend, a lot of energy to convince their clients that the virtues of decorrelation between key asset classes will ultimately return, while expanding the scope of this diversification to real assets should allow them to access a much broader universe of private companies.
BT: How are you adapting your services to the digital demands of the new generation of high-net-worth clients?
Lee Lung-Nien: The new generation of high-net-worth individuals are demanding better digital experiences alongside face-to-face advice. Citi offers a hybrid investment platform with human touchpoints at key moments.
For instance, digital signatures via the DocuSign tool has enabled paperless flows across onboarding and account servicing. We have now expanded it to the assets servicing and trust account handling realms. The use of social media channels has made it easier for clients to engage in the preferred and more popular channels of choice. Their ability to access a global view of portfolios via an online portal in near-real time is also seen as a clear competitive edge by clients.
Our Citi Global Wealth framework allows us to leverage the best of the digital capabilities across the broader platform in service to our clients. This will enable a suite of integrated cash management capabilities and self-service features that will expand accessibility.
Tee: The “Uber moment” for private banking is here to stay. Digitalisation is transforming the way private banks do business with the high-net-worth as well as mass affluent clients. Robotics and artificial intelligence will take over a lot of the investments for the high-net-worth, but this will not affect or replace the human touch in our high-touch businesses with the ultra-high-net-worth or family office wealth management clients.
Pictet originated as a family office more than 210 years ago, and is still working with family offices across the world. It is interesting to note that 80 per cent of Pictet assets under management in Asia comes from mega clients and family offices. Large family wealth holdings can be complex.
Beyond investment advice, the exponential rise in private wealth across the region brings with it a significant increase in demand for bespoke wealth-structuring advice, including demand for more sophisticated structures and solutions that can help professionalise the management and protection of this newly-created wealth.
Jimmy Lee: Julius Baer has enhanced its digital touchpoints, such as launching e-trading which allows clients to trade on demand, and allowing clients to place orders and instruct managers via WhatsApp and WeChat platforms. We also introduced a Digital Advisory Suite, which uses machine learning to create personalised investment ideas based on client’s investment objectives, risk appetite and preferences.
For 2023-2025, we will invest about 400 million Swiss francs (S$580 million) into technology globally to enhance the scope of our digital channels and upgrade our e-banking capabilities. In the next stage of our digital evolution, we will be looking into a digital-first, hybrid service model with access to human expertise, at a transparent fee.
We will also explore the use of distributed ledger technology. Decentralised finance will transform the financial sector of the next 10 years, and it is important for us to gain a strong foothold in this area. We are exploring various options in Asia to capture the growing opportunity.
Quek: As clients become more digitally savvy, we continue to challenge ourselves to innovate so as to enhance their experiences.
An example is our recent launch of UBS Circle One, a digital platform that brings the best of UBS’ global ecosystem to clients. The mobile app, first rolled out globally in Asia, delivers the entire investing journey to our clients from start to end seamlessly. Our clients receive our award-winning CIO thought leadership made digestible through short videos, podcasts and interactive live webinars. Actionable ideas and investment recommendations are also provided to clients for them to consider. UBS Circle One is a testament to how we stay relevant for our clients in this digital age.
Kunz: Over the past 12 months, we have introduced many enhancements and new digital features to our clients across the wealth continuum. For private banking clients in this region, we have introduced HSBC GPB Chat in August 2021 which allows them to conveniently and securely connect with their relationship management team through their preferred digital channel, including WhatsApp and WeChat.
Recently, we have also launched a new online trading platform which gives private banking clients in Asia direct access to trade and the ability to manage their cash equities, exchange traded funds and structured products using their mobile phones. They can now track and analyse investments in real time and review trade portfolios at their convenience, while accessing up-to-date quotes and price charts to help them make more informed investment decisions.
Magnenat: Even before Covid-19 accelerated the shift towards digitalisation, Lombard Odier always understood that the next evolution for banking will be built on cutting-edge technology and we have been investing in our own banking technology for over 50 years. Most of the next-generation clients are digital natives and are looking for a seamless technology experience when banking, just as what they are used to in their daily lives with big tech. This is why our technology platform and solutions are designed to provide clients with a smooth, personalised, transparent and secure digital experience.
Our recent study on high-net-worth individuals has shown that regardless of which generation they are in, clients still prefer elements of physical interactions. Ultimately, personal relationships with clients are still key, and the quality of advice delivered through a mix of physical and digital engagements will define the new way forward.
Cavalli: We recently launched the 2.0 version of the Credit Suisse Wealth Management APAC app, which is designed based on feedback from our clients to enable the best possible experience for them.
We introduced Credit Suisse Chat in 2019 so that clients can quickly reach our teams to give trade instructions on various mobile messaging platforms such as WhatsApp, iMessage and WeChat. Today, our eligible digital banking clients execute almost two-thirds of their trades online directly themselves.
We have also seen our investors’ portfolio preferences and digital needs evolve. Given the bank’s multi-year growth trajectory in Asia in terms of discretionary and advisory mandates, we first launched Credit Suisse Invest in 2017. In contrast to more commonly known robo-advisory services, CS Invest is an individualised and tailored advisory solution that takes into account the client’s needs, objectives and preferences, with the client making the final decisions on their chosen solutions.
BT: Amid the increased awareness of environmental, social and governance (ESG) investing, where do you see the biggest gaps in understanding?
Kunz: The first barrier is the lack of knowledge. An internal survey shows that 80 per cent of investors believe ESG issues are central to their investments. Still, half of them would like to do more on ESG issues, but are unsure where to begin.
Typically, investors will look at financial metrics such as profitability, debt ratios and cash flows when considering an investment, but that is insufficient. One needs to look at ESG factors as well. ESG has economic repercussions that influences future return and risk of any investments.
The second misconception is that investing into ESG assets will sacrifice returns.
Recent studies have shown that companies with strong ESG scores, compared to their peers in the same sector, are more likely to gain market share and have better earnings capabilities and long-term cash flows. Studies have also shown that companies with strong ESG scores are better able to manage risk.
The third barrier is the question of how an individual investor can make a difference.
To make the net-zero transition possible, all investors have to be on board. ESG investing provides capital to companies who are committed to the environment and the community where they operate in, and who have the right practices in place to make effective decisions towards sustainable growth. Ultimately, consumer demand for sustainable finance services and products can compel financial institutions and companies to meet these expectations.
Cavalli: Our global research found that over 80 per cent of global financial ESG assets are located in developed countries. In contrast, 70 per cent of spending needs are related to the United Nations’ Sustainable Development Goals and over 80 per cent of the global population lives in developing countries. This is a huge opportunity for ESG leaders in Asia-Pacific.
There is an understandable emphasis on the ‘E’ (environment) in ESG investing. But we have long been convinced that ‘S’ (social) has an advantage of providing different performance drivers.
The Credit Suisse Research Institute’s CS Gender 3000 study found that more diverse companies achieve better earnings before interest, taxes, depreciation, and amortisation (or Ebitda) margins and higher cash-flow returns while having lower leverage over time. Globally, companies that have higher gender diversity on their boards and at the executive levels also tend to substantially outperform peers with a less diverse gender representation, even in the current volatile environment.
We need to identify activity that brings together complementary benefits across the ‘E’ and ‘S’ areas of focus – the blend of these themes will bring significant uplift in delivering the financial and societal returns needed to secure a more sustainable future.
Quek: One of the misunderstandings is the portrayal of sustainable investments as a singular investment strategy. It is often grouped together and this causes confusion. The common question investors have raised include whether ESG is about investing in green stocks or bonds – or is it simply investing less in polluting growth sectors?
UBS sees sustainable investments as a holistic investment approach that integrates ESG considerations across different asset classes and strategies. Our flagship dedicated Sustainable Investing portfolio goes beyond simplistic themes or best-in-class leaders components, but also offers improvers and engagement modules. We are also constantly driving further product innovation and portfolio diversification. Clients are given alternate opportunities where products deliver comparable risk returns and at no additional cost, providing improved accountability and alignment in sustainability and impact. This is why client interest has been consistently strong.
Lee Lung-Nien: The top misperception is that sustainable investments have financial performance trade-offs. The integration of sustainability factors into investment processes captures a more holistic analysis of an investment’s risks, business strategy, management quality, and competitive positioning, which could lead to better long-term financial returns alongside positive environmental and social impact.
Another source of confusion is how to define what is sustainable. As different investment products use a variety of data sources, ratings and assessment methodologies, it is challenging for investors to compare these products and assess if the sustainability claims are accurate.
Some also believe sustainable investing is a fad. Sustainable investing continues to become more mainstream, and we expect that the incorporation of ESG data into investment decision-making will become the standard in the next few years – at the minimum, as a potential risk indicator. We already see an increasing number of jurisdictions mandating ESG disclosures and the consideration of sustainability related risks in the investment process.
Magnenat: The rapid growth of ESG products over the last few years has led to rising confusion among the different types of approaches and methodologies, increasing the risk of greenwashing on the supply side and of future disappointment on the demand side. As with any other investments, private investors need to understand what they are buying and align their choices of providers and products with their own preferences and convictions in terms of sustainability.
Most ESG products today are still based on subjective scoring methods. Slightly more advanced strategies are relying on more factual impact metrics, such as carbon footprint, water consumption, etc, but still have large discrepancies in the scope measured and little-to-no predictive power in terms of future trajectories. Only very few providers, including Lombard Odier, propose methodologies relying on science-based frameworks to analyse the “temperature trajectory” for individual companies. We hope this will be increasingly adopted across the industry.
Jimmy Lee: For capital markets to play a more significant role in driving focus on ESG issues, we need high-quality data that is globally comparable. This will drive greater standardisation of ESG reporting. In time, ESG reporting will be the norm rather than the exception, and maybe even mandatory, globally.
With an increasing demand for sustainable and impact investing products, “greenwashing” and “impact washing” have become potential risks. Bank Julius Baer has defined a set of concrete sustainability criteria for “sustainable” or “impact investing” investment solutions across asset classes. The methodology is closely monitored to ensure compliance with the changing regulatory environment and alignment with best practices.
We are continuously working on the implementation of regulatory technical standards and with these measures in place. We strive to provide our clients with transparency on the sustainability and impact ambition of our solutions and services to enable them to make informed choices.
Tee: With time, the ESG conversation has become less about reducing risk and more about finding the right opportunities for investing in the future we would like to see. Private clients are increasingly interested in solutions to climate change, sustainable agriculture, responsible consumption and circular economy.
Investing in ESG is also about no longer investing in silos. We have moved from investing in ESG, despite lower returns, to recognising that investors do not need to sacrifice returns to invest sustainably or responsibly. Now, we are beginning to appreciate the changing performance dynamics mainly around a few areas, such as how ESG investing offers downside protection, and how financial performance due to ESG improves over longer time horizons.
We should also highlight that sustainable and responsible investing is not just about negative screening. ESG integration as an investment strategy performed better than negative screening approaches. It is also not just disclosing without strategy – ESG disclosure without an accompanying strategy does not drive financial performance.
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