90 Day Round-Up: Investments (May - July 2021) by Asian Private Banker

9 0 D AY R O U N D - U P INVESTMENTS S ele c t e d s t o r i e s f r o m M ay t o J u l y 2 02 1

Dear Reader,

Asian Private Banker wraps up the past 90 days of investment stories with a compilation of our most popular articles for your reading ease. These are the most viewed stories from the past three months across the Asian Private Banker website, as well as our social media broadcasts. We hope you enjoy our compilation from the past 90 days, bringing you a digest of our top investment stories. Stay tuned as we return next month with a round-up of our China coverage from the past 90 days. Kind regards, Patricia Jover Marketing Manager Asian Private Banker

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3 May 2021

When one of the world’s richest cribs about prices, it’s time to listen

hen the Oracle of Omaha speaks, the world listens.

At the annual shareholder meeting of Berkshire Hathaway on 1 May, Warren Buffett told the company’s investors that there was a distinct rise in inflation — despite the delay in the macroeconomic data showing the actual evidence of that happening. “We are seeing substantial inflation,” Buffett said according to comments cited by the FT. “We’re raising prices. People are raising prices to us, and it’s being accepted.” The veteran investor is widely followed by U/HNWIs around the world for investment advice, particularly in mainland China where he remains a totem symbol of value investing. “People have money in their pocket, and they pay higher prices… it’s almost a buying frenzy,” Buffett said. The US economic rebound is “red hot,” he added.

When will the music stop? The rise in expectations of an interest-rate increase on the back of rising inflation “is not that surprising,” Felix Brill told Asian Private Banker. “Some might have been surprised by the magnitude of the recent yield increase,” the chief investment officer of VP Bank AG added. This could be in part due to US-president Joe Biden plans to add additional fiscal support while monetary conditions are “already very supportive”, he added.

Housing has been the biggest contributor to inflation in the US, data from financial research firm Macrobond showed. The rise in inflation has therefore led to a spike in longterm yields, which in turn has led to speculation of a sharp pullback in global markets in the three months between May to July this year, according to Deutsche Bank. Rising yields affect stock valuations, because investors seek more against the risk-free rate of US Treasurys.

Source: Macrobond (Continued on next page.)

“Our main scenario is unchanged, in the sense that we think that the immediate inflation spike is really going to be (just that) — a spike,” Brill said. “It will be basically much driven by basis effects and the higher oil price.”

The Biden administration’s spending is expected to reach US$8 trillion along with the Fed balance sheet expanding to US$7.5 trillion. Markets are well aware of the possibility of US CPI inflation moving over 3% in the next couple of months on account of these temporary basis effects, Brill said. “So the mere increase of inflation rates should most likely not trigger another sell-off in bond markets,” he added. “For that to happen, we would need more evidence that additional inflation pressure is mounting,” and a perception that the Fed might be “losing control of inflation”, he added.

Hedging your portfolio “In an environment where inflation and bond yields rise, you want to manage your interest rate sensitivity in the portfolio carefully,” cautioned Brill. At the end of last year, the Liechtenstein-based bank advised clients to reduce their share of fixed income in the portfolio from a strategic point of view.

Felix Brill, VP Bank

insurance-linked securities help to better diversify a portfolio and thereby to make it more robust. “And clients are positive about this approach,” he told Asian Private Banker. On the advisory side, VP Bank can help clients to add additional downside protection in case they are afraid of higher short-term volatility, Brill noted. On the equities side, there has not been a “permanent rotation” into value at the cost of growth stocks, Brill said, despite the financials being favoured when Treasurys got sold off. “Tech stocks managed to recover quite well from these setbacks,” he noted. “It caused a bit of volatility, but the underlying structural trend toward digitisation and tech is still intact.” VP Bank favours European stocks versus US stocks and is neutral on the latter and overweight on the former because European stocks still offer catch-up potential, explained Brill. Progresses on vaccination could “unleash this catch-up potential”, he added.

No reason to worry, yet “This recommendation was driven on the one hand by increased short-term risks of a bond sell-off on the back of temporary inflation increase,” as the economic recovery from the COVID-19 pandemic will drive inflation higher in the long-term, added Brill.

Strategic calls

The recent increase in interest rates “is not an issue” for equity markets yet, said Brill. However, if interest rates were to double again over the next six to 12 months, then it could be much more difficult as central banks might come under pressure to counter the “too fast too strong” rise in yields, he explained.

In discretionary mandates, VP Bank reduced for that reason the exposure to fixed income while adding both equities and alternative assets to the portfolios, said Brill. Alternative assets such as gold or

“If you look at the longer time horizon, 10-year Treasurys at 1.6%1.7% is not the big issue,” Brill said. “We have already more than doubled within a couple of months.”

7 May 2021

Elon Musk be damned, Bitcoin detractors allege a Ponzi scheme

hen you are 97 years old, there presumably isn’t much that can possibly stop you from speaking your mind. At the Berkshire Hathaway annual shareholders meeting on May 1, vice chairman Charlie Munger did just that. “Of course I hate the bitcoin success,” Munger said when asked about the cryptocurrency’s success. “I don’t welcome a currency that’s so useful to kidnappers and extortionists and so forth, nor do I like just shuffling out of your extra billions of billions of dollars to somebody who just invented a new financial product out of thin air,” Munger said. “I think I should say modestly that the whole damn development is disgusting and contrary to the interests of civilisation.” While the cryptocurrency supporters understandably took umbrage at the comments, research by a well-respected macroeconomic research firm based out of Montreal, Canada, shows that Bitcoin and other currencies are unlikely to replace fiat currencies anytime soon.

A Ponzi scheme in the making? “I am more convinced than ever that the raging craze in cryptocurrencies will prove to be a gigantic Ponzi scheme of epic proportions,” Zhao Chen, co-founder and chief global strategist at Alpine Macro wrote in his report — “Why the Bitcoin mania is a Ponzi game.” Zhao Chen, Alpine Macro

His comments dovetail with those of Paul Donovan, chief economist, Global Wealth Management at UBS who believes Bitcoin’s fixed supply could cause the collapse of its value and spending power, making it unattractive to use as a currency. These views come as the world’s most respected financial institutions make available investing, and trading in crypto-assets available to clients. A majority of fund selectors at the helm of US$12.7 trillion in assets expect a correction this year in cryptocurrencies. Private bank CIOs have erred on the side of caution. Overnight in the US, shares in Coinbase, the operator of the largest US cryptocurrency exchange, slumped 6% to a record low; falling for the fourth-straight day to just above the US$250 price referenced in its direct listing in April. This was after the firm’s so-called Transparency Report showed authorities’ request for customer data surged 17% YoY in 2020. Most insiders have sold out.

On the radar of U/HNWIs On Friday, Max Minton, Goldman’s Asia-Pacific head of digital assets told Bloomberg that the global investment bank will begin offering Bitcoin futures, in the form of non-deliverable forwards, to institutional investors. The new offering is “paving the way for us to evolve our nascent cash-settled cryptocurrency capabilities,” he added. In March, the Wall Street bank said it was close to offering private wealth clients additional vehicles to bet on cryptoprices. Rival JPMorgan Chase & Co., America’s biggest bank by assets, plans to launch a cryptocurrency exchange-traded fund (ETF) for private (Continued on next page.)

clients, after its investment banking unit issued the first cryptorelated structured note in March to U/HNW clients. Most HNW clients in Asia, including family offices, have been trading in cryptocurrencies directly, said Arrano Capital CIO Avaneesh Acquilla.

Tesla founder Elon Musk ’s backing has sent the price of some cryptocurrencies skyrocketing. Bitcoin prices reached an all-time high of US$64,829.14 a coin and despite a temporary pullback trade at six times their price a year earlier, according to Coindesk. Ethereum surpassed the US$3,500 mark after trading at US$211 a year earlier.

The Emperor’s clothes The momentum that has sent cryptocurrencies soaring reflects that “the scope of speculation is getting very big. Nothing else,” Zhao told Asian Private Banker. “Speculation kept the South Sea bubble going for two years before collapsing,” he said. “Bitcoin has been around more than 10 years with no real value or usage. But ultimately it will collapse,” he added. There has been no massive “currency debasement” or bad inflation since the global financial crisis of 2008, Alpine Macro said. “On the contrary, the biggest problem for most central banks in the developed world has been too low a rate of inflation,” it added. Advocates of cryptocurrencies have argued that such technologies will replace the role of the currency printed by global central banks as the incessant supply makes it lose value. But Alpine Macro pointed to the fact that the purchasing power of the Japanese yen has remained more or less steady — or even increased in periods — when the Bank of Japan resorted to the negative-interest rate experiment, a first in global monetary policy. Also, Bitcoin’s limited availability may work against it in terms of money supply in the real economy. The US economy would have to deflate by 95% if it were priced in Bitcoin as pricing the world’s largest economy in purchasing power parity terms would mean its entire GDP would be worth about 500 million coins, the firm pointed out. Bitcoin availability is limited to 21 million coins.

Chart 1

U.S. And Europe: Inflation Has Been Too Low

Chart 2

%yoy

Meme-cryptocurrency Dogecoin has rallied 13,500% since the beginning of 2021 to roughly US$0.60 per coin on Musk’s mentions. His decision on Tesla allowing customers to pay in Bitcoin acted as a shot in the arm for speculative investors that have been emboldened by work-from-home and the #wallstreetbets craze on Reddit. “Elon Musk has a free choice to accept BTCs (bitcoin) or cows, or anything else, as payment for a car, so long as the dollar prices of Bitcoins or cows equal the dollar price of the car,” quipped Alpine Macro. “If BTC is a currency, not only should the Tesla car be priced in Bitcoins, but the number of coins must be independent of the dollar price of BTC. That is clearly not the case.” Analysis by Alpine Macro suggests that there is a direct correlation between Bitcoin prices and the availability of easy money. (See chart 7) “The cryptocurrency mania could still last for a while longer, but another crash will likely occur when the Fed starts to renormalise its policy,” it cautioned. “Tight money always pricks asset bubbles.” In its latest Financial Stability Report, the Fed cautioned about “significant declines” in asset prices. “Asset prices may be vulnerable to significant declines should risk appetite fall,” it said. When asked about the implications for family offices that are planning to or have already bought into cryptocurrencies, Zhao only had a one-line answer— ”Don’t get sucked into it.”

JPY's Purchasing Power Has Been Well Preserved Since 1998

Chart 7 $ 50000

%yoy

Annual Inflation Rate

4 100

Japan: Purchasing Power Proxy*

100

-85% 92

500

-92% 84

-83%

U.S.* Eurozone**

Tn$

Bitcoin Price (ls) Fed Assets (rs)

5000

Bitcoin Mania Vs Fed Balance Sheet

The purchasing power of the Japanese yen has been essentially flat since 1998

80 1

-2 -4

-2

Cumulative Deviation from 2% Inflation since 2000

-4

0 2012

2014

2016

2018

2020

1980

1990

2000

2010

2020

*Inverse of consumer price index; rebased to Jan 1980=100

-6 -8

2000

2005

2010

2015

2020

*Core PCE deflator **All-Items HICP

Source: Alpine Macro

17 May 2021

Banks yield to U/HNWI pressure in offering cryptoservices

anks are stepping up their cryptocurrency offerings as demand from U/HNWI clients surges, despite recent pullbacks in the price of digital assets.

The offerings come despite a degree of reluctance on the part of bankers and fund selectors who are trying to balance their fiduciary duties with clients’ desire to benefit from the stratospheric appreciation in prices of some digital assets. Asia is reportedly home to cryptowhales, especially in mainland China, South Korea, and Japan. The latest to join the bandwagon is DBS Private Bank which last week said it is introducing digital trustee services to its clients. The trust solution will enable its private banking clients to invest, custodise and manage their digital assets, a press release said. It will build on the bank’s digital exchange platform (DDEX) which allows institutional investors and accredited investors to access the digital-asset ecosystem for tokenisation, trading and custodial services, it added. Clients will be able to integrate these assets into their wealth succession plans, according to the press release. The offering is limited to cryptocurrencies hosted on the digital exchange namely Bitcoin, Ether, Bitcoin Cash and XRP. Since late 2020, PB/FO clients of DBS Private Bank who are accredited investors have been able to invest in digital assets hosted on DDEX, a spokesperson told Asian Private Banker. “In recent years, more clients have expressed interest or are already invested in digital assets, and we expect this trend to accelerate as cryptocurrencies turn more mainstream,” said Joseph Poon, group head of DBS Private Bank. The bank’s trust structure allows clients to “conveniently hold these assets, with a peace of mind that they will be safely managed and passed on to their intended beneficiaries.”

The solution by DBS will help clients make sure instructions to access cryptowallets, passwords, etc. will be in safe hands, because trusts as a rule are kept out of the probate process and do not normally become part of the public record, the Singaporean bank said. Such a development is not unusual. Investors in QuadrigaCX were unable to access some US$190 million after Gerald Cotten, the founder of Canada’s largest cryptocurrency exchange died. In mid-January, San Francisco-based German programmer Stefan Thomas was left with two guesses to figure out a password to his cryptowallet which had US$220 million in digital assets at the time.

When the client is king “Confidentiality, peace of mind and taxation often emerge as top-ofmind concerns in our conversations with clients, and we would advise them to set up trust structures rather than wills, which are subject to the probate process,” said Lee Woon Shiu, regional head of family office, Wealth Planning and Insurance Solutions at DBS Private Bank. Since its launch in December of 2020, DDEX, DBS’ members-only exchange for institutional investors and accredited investors, holds S$80 million (US$59.9 million) in assets under custody, with trading volumes up 10-fold to S$30 million-S$40 million. It currently has 120 clients and “a robust pipeline awaiting onboarding.” The Singaporean bank is preparing its first security token offering and plans are underway to expand operating hours (from Asian time zone to round-the-clock). Last week, Bloomberg reported that UBS is in the early stages of planning to offer U/HNWI customers access to digital assets. Any such offering would be limited to a “very small portion of the clients’ total wealth because of the volatility,” the news agency said, citing people familiar with the matter.

(Continued on next page.)

‘’We are monitoring the developments in the field of digital assets closely,” a UBS spokesperson based in Hong Kong told Asian Private Banker. “Importantly, we are most interested in the technology which underpins digital assets, namely the distributed ledger technology.” Citi is planning to launch custodian services for digital assets in response to client demands from U/HNWI and FOs, a person familiar with the matter told Asian Private Banker. The American bank is a market leader in the segment with over US$24.9 trillion of assets under custody and administration and a network spanning over 60 markets as of 4Q20 and became the first US bank to receive a domestic-fund custody approval from the China Securities Regulatory Commission. A Singaporebased spokesperson for the bank declined to offer further comment. Citi is considering offering trading, custody, and financing services in relation to digital assets such as cryptocurrencies, Itay Tuchman told The Financial Times. “There are different options from our perspective and we are considering where we can best service clients. This is not going to be a prop-trading effort,” Citi’s global head of foreign exchange told the newspaper. Proprietary trading refers to a bank’s trading activity on its own book. Goldman Sachs Asia-Pacific head of digital assets told Bloomberg that the global investment bank will begin offering Bitcoin futures, in the form of non-deliverable forwards, to institutional investors. Rival and America’s biggest bank by assets, JPMorgan Chase, plans to launch a cryptocurrency exchange-traded fund (ETF) for private clients, after its investment banking unit issued the first cryptorelated structured note in March to U/HNW clients. In March, Morgan Stanley became the first US bank to allow access to Bitcoin for HNWIs who have at least US$2 million in assets and “an aggressive risk tolerance.” Investment firms will need at least US$5 million to qualify for such investments, said the bank which had US$4 trillion AUM in wealth management. It is limiting such investments to 2.5% of the total net worth of accredited US investors, CNBC reported citing people familiar with the matter.

Not an easy ride Banks’ eagerness to limit the investments of clients is understandable. After earlier agreeing to accept payments in cryptocurrencies, and reportedly sitting atop US$2.5 billion in digital assets, electric car maker Tesla last Wednesday indicated that it would stop taking Bitcoin as payment. Over the weekend, Elon Musk hinted that Tesla may sell or may already have sold its Bitcoin holdings. On Monday, Bitcoin was initially down 8.6% to US$44,782, until Musk tweeted a kind of clarification, stating that “Tesla has not sold any Bitcoin“. Investors subsequently started buying cryptocurrencies again. Musk’s changes of heart have been viewed critically by respected investment veterans — with Zhao Chen, chief global strategist at Montreal-based Alpine Macro calling the Bitcoin mania a Ponzi scheme.

1 June 2021

Private banks brace as China acts to tame runaway currency

n Monday, the People’s Bank of China acted to rein in the runaway RMB which has appreciated against global currencies as investors flock to benefit from the reopening of the economy there.

The RMB has only risen 0.5% since early April against a tradeweighted basket of currencies (CFETS index) even as the US Dollar Index itself has fallen 3.5%. The latter is a closely watched measure of the US dollar’s value relative to the world’s top six currencies.

The PBoC increased the cash that banks have to put up with the Chinese central bank to exchange foreign currencies for RMBdenominated assets. It increased the reserve requirement ratio or RRR from 5% to 7%, compelling banks to put up US$7 for every US$100 in foreign-exchange deposits.

Onshore RMB-denominated foreign exchange deposits amounted to around US$660 billion as of April, and the 2-pp increase in the RRR would likely result in around US$13 billion in more reserves and less foreign exchange available for loans, according to Goldman Sachs. “Besides the actual impact on liquidity, this announcement sends a signal of the increased discomfort from the PBoC with the rapid appreciation of the currency,” the American investment bank said in a note to clients.

The increase would help lower foreign-exchange liquidity and ease off some of the rally in the RMB. Global investors doubling down on Chinese and RMB-denominated assets have given rise to strong demand for converting foreign-exchange into RMB. The currency has been on a tear against the greenback since April of 2021, appreciating by 2.5% as of May 25. Most of this has been due to the weakness in the US dollar. China, FX Spot Rates, Macrobond, CNY per USD

CNY/USD 8.25

8.00

7.75

The PBoC had similarly acted in May 2007 when it increased the ratio from 4% to 5% as China faced inflows resulting in appreciation pressures for the RMB.

Exhibit 2: Banks recorded higher net receipts of FX from offshore on behalf of their clients USD bn 80

USD bn 80

Banks' net receipts of FX* on behalf of clients

40 7.50

7.25

7.00

-20

-40 6.75

6.50

6.25

6.00 2006

2007

2008

2009

Source: Macrobond

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

-40

-60 -80

-60

* we included USD, JPY, EUR, HKD and other non-RMB currencies

Source: PBOC

Source: Goldman Sachs (Continued on next page.)

Despite that move, foreign-exchange loans growth “stayed fast” through June 2007, noted Goldman Sachs, even if at about US$160 billion the amount of outstanding foreign exchange deposits in April 2007 was “much smaller”, the Goldman Sachs economists led by Maggie Wei wrote in a note.

Jack Siu, Credit Suisse

The fact that the PBoC decided to raise RRR rather than directly intervene via fixing the daily exchange rate for the US dollar to the RMB suggests authorities are trying to decelerate the appreciation rather than act to depreciate the currency, Credit Suisse Greater China CIO Jack Siu told Asian Private Banker. “China’s recovery is still well underway and its current account and capital account surplus continues to support RMB appreciation.”

The Chinese central bank fixes a daily midpoint for the RMB’s trade against the US dollar. The currency is allowed to trade in a 2% band either ways onshore. The “daily fix” as it is known in global markets is an important benchmark in the financial world in view of China’s importance and is used for everything from forex trades to derivatives trading. The RMB remains one of the few global currencies that is actively managed by its central bank. Early this year, the PBoC acted to cut the weighting of the US dollar in the reference currency index basket (CFETS basket), helping push the RMB’s value higher.

investment changes as a result , because our forecast on the CNY’s positive outlook remains although the speed of appreciation will likely be tamed, so it is unlikely that this event is going to alter investment allocations.” At Credit Suisse, private banking clients have been increasing their allocations to RMB denominated assets including both onshore bonds and A-shares, Siu told Asian Private Banker. Analysts at CICC, China’s largest investment bank, expected onshore liquidity to remain “relatively ample” before the US Federal Reserve officially starts reducing its bond purchases which is likely by the end of 2021. “Meanwhile, a high probability exists that average US inflation will increase in the coming quarters due to changing stance on fiscal policies,” the CICC team led by Zhang Jundong told clients. “We foresee continued pressure on USD, because of rising average inflation and possible deficits in fiscal budget and current accounts driven by the Biden administration’s expansionary fiscal policies.” The dollar-RMB pair still remains “modestly overvalued in the grand scheme of things”, noted Lombard Odier’s global emerging markets forex strategist Kiran Kowshik and Vasileios Gkionakis, head of foreign exchange strategy in a note to clients. The Geneva-based banking group will continue to hold a 4.5% overweight via the long Chinese government debt holding across most portfolios, they added.

Siu expects the rate of increase in the RMB to likely slow but still expects the dollar to buy RMB 6.34 in three months and RMB 6.30 in 12 months. “Moreover, we don’t think such a move will change our medium term positive forecast for RMB denominated equities and bonds.”

“We remain constructive on the RMB in view of the supportive valuation, strong balance of payments support, and a still-decent outlook for Chinese exports,” Kowshik and Gkionakis wrote. “The common denominator of weaker global export outlook, seen in both the 2015 and 2018 episodes of RMB depreciation, are not present at this stage.”

Siu said he expects the RRR increase to lead to “increased queries and interest” from private banking clients on the impact for the dollarRMB currency pair. “However, we do not believe they will make much

“That said, we would continue to monitor the China-US trade agenda and export outlook, the domestic growth cycle, and authorities’ liberalisation of capital outflows going forward,” both cautioned.

3 June 2021

World’s biggest AM that you have never heard of: Real-estate is more than office space

For example, non-traded R EITs — R E I Ts t h at do not t r ade on exchanges — or private business development companies (BDCs) — c lo s e d- end f u nd s t r uc t u re s t hat c a n g ive access to pr ivate credit — offer innovative ways for individual investors to access these otherwise illiquid asset classes, Chui explained.

ne of the world’s largest asset managers that you may never have heard of is leaning on a technology-first strategy to bring income-generation to private wealth clients in the region.

Nuveen, the manager of US$1.2 trillion in assets at the end of December, has signed up two separate partnerships with Altive, the alternative investment fintech platform funded by Pacific Century Group, and iCapital, the alternative investing platform for the asset and wealth management industries to provide private wealth clients in the APAC region with access to its core global real-estate platform. The partnerships will help distribute a Nuveen strategy, which aims to provide income and growth from direct investments across commercial property types and geographic regions globally that may benefit from urbanisation, technology and ageing populations. It will be available to private wealth investors in Asia Pacific through either the Altive or iCapital feeders. “Individual clients are looking for yield, and we want to provide clients with access to asset classes that were traditionally only available to institutional investors, in an easy to understand format,” Henry Chui, head of private wealth, Asia Pacific at Nuveen, told Asian Private Banker.

Henry Chui, Nuveen

“These are more recent financial innovations within asset management that can be enabled by partnering with fintech firms like iCapital and Altive to lower the cost of this access to the individual investor,” said Chui.

Appealing to the landlords Nuveen’s strategy is to expand into the growing wealth management segment in the region with a focus on ESG and alternatives. It is estimated that HNW wealth in Asia will have grown by 10% in China and 6% in other APAC countries by the end of 2024, despite the impact of COVID-19, the firm said. (Continued on next page.)

The Chicago-based wholly owned subsidiary of financial planning firm The Teachers Insurance and Annuity Association of AmericaCollege Retirement Equities Fund (TIAA) has over 80 years of real estate investing experience and more than 600 real estate employees across 25 cities throughout the US, Europe and Asia Pacific. Within real-estate, it offers a wide swathe of investment strategies traversing funds and mandates, across both public and private investments, and spanning both debt and equity across diverse geographies and investment styles. Nuveen is witnessing strong demand in the intersection between public and private markets, Chui told Asian Private Banker because investors continue to search for yield in a low rate environment, with potential inf lationary risk on the horizon. On tap are alternative income strategies — such as real estate, real assets, and/or private credit exposure — that can supplement an income oriented portfolio by offering monthly or quarterly cash flows that may have more yield than traditional fixed income assets but can benefit in a reflationary environment, Chui said.

Real-estate investments in a COVID-19 world The real-estate sector has been whipsawed by lockdowns across the world and work-from-home reducing the demand for office space. With vaccinations in developed countries gaining traction and employees returning to work, companies have been flexible in allowing alternative or permanent work-from-home options.

Outside of the traditional real estate asset classes, there are newer segments including data centres, single family homes, and medical offices. It can be difficult for an individual investor to gain access to such a wide range of sectors and geographical regions without professional management, Chui pointed out. “While retail has been struggling, other areas like industrials have really benefited,” Chui said. “Where people have shopped less on high street retail, they’ve done a lot more shopping online, and that has benefited industrial properties.” Advoc at i ng for t he adva ntage of pr ivately-held rea l-estate investments, Chui explained that publicly-listed R EITs have correlations “very much tied” to the equity market, exposing a portfolio to potential mark-to-market volatility when equity markets sell off. “For private real estate, it’s going to move much more in line with the fundamentals of real estate, because these assets are driven by regular appraisal values.” To substantiate his case, Chui pointed out that in March 2020, Nuveen’s non-traded REIT strategy was down less than 1% despite public REITs easily falling by 20%-30% during the same time period. “We’re trying to educate investors that they actually do not need to move out the risk spectrum significantly to generate higher potential returns,” Chui told Asian Private Banker. “Instead, they can try to capture the illiquidity premium in asset classes such as stabilized, income producing real estate that can be much complementary to an income oriented portfolio through these newer investment vehicles.”

However, investors curious about the sector may be better off looking beyond the office-space vertical, Chui opined. A common misconception among investors, particularly individual investors, is to think of real estate as only residential property and the asset class is probably their first “dip into the real-estate market,” Chui said. But within the asset class, there is multifamily (residential housing), industrials, office and retail, he explained.

9 June 2021

J.P. Morgan AM doubles down on private investments within alternatives franchise

.P. Morgan Asset Management named a string of high-profile hires to a new private investments unit, as the stratospheric rise in valuations at high-growth investments is stoking interest from U/HNWI and family offices. The asset management unit of America’s largest bank by assets said it is launching J.P. Morgan Private Capital, led by Brian Carlin, former CEO of Wealth Management Solutions at J.P. Morgan, and Rick Smith, former head of private investments at JPMorgan Chase, serving as chairman of the group. Another wealth management veteran Meg McClellan will serve as the head of private debt, according to a press release. The new growth-equity investment unit along with an existing privatedebt business will enable institutional, and high-net worth clients to invest in early-and-growth stage companies. It will have the ability to invest the firm’s capital alongside investors, the release added. J.P. Morgan Asset Management said it has roped in former Goldman Sachs private investing co-head Christopher Dawe as a managing partner to lead the technology and consumer growth equity business. Dawe co-headed the venture capital and growth equity business within

Goldman Sachs Investment Partners where, over a 15-year long tenure, he helped investments in private companies such as Spotify, Plaid, Ring, Pinterest and Compass. Another Goldman Sachs and Wells Fargo executive Osei Van Horne joins the new unit as a managing partner to lead investments across industries with an initial focus on climate action and inclusive economic growth, according to the press release. Van Horne co-founded the technology growth equity practice at Wells Fargo where investments included Flexport and BMC Software.

Targetting the gold rush into alternatives The new investments platform will be under J.P. Morgan AM’s US$168 billion Global Alternatives franchise, reporting to Anton Pil, global head of alternatives, the US firm said. The platform includes a “robust private debt business,” led by McClellan, who manages US$15 billion in assets across corporate and asset-based lending strategies. This will be in addition to McClellan’s role leading J.P. Morgan Private Capital’s “efforts to build out a new direct lending business focusing initially on middle-market corporate direct lending across North America”. (Continued on next page.)

The development comes as global capital rushes in to cash in on the growth potential of middle-market companies in North America. Credit Suisse veteran SJ Hwang told Asian Private Banker in February that middle-market opportunities in the US and Europe, especially in terms of buyouts, has caught the attention of Asia’s UHNW and family office investors. Former UBS and Deutsche Bank rainmaker Henry Cai runs a US$1 billion fund that makes similar investments in German-speaking countries and counts sovereign-wealth fund China Investment Corp., as an anchor investor. Between the end of 2020 and the end of 2025, global AUM in alternatives is expected to increase by 60%, equal to a CAGR of 9.8% to US$14 trillion by 2023, according to Preqin. “The rate of growth should far outpace global GDP and inflation, with significant real appreciation across the alternative asset space,” the alternative assets tracker said. “The distribution of this growth will not be even.” Private equity and private debt assets are set to grow by 15.6% and 11.4% per year, respectively, far outpacing other asset classes growth of 5% per year or less with the “bulk” of AUM growth in private markets expected within the Asia-Pacific region, where Preqin expects AUM to rise from US$1.62 trillion in 2020 to US$4.97 trillion in 2025. “The twin factors of lower penetration rates and faster GDP growth than more established markets in the US and Europe will attract significant interest from both investors and fund managers.” Asian Private Banker understands that the unit is largely focussed on the US as of now.

Tapping into private markets’ continued growth J.P. Morgan Global Alternatives is the alternative investment arm of the asset management unit and manages US$168 billion in assets. It offers strategies across the alternative investment spectrum including real estate, private equity and credit, hedge funds, infrastructure, transportation and liquid alternatives, with over 600 executives operating from offices throughout the Americas, Europe and Asia Pacific, a press release reads. “Our 15 independent alternative investment engines combine specialist knowledge and singular focus with the global reach, vast resources and powerful infrastructure of J.P. Morgan to help meet each client’s specific objectives,” it adds. “As companies elect to remain private longer, many seek partners who can add significant value in addition to flexible capital solutions, and J.P. Morgan Private Capital will be well positioned as a preferred global partner for these firms,” the firm said in a press release. “This new group will draw on the broader resources of J.P. Morgan to drive value in portfolio companies and will harness the firm’s unique access to technology companies to inform investment ideas and gain insights into emerging and financial technologies,” it added. “The new unit will tap into the continued growth of private markets and significant pre-IPO value creation opportunities across a range of asset classes and sectors, including consumer, technology and sustainable growth equity investing, as well as middle-market direct lending strategies,” it continued.

Asia-Pacific-Based Assets under Management ($bn) 5,000 Private Equity

4,000 3,000 2,000 1,000 0 2020

Source: Preqin

2025

2020

2025

CAGR

1,259

4,363

28.2%

Private Debt

155

21.2%

Hedge Funds

118

-6.8%

Real Estate

108

125

3.0%

Infrastructure

246

27.6%

Natural Resources

-2.2%

“Growth equity and private debt are among the fastestgrowing asset classes in the alternatives industry,” Carlin commented, “with strong demand from both individual and institutional investors to look beyond public markets.” “The launch of J.P. Morgan Private Capital reflects the increasing client demand for alternative asset classes,” added Pil, “and our focus on providing clients with new opportunities to enhance portfolio returns through private markets.”

7 July 2021

PB clients prefer bootson-the-ground in private investments: Donald Rice of Julius Baer

rivate banking clients are seeking shorter-duration alternative investments, in many cases preferring to go with local private equity (PE) managers that have boots on the ground, according to the key gatekeeper for Julius Baer in the Asia Pacific region.

“It’s predominantly invested in privately negotiated loans from the US middle market companies, with a portion allocated to more liquid securities, primarily broadly syndicated loans,” Rice explained.

“Although this is a highly innovative programme, it’s important that investors look under the hood to take that extra time to learn the “You have got lofty valuations, you have inflationary concerns, mechanisms that are in place to provide liquidity and to mitigate risks,” rotations, Sino-US tensions, you name it,” Donald Rice, head of funds he cautioned. for Asia Pacific at Julius Baer, told Asian Private Banker at APB Change Makers, its annual event for progressive Exhibit 6 industry transformation. “It has placed Private market market closed-end closed-endassets assetsunder undermanagement management surpassed $7.3 trillion. Private surpassed $7.3 trillion. some investors on the sidelines.” Private market assets under management, H1 2020, $ billion

“This however, has opened up a fresh dialogue on alternatives and as such, we are having an outstanding year in private markets,” Rice added. Julius Baer is catering to that demand by periodically reaching out to clients directly, and through focused groups with front-office staff, Rice added. While Rice and his fellow panellists did not comment on any specific company, they did highlight the importance of having money managers with boots on the ground and some skin in the game to benefit from private market investments that may be on their way to a public listing.

100% = Rest of world

2,276 58 (3%)

Asia

257 (11%)

1,242

779

61 (5%)

45 (6%)

198

883 22 (2%) 64 (7%)

1,086 42 (4%)

880 88 (10%)

117 (11%) 75 (9%)

Europe

263 (30%)

522 (42%)

578 (25%)

302 (28%) 244 (28%)

439 (56%)

127 (10%)

North America

62 (8%)

1,382 (61%)

534 (61%)

625 (58%)

473 (54%)

Real estate

Infrastructure and natural resources

532 (43%)

Hunt for yield

233 (30%)

“Clients are always hungry for yield and today is no different,” explained Rice. They are searching for alternative forms of yield as traditional markets “seem to be in a holding pattern” with some clients “reticent about jumping in” at these levels, he added. One such fund offered by Julius Baer offered “attractive yields” with options to exit on a quarterly basis after the first year.

Buyout

Venture capital

Private equity

Growth Other Private debt

Real assets

Note: Figures might not sum to 100%, because of rounding. Source: Preqin

Source: McKinsey & Co

(Continued on next page.)

Short duration co-investment

Cautious optimism

“There is a certain segment of clients that are still resistant to tying up their money for ten years. So where it makes sense and where it’s prudent, we do look at PE strategies with a shorter duration,” Rice said.

Julius Baer is advocating that clients go with quality, both in terms of private market investments, as well as the managers guiding them on it.

“We will have such a programme in 3Q21 and only a six-year duration programme.” Julius Baer manages to do that through what if refers to as “a co-investment programme”. This strategy has a faster-than-usual ramp up due to the 12-month investment period, as opposed to the typical four to five years for traditional PE, Rice elaborated. “It’s much easier for clients to get their heads around six years and this strategy also tends to have a very shallow J-curve,” Rice said referring to the private market investment notion of a slight drop in valuation during the capital-investments phase, followed by a dramatic rise in valuations as growth surges. Julius Baer’s programme invests directly into PE companies alongside other blue-chip PE firms, hence the co-investment categorisation, Rice explained. “And it’s good to know that there is not a trade-off in terms of return, because we have seen that they can earn 17% IRR (internal rate of return) on previous programmes.”

“We would like to emphasise quality over quantity, and we would certainly prioritise due diligence,” Rice said. “A lot of these clients are themselves entrepreneurs, and if you relate the private market investments to all the pros and all the benefits, but also some of the cons and some of the challenges, they actually understand the concept quickly, because growing your own business operation is quite similar to private equity investing.” Such caution is imperative as clients make a beeline for private market investments. Total AUM across private markets globally grew 5.1% to a record US$7.4 trillion, despite volatility in raising funds in the first half of 2020, according to the McKinsey Global Private Markets Review 2021. “AUM saw increases in most asset classes, with PE accounting for the largest growth,” the global consultancy said in its April 2021 report.

Exhibit 7

Local champions “We also see a surge in client appetite for what we refer to as local champions,” Rice explained. “These are greater China or Asian-focussed private market managers — their skills sets, their experience, and pedigree are quickly closing in on their Western rivals,” he said. These managers “may not be household names in the West”, but their agility and boots-on-the-ground management style combined with proven track records are gaining in client interest, Rice told Asian Private Banker. The private bank had a “very successful raise” earlier this year for such a fund focussing on healthcare, technology, medical technology, and pharmaceutical sectors across the Greater China region, Rice said. “This is not a less liquid programme, rather a ten-year structure,” he added. “But it is important that we are offering the right balance between the two.”

Private equity equity has outperformed other other asset assetclasses classesand andhas hasexperienced experienced less Private has outperformed less volatility since 2008. volatility since 2008. Global fund performance over 2000–20 by asset class,1 global funds raised in 2000–17 1-year pooled IRR for 2000–17 vintage funds,2 % 50

Private equity Infrastructure

Private debt Real estate

Natural resources

20 10 0 –10 –20 –30 –40 2000

2005

2010

2015

2020

Fund performance assessed using IRR calculated by grouping performance of 2000–17 funds during 2000–20. Some data not available for certain periods. Internal rate of return for 2020 is 9 months (YTD, Q3 2020). Source: Burgiss

Source: McKinsey & Co

16 July 2021

At 20% of all client invested assets at UBS, core sustainable investments surge 62% YoY to US$793B

ore sustainable investments make up 20% of all client invested assets at UBS, the world’s largest wealth manager by AUM, a senior executive said Friday.

Such investments totalled US$793 billion last year, a 62% YoY increase, said Edmund Koh, UBS Asia-Pacific president, in a press release to mark the APAC Sustainable Finance Conference 2021 that seeks to connect clients, companies and ESG thought leaders to mobilise private wealth towards a sustainable future.

UBS’s flagship 100% sustainable investing cross-asset discretionary mandate more than tripled to US$3.5 billion in APAC by 1Q21, up from US$1 billion at the beginning of last year, demonstrating the “strong client demand and growth in sustainable investing in recent years”, said August Hatecke, co-head of wealth management AsiaPacific and country head of UBS Singapore. “ We b e l i e v e t h a t i n v e s t m e n t s that support a sustainable future will likely benefit financially over the long term,” Hatecke said. “In A s i a -P a c i f i c , w e ’v e s e e n m o r e clients, particularly those from the millennial generation, appreciating t he i mp or t a nc e of s u s t a i n a ble development.”

U B S ’s f l a gs h ip c on ferenc e w a s “very well received”, with “strong pa r t icipat ion by ma ny of Asia’s wea lt hiest business ow ners a nd institutional investors,” Koh said. “It is heartening to see increased awareness among our clients in the adoption of ESG practices,” he added Invest ments i nto susta i nable invest ments have been mark ing fresh records in t he wa ke of heightened awareness during the COVID-19 pandemic. The sector’s assets touched a record of US$2 trillion in 1Q21, up 19% from 4Q20, according to a report by Reuters citing Morningstar data. This was the fourth straight quarter that assets in the sector marked a record, the news agency reported. Edmund Koh, UBS

“Last year, we became the first financial institution to make sustainable investments our preferred solution to private clients investing globally”, Koh said.

About 70% of UBS’s clients in Asia are entrepreneurs and are becoming more focused on sustainable investments as they can generate equal, or superior returns compared to traditional investments, Hatecke added. August Hatecke, UBS

The amount of sustainable bonds in Asia outstanding could double within the next three years on growing investor demand and government support, noted Desmond Kuek, divisional vice-chairman in UBS Global Wealth Management and head of the sustainable finance committee in UBS Global Office of Sustainability & Impact. Year-to-date issuances in the region have reached US$31 billion, surpassing the annualised issuances in the last three years, he added.

23 July 2021

Hong Kong PB and private WM business AUM grew by 25% in 2020: SFC survey

he AUM of Hong Kong’s private banking (PB) and private wealth management (WM) business grew by 25% to HK$11.3 trillion (US$1.5 trillion), highlighting the city’s top position as Asia’s WM hub. A survey published on Thursday by the Hong Kong Securities and Futures Commission (SFC) shows AUM at the city’s asset and WM businesses grew 21% YoY to HK$34.93 trillion at the end of 2020. Not to be left behind, AUM of Hong Kong’s asset management and fund advisory business rose 20% to HK$24.04 trillion. Net fund inflows into PB and private WM business fell from HK$681 billion to about HK$656 billion, the SFC said. The net fund inflows accounted for 29% of the YoY increase in the PB and private WM business, it added. Hong Kong’s PB and private WM business employed 8,084 staff of which 2,819 were private WM professionals, the SFC said.

Private Banking and Private Wealth Management Business – Analysis by Investor Base

52%

25. As at 31 December 2020, 52% of the total AUM by the private banking and private wealth management business were sourced from non-Hong Kong investors, most of which were from the Asia-Pacific region.

Chart 10: Private Banking and Private Wealth Management Business ($11,316 billion) – by Investor Base

Assets sourced from non-Hong Kong investors

North America (4%)

Others (10%)

Europe (including the UK) (5%)

Rest of Asia-Pacific (including Australia and New Zealand) (17%)

Hong Kong (48%)

Chart 9: Private Banking and Private Wealth Management Business ($11,316 billion) – by Market Player LCs – Private Banking and Private Wealth Management Business (excluding Asset Management) $1,105 bn (10%)

LCs – Asset Management $226 bn (2%)

RIs – Asset Management $1,296 bn (11%) RIs – Private Banking and Private Wealth Management Business (excluding Asset Management) $8,689 bn (77%)

Source: Hong Kong SFC

More than half of the total AUM by the PB and private WM business came from non-Hong Kong investors, most of which were from the Asia-Pacific region. While 48% of the inflows came from people or entities registered in Hong Kong, mainland China and rest of Asia Pacific region led the non-Hong Kong inflows. Providing an insight into the asset allocation of investors of the PB industry, the SFC said listed equities continued to account for the largest portion of invested assets representing 49% of the total AUM as at 31 December 2020. The remaining assets were diversified into other products, such as private funds including hedge funds, private equity and venture capital, bonds, cash and deposits, the SFC added. (Continued on next page.)

Mainland China (16%)

Source: Hong Kong SFC

Not surprisingly, 52% of the AUM of the PB and private WM business was invested in the Asia-Pacific region, with 44% invested in mainland China and Hong Kong, the SFC said. The city’s asset management and WM businesses witnessed net fund inflows of HK$2.04 trillion in 2020, compared to HK$1.67 trillion in 2019), accounting for 33% of the YoY increase in the asset management and WM business, the survey shows. The annual survey polls licensed corporations which engage in asset management and fund advisory business and banks or registered institutions engaged in asset management, PB and private WM, insurers that get some or all of their operating income from WM products and trust-service providers.

Chart 12B: Private Banking and Private Wealth Management Business ($11,316 billion) – by Asset and Product Type (2020 vs 2019) 5,570

Listed equities

3,844 1,503

Cash and deposits Private funds

1,007 1,041

Bonds

763 671

Public funds Managed accounts

+12%

1,343 1,245 1,123

+45%

+11% -3%

+14%

375 +36% 276

Others

853 760

+12%

1,000 2019

2,000 2020

3,000

4,000

5,000

6,000

$ billion

Source: Hong Kong SFC

“Hong Kong experienced strong growth in asset management, fund advisory, PB and private WM business which was supported by strong net fund inflows in 2020,” said Christina Choi in a press release issued by the city’s de facto securities regulator. “Strengthening Hong Kong’s competitiveness as a leading asset management and WM centre will remain one of the SFC’s top priorities in the coming year,” the SFC’s executive director of investment products added.

Highlights

$34,931 bn (A) Asset and wealth management business

$24,038 bn (B) Asset management and fund advisory business

$11,316 bn (C) Private banking and private wealth management business

$4,480 bn (D) Assets held under trusts

Items above refer to the assets under management (AUM) of the relevant businesses. Certain assets reported under items C and D were managed by licensed corporations or registered institutions and therefore were also reported under item B. Accordingly, item A is not the sum of items B, C and D. For details, please refer to Appendix II on page 47 of this report.

Source: Hong Kong SFC

Offshore inflows continued to remain the mainstay for the increase in AUM for the city’s asset and wealth managers, reinforcing Hong Kong’s continued relevance as an offshore wealth hub despite stiff competition from Singapore. Non-Hong Kong investors dominated the inflows, contributing to 64% of the AUM of the asset and WM businesses assets or HK$21.34 trillion, the SFC said.

Asset and Wealth Management Business – Analysis by Investor Base 7.

More than

60%

Assets from non-Hong Kong investors amounted to $21,336 billion as at 31 December 2020, representing 64% of the asset and wealth management business7.

Chart 1A: Asset and Wealth Management Business7 ($33,594 billion) – Assets from non-Hong Kong Investors 100%

Sourced from non-Hong Kong investors over the past five years

This dovetails with the results of an industry and client survey last year by the Private Wealth Management Association (PWMA) of Hong Kong and KPMG China that showed industry executives were expecting an annual AUM growth of 5-10%, mostly through further penetration of mainland China.

90% 80% 70%

66%

2016

2017

62%

64%

2018

2019

2020

60% 50% 40% 30% 20% 10%

Sourced from non-Hong Kong investors

The relative resilience of the stock market in Hong Kong, coupled with the relative value perceived by mainland clients likely helped as well. As the Hong Kong dollar gets weaker compared to the Chinese currency, investors in mainland China might find stocks in the city at value, according to Raymond Chan, CIO equity Asia Pacific and portfolio manager at Allianz Global Investors.

Chart 1B: Asset and Wealth Management Business7 ($33,594 billion) – by Investor Base Others (8%) North America (22%)

Europe (including the UK) (11%)

Unsurprisingly, assets managed in Hong Kong made up 58% of the AUM of the asset management business, with 54% of these assets invested in equities as at 31 December, the SFC survey shows.

Rest of Asia-Pacific (including Australia and New Zealand) (13%)

Hong Kong (36%)

Mainland China (10%)

Excluded REITs and assets held under trusts attributable to non-LCs/RIs.

Source: Hong Kong SFC Asset and Wealth Management Activities Survey 2020