Issue 88 June 2015 Lite by Asian Private Banker

www.asianprivatebanker.com

ASIAN PRIVATE BANKER

Independent, Authoritative, Indispensable

JUNE 2015 • ISSUE 88

CROW’S NEST

EDUCATING HNWIs ON THE MERITS OF DPM – A SISYPHEAN TASK? APB MANDATE: THE LAUNCH ISSUE POWERED BY ASIAN PRIVATE BANKER APM MANDATE DIVES DEEPER INTO THE UNIVERSE OF MANAGED SOLUTIONS

CEO PANEL DISCUSSION A VIEW FROM THE TOP

TECHNOLOGY

HEAVY HIRING FOR PRIVATE BANK TECH TEAMS

JUNE 2015

CONTENTS 4

Letter from the editor

The Scoop: M&A chatter is getting louder... so let’s join the conversation

APB Mandate 8

Allocator hub

House view: A need for active management

10 Crow’s Nest: Educating HNWIs on the merits of DPM – a Sisyphean Task? 12 No such thing as a free lunch 14 Risk is a four-letter word 15 Who’s afraid of a rate hike?

View from the top

It’s a matter of trust

Structured product play of the week / What’s selling at private banks

Heavy hiring for private banking tech teams

What keeps CEOs awake at night?

Movers & shakers

PUBLISHER Andrew Shale

OPERATIONS Benjamin Yang, Sam Chan

DESIGN Simon Kay

EDITOR Shruti Advani

DIRECTOR OF BUSINESS DEVELOPMENT Madhuri Chatterjee

PRODUCTION DG3

EDITORIAL Richard Otsuki, Priyanka Boghani, Fergus Herries

BUSINESS DEVELOPMENT MANAGER Sonia Lam

ISSN NO. 2076-5320

MANAGING DIRECTOR Paris Shepherd PUBLISHED BY KEY POSITIONING LIMITED 1205 The Dominion Centre, 43-49 Queen’s Road East, Wanchai, Hong Kong Tel: +852 2529 5577 Fax: +852 2529 0077 Email: info@asianprivatebanker.com

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LETTER FROM THE EDITOR

Lucky number 8 Welcome to issue 88 of Asian Private Banker. The number eight (“ba” or “baat” depending on whether you speak Mandarin or Cantonese) in Chinese culture represents good fortune (“faat”)

am no feng shui master but I am assuming double-eights imply a two-fold increase in fortune? May the good times roll for all of us. Despite energetic global markets in the first quarter of the year, private banks in Asia continue to be anxious about rooting their business in long-term investment structures and services that offer better revenue visibility for the banks and, one would hope, the clients. This issue of Asian Private Banker includes the first edition of APB Mandate, which will take readers on a journey as it documents how the house view at a private bank translates into a flurry of activity – the chase for best-in-breed product, the selection process and the challenges, regulatory and otherwise, of implementation. Only market performance (or the lack thereof) can deem these strategies successful or unsuccessful, but APB Mandate offers readers a rare opportunity to judge the efficacy of the process at various private banks. Thank you for all the feedback on our last issue; some of it made me smile, some of it didn’t. All of it made me think. For those of you I have met before, it should come as little surprise that every time you make a suggestion, it is keenly debated at our weekly editorial meetings. For the uninitiated, join the debate by mailing your comments to editor@asianprivatebanker.com. I look forward to hearing from you.

Shruti Advani Editor Asian Private Banker

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EDITORIAL

M&A chatter is getting louder … so let’s join the conversation

he Scoop is not supposed to be about chronicling M&A activity among Asia’s private banks. However, if the conversation du jour among those that matter in Hong Kong and Singapore is any indicator, it may well be headed in that direction. Divided between analysis of acquisitions that have or have not been successful and the sales that are about to happen, the region’s private bankers can talk of little else. Conversations centering on analysis of acquisitions gravitate either towards the DBS/Société Générale or the UBP/Coutts deals. I’ve written all there is to be written about UBP and Coutts - for now. So here’s my two cents worth on DBS and its acquisition of the erstwhile Société Générale private banking business. Caught by surprise when it pipped frontrunner ABN AMRO to the post for the deal, DBS used this position of power - unexpected though it may have been - to shave US$140 million off the ask. An auspicious start but no guarantee of continued good fortune, it has since turned out. The private bank’s senior leaders - and there are a few of them - have spent more time on remediation of client files, KYC filings, and making sure the bank has documented the source of wealth for its new client base, than they have capitalising on the natural momentum generated by the sale. Perhaps a wiser way would have been to hire external consultants for the remediation, thereby establishing neutrality and freeing up management bandwidth to harness the true prospects of the deal? Indeed, I think the key to whether the industry will look back at this acquisition as a successful or not will depend not on the business case (the synergies from the deal are indisputable) but whether DBS will be able to harness these forces for its greater good. Balancing its regional footprint by building a credible North Asia presence as a counterpoint to its South Asia dominance would be a good place to start. Last I heard, Januar Tjiandra, North Asia head of private banking, is still waiting for reinforcements and a seat on the regional management committee. Co-opting Societe Generale stalwarts would be another. Here again, DBS seems to be ducking the hard decisions, anointing co-heads and diluting power rather than concentrating it. What, you might ask, are the clients up to in this whole affair? Preparing personal net worth statements it would seem. The

exercise may lead to some of them having to accept the reality (and sound service) of DBS Treasures and Treasures Private Client. ABN AMRO, which until now has issued several tenable denials about selling its international private banking business, may be reconsidering this position. An investigation by the Dubai Financial Services Authority into alleged mis-selling, had board members from the Netherlands on a plane in a trice and since then shareholders have rallied Lazard - the investment bank tasked with the bank’s upcoming IPO - about the prudence of retaining a business that contributes less than 5% to global profits but prompted questions in the Dutch parliament in the wake of the incident. Expectedly, the bank has appointed Deloitte to “review all client files and make sure they comply with the bank’s KYC guidelines”. Unexpectedly, it has also appointed Ernst & Young to assess its international private banking business in Asia and the Middle East in an exercise similar to the one Coutts underwent before it was put on the block.

DBS seems to be ducking the hard decisions, anointing co-heads and diluting power rather than concentrating it

The Coutts corollary may well extend to pricing as well - with a similar-sized asset base, ABN AMRO could hope to get US$300350 million for its international private banking business. The underlying assumption of this valuation is that the bank is able to contain the fallout of the investigations in Dubai on both assets and bankers - six of whom resigned in the wake of the allegations. Not altogether impossible but, as Lazard is apparently insisting, requiring immediate action. Also, similar to Coutts, ABN AMRO is unlikely to sell the private bank in its home market - most of its European business is onshore and hence, low risk. So, as you can see, M&A chatter among private bankers has plenty of ammo to keep it firing away for a while yet.

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Powered by Asian Private Banker, APB Mandate dives deeper into the Asian HNWIs’ universe of managed solutions. Be it funds, advisory mandates or discretionary mandates, a combination of factors has led to a growing willingness for Asian millionaires to delegate a share of their US$14.2 trillion in liquid wealth for managing. Join APB Mandate as we take you on a journey featuring the entire value chain of chief investment officers, product gatekeepers, discretionary managers, client advisors and asset managers in a mandate to help Asian HNWIs grow and preserve their wealth. We will take you every step of the way from the communication of a private bank’s house view all the way to when trade is executed (or not). Every flow has a story. Follow it here from call to trade.

Disclaimer: The information by Key Positioning Limited (“Key Positioning”), including any opinion expressed by its authors, within this document is for information purposes only and should not be considered as any form of advice, recommendation, representation, endorsement, arrangement, or solicitation to deal or subscribe to any particular investment.

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IN ASSOCIATION WITH

CONTENTS

APB Mandate: Allocator hub

A brief overview of the region’s top bank’s asset allocation strategies

No such thing as a free lunch Gatekeepers draw the line for multi-asset managers aiming to deliver income at all costs

APB Mandate: House view

Private banks in the region respond to the predicted aftermath of a Fed rate hike

Risk is a four-letter word The divergence of yield within bonds of similar credit ratings has Pioneer warn against foreseeable risks

Educating HNWIs on the merits of DPM – a Sisyphean Task? Publisher Andrew Shale discusses DPM...and reflects on a bygone era

Who’s afraid of a rate hike? APB Mandate talks to gatekeepers to see how they are positioning themselves for the Fed’s expected rate increase

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APB MANDATE: ALLOCATOR HUB In the increasingly dynamic and volatile market environment, asset allocation continues to play a core role to ensure both risks and returns are prudently diversified across global markets. Join APB Mandate as we share with you the asset allocation strategies of private banks in Asia

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APB MANDATE: HOUSE VIEW

A need for active management Among the most notable changes in Asian private banking is the need to diversify, and have assets and allocations actively managed at an institutional level - as CIOs’ closely monitor the aftermath of Fed monetary policy and global policy divergence

conomists have predicted the Federal Reserve will increase interest rates by 25 basis points in September this year. CIOs believe that subsequent rate hikes will be gradual and capital will shift slowly from one asset class to another, beginning with an exit from sovereign bonds. “It’s a trading environment,” says Stefan Hofer, BNP Paribas Wealth Management’s Asia CIO. “Of course, there will continue to be value in a few select names but the market is fundamentally tougher. We still expect single-digit returns but none of the solid double-digit levels investors have gotten used to.” Credit Suisse and Deutsche AWM see buying opportunities following the rate hike. “Initially, we expect credit spreads to widen but after investors realise that this is the only rate hike for a while, there will be a tightening bias,” says Sean Taylor, emerging market equities head Deutsche AWM. “Volatility will be especially higher for emerging market credit immediately after the hike and we recommend buying on that.” The coming rotation into equities is likely to be piecemeal, but continual policy loosening and a growing focus on paying dividends in markets like Japan and Europe have generated interest across the board. Currency-hedged equity dividend strategies have garnered significant interest, especially those invested in Europe, as the region’s search for yield persists.

CIOs believe that subsequent rate hikes will be gradual and capital will shift slowly from one asset class to another

...continual policy loosening and a growing focus on paying dividends in markets like Japan and Europe have generated interest across the board

Echoing sentiment from other private banks, Credit Suisse’s Asia head of asset allocation Lena Teoh warns against being overconfident about theories. “As monetary divergence occurs, markets could be dichotomous,” she warns. “Indeed, despite the likely US rate hike, at least 25 other global central banks have cut rates this year,” she says. “You would think that a beneficiary of rate rises would be US equities rather than Europe, but don’t be surprised if this isn’t the case.” Clients in the region often make levered bets and correlations between US monetary policy, and in Singapore and Hong Kong local interest rates could damage performance. UBS Wealth Management’s head of investment management APAC, Patrick Grossholz, stresses the need to keep in mind liabilities, not just assets, when constructing investment strategies. “In both [Hong Kong and Singapore] economies, credit growth in recent years has been staggering, making it likely that there are at least some pockets where excessive leverage could become an issue when interest rates go up. This is also a topic we actively raise with our clients … via our CIO house view pertaining to the Asia region and our regional investors,” Grossholz says.

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Educating HNWIs on the merits of DPM – a Sisyphean Task? Sometimes a survey presents a rather shocking result, like the one Crow’s Nest was presented with at the Asian Private Banker’s 2015 Investment Advisory Summit, held last month

hen I was studying in Taipei back in 1989 (the Tiananmen Square incident forced a move of university from Beijing to Taiwan), I came across a homonym in Chinese that led to an interesting and confusing conclusion. I hopped into a taxi and asked the time with the straightforward question: “xianzai, ji dian?” (“what’s the time?”), but received the equivalent English answer of: “8,153”. Clearly, my agitated driver was an avid investor in stock market (along with practically everyone else at the time) as his answer was that of the TAIEX index value. “Ji dian?” means not only: “What is the time?” but also, literally, “How many points?” Stock market investment back in 1989 was not the obsession in Taipei it is now, it was the only topic of conversation. As I sat in Andrew Hendry’s tour de force presentation at Asian Private Banker’s 2015 Investment Advisory Summit last month, the above incident immediately sprang to mind. Andrew is the managing director, Asia, for M&G Investments and was presenting the amazing findings of a survey his company commissioned Scorpio Partnership to conduct on high net worth and ultra high net worth investor knowledge. The survey involved one-on-one telephone conversations with 1,000 high net worth individuals, 55% of whom had disposal wealth above US$1 million and 31% had in excess of US$10 million.

HNWI FINANCIAL ACUMEN – OR LACK OF IT

The results made for rather shocking reading. Hendry is fascinated in behavioral investing, and while his conclusion that high net worth individuals have inflated opinions of their

… only 37% would be willing to pay a fee for a professional to manage their wealth

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… professional wealth managers are fighting an almost impossible battle for investors’ mindshare

own financial acumen than the truth proves may not shock the reader, the extent of the gap in reality versus perception certainly will. A total of 60% answered wrongly when asked to given the correct explanation of a P/E ratio, while only 29% of those interviewed understood that if yields go up, bond prices go down. And now for the reality ... 74% of those interviewed rated their knowledge of finance to be “good” or “very good”. Perhaps, most worryingly for private banks, while the fact of the matter is that these individuals have undeserved inflated opinions of their own financial knowledge, only 37% would be willing to pay a fee for a professional to manage their wealth. One of the survey’s, and Hendry of M&G’s, conclusions was that professional wealth managers are fighting an almost impossible battle for investors’ mindshare and time with all aspects of digital media and/or electronic gadgetry/games, whether that’s YouTube or Twitter, Facebook or Candy Crush. Clearly, private banks have their work cut out when it comes to achieving their targets for DPM penetration rates. Of the eight private bank CEOs Crow’s Nest talked to in January with regards to DPM growth rates, all are looking to achieve a growth in absolute assets under management in DPM of between 50-90% over the next 12 months. Those are pretty aggressive figures by any stretch of the imagination, even given the low base rates for many of those talked to. While DPM is the Holy Grail for private banks in terms of annuity revenue, I would argue that Asian investor mentality coupled with coincident stock market bull runs has made it doubly tough in winning over clients to DPM from straight execution or advisory (effectively enhanced brokerage) accounts.

MEANWHILE, BACK IN TAIPEI

Back to my Taiwan experience. If you look at the performance of the TAIEX since 1989, with hindsight, selling DPM to a high net worth Taiwanese client should be a doddle – over 26 years the index has risen from 8,600 to 9,000 at the end of 2014. That’s a compound annual growth rate of 0.2%! Now look at the nadirs of between 4,200 and 4,900 in 1992 and 2001 during that period – a possible loss of over 50% and 43%, respectively, and I think the risk profile for this index alone would encourage even the most confident of investors that a more balanced DPM approach is not just prudent, but potentially sensible coronary by-pass avoidance planning. However, as Hendry’s presentation (and my above assumption) shows, these investors are impervious to such advice. Each time a giant crash occurs – the Asian financial crisis (1997-1998), the internet boom crash (2001-2002) and, more recently, the global financial crisis (2007-2008) – it has been succeeded by a whopping bull run that erases the horrific memories of the past. Consider that it is just three years since the demonstrations raged against the big

retail and private banks in Hong Kong and Singapore concerning accumulator and mini-bond mis-selling. Today, the Hang Seng Index is at 27,000 and the Straits Times at 3,400, and accumulator sales volumes are at their highest since 2007. So, how to convince Asian high net worth individuals to use DPM to manage money? Personally, I’d simply show Asian indices performance with a photomontage of the above-mentioned demonstrations. I would also relate a personal Crow’s Nest cautionary tale. I was teaching English to high school students in 1989 (as per the start of this article). A very wealthy Taiwanese stock trader, who had recently added an Aston Martin Vantage to his vast fast-car collection, hired me at the start of that year, and paid exorbitant tutor fees (yippee!), to teach his 14-year old son. A year later and I was unemployed (boo!). However, as I walked to Chengchi University for my next lesson I spotted my erstwhile employer. He was taking the 282 bus to Jingmei where he worked …

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No such thing as a free lunch

truggling with a global environment where quality yields are difficult to source, Asian HNWIs continue to favour multi-asset funds - some industry observers have called the spike in demand “overwhelming”. Varying between dividend stocks, selective bonds and a growing range of more innovative sources of income, this breed of solutions has allowed asset managers greater flexibility than ever before in making investment decisions. Despite the advantages, fund distributors, including private banks, are increasingly unenthusiastic about funds that pay dividends out of capital during market downswings. “When a product is headlined with an 8% payout, it is quite an easy sell to clients in the current environment,” says Chandrima Das, head of fund solutions at the Bank of Singapore. “If we were to on-board such a fund, we could easily write US$50100 million in business, but when we consider the positions in three to five years’ time, we believe clients’ portfolios could be hurt.” Private bank fund selectors like Das and her ilk, may prove to be more prudent than their counterparts at retail banks. The inability for cash or deposits to beat inflation rates in many Asian markets has led ma and pa money to chase products headlining returns of 8% or more. “In markets like onshore Taiwan, there is greater demand for these kinds of yield products, but you don’t find this in Hong Kong and Singapore,” explains an Asia-based gatekeeper from a European private bank. “This is a retail-flavoured product.” Apparent concerns about income funds that pay out of capital include pressure to sell when in unfavourable positions; taking tactical capital away; disruption and deviation from the mandate; and excessive risk-taking. Clients who insist on both high income and a tactical approach to market swings, may find they now have to do so on their own dime.

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“If we were to on-board [a fund headlined with an 8% payout], we could easily write US$50-100 million in business but when we consider the positions in three to five years’ time, we believe clients’ portfolios could be hurt.” – Chandrima Das, head of fund solutions, Bank of Singapore

Risk is a four-letter word

nusual as it may be for a fund house to temper market bullishness, Pioneer Investments believes many of Asia’s yield-hungry clients have not properly assessed the risk hiding in their fixed income portfolios. “Private banking clients in Asia continue to seek high levels of income but because of the current low-yield environment, many managers have had to shift allocations from higher quality credit into high-yielding but lower quality bonds,” says Reema Desai, vice president and client portfolio manager at Pioneer. These overreaching asset managers are underestimating risks that may well be systemic to the global economy, turning instead to the lower end of the bond spectrum to maintain income levels. “We believe that the current spreads are not reflecting some of the risks that will soon emerge, especially as the Fed begins to hike rates,” Desai cautions. Assessing risk accurately is further compounded by reducing intra-bond correlations. As a result, fixed-income instruments of similar credit rating could offer vastly different yields. Global high yields, US high yields, and global EM high yields, are all rated B1, but yield differentials between these instruments are stretched beyond 70 basis points.

Because a bond’s credit rating is a reflection of several factors - including who is buying the bond - a higher rating may be a result of a sovereign fund holding the bond rather than an accurate estimation of the risk associated with it. Precarious as it is, this house of cards could collapse if emerging markets experience a liquidity squeeze or other factors precipitate risk-repricing. “There will be a cost to recklessly chasing yields and by the time investors realise [this], there may be no liquidity,” says Desai who favours trading higher yields for lower risk. Pioneer’s income-oriented multi-asset strate“We believe that the current gy has, on average, an A1 credit rating but its more modest yields may not be the most allurspreads are not reflecting some of ing for the region’s more aggressive investors. the risks that will soon emerge, “Are 5% yields going to be enough for Asian investors? Maybe not, but our view is that especially as the Fed begins to multi-asset investing is about diversifying hike rates.” risk, rather than just diversifying passively across asset classes,” Desai says. The quanda– Reema Desai, vice president ry of choosing between risk and rewards is by and client portfolio manager, no means a new one but Asian fixed income investors may well need to take a more comPioneer Investments monsensical look at the relationship between the two.

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Who’s afraid of a rate hike? Asian Private Banker asks gatekeepers at some of the region’s top private banks how prepared Asian HNWIs are for a rate hike by the US Federal Reserve, predicted to be announced in the last quarter of this year

any private banks are preparing clients for a quarter percent rise in interest rates in the last quarter of this year and subsequent increases thereafter, should the Fed decide the time for monetary easing is now over. Multi-asset solutions, dividend equity funds, unconstrained bond funds and liquid alternatives have all had their role

to play in this preparatory process. Even so, with private banks in Singapore and Hong Kong alone managing an estimated US$1.5 trillion in assets, cushioning client portfolios from a rate hike is going to be an uphill task. Here then, is a round-up of how some of the region’s top private banks are preparing.

BANK OF SINGAPORE KEY FIGURES

Asian AUM US$51.0bn Asian RM Headcount 313

KEY INVESTMENT ACTIVITIES • Advising clients to make tactical investments in contingent convertibles (CoCos) • On-boarding Europe equity managers investing in export-oriented companies, quality dividend-paying companies • On-boarding US long-short and US M&A arbitrage hedge funds

A combination of region-specific monetary loosening and growing demand for income has led Bank of Singapore to onboard dividend equity funds in Europe and managers who invest in export-oriented companies that have up to 60% of revenue sourced abroad. The Singaporean private bank’s portfolios have also invested in contingent convertibles (CoCos), seeing a tactical opportunity to make gains. “Banks in the region are cleaning up balance sheets but [still] lag behind the US,” says Chandrima Das, head of fund solutions at the bank. Coupled with the issuance story and supply-demand mismatch, we believe it is a strong tactical idea.” Das has seen an unexpected increase in demand for multi-asset solutions. “As a private bank, we would have thought that [the region’s] clients would be keen on implementing asset allocation strategies on their own, but what has caught us by surprise is their willingness

Banks in the region are cleaning up balance sheets but lag behind the US

to delegate these activities to multi-asset managers,” Das says. “Clients have been on the higher tenured end of fixed income for a long while and many of these bonds will be adversely affected by the Fed rate hike; it is no longer a story about spread compression but more so about coupon clipping.” Das is encouraged by the growing diversity of income sources, including covered call writing, mortgage-backed securities and REITs. “We are seeing more unique buckets to source income, rather than just buying the highest end of high-yield bonds and dividend-paying equities,” she adds.

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BNP PARIBAS WEALTH MANAGEMENT KEY FIGURES

Asian AUM US$59.3bn Asian RM Headcount 236

KEY INVESTMENT ACTIVITIES • On-boarding a pure-Europe multi-asset fund • Advising clients to selectively buy equities in Europe and Asia • Recommending pure-Japan and Europe discretionary equity mandates to clients

“For clients who haven’t adjusted their portfolios, we recommend that they increase their equity allocations,” says Arnaud Tellier, the bank’s head of investment services, Asia. The bank says it’s clients were significant participants in the recent equity rallies on the Hong Kong and Shanghai stock exchanges, and a 50% increase in net new investments this year underscores the validity of this claim. “We are observing a number of clients in Asia who have opened pure-Japan and pure-Europe equity mandates without taking currency risks, either by borrowing or by hedging,” says Garth Bregman, Asia head of discretionary services. But Bregman says bond allocations will remain high. “Although we are overweight on equities, we are not encouraging clients to make huge wholesale shifts out of bonds,” he says. “We run sensitivity analysis on our bond portfolios to see how they react to different interest rate environments and we’ve observed that they are fairly robust.” The bank has also been allocating capital into hedge funds with low correlations to equity markets.

Although we are overweight on equities, we are not encouraging clients to make huge wholesale shifts out of bonds

Asian clients, especially from the UHNW segment, are becoming increasingly involved in philanthropic investments - the bank recently launched World Bank’s Green Growth Bond. The product allows investors to finance environmentally friendly initiatives and reinvest coupons in the Solactive-designed Ethical Europe Equity Index. Despite the optimism, the bank remains wary of possible tail risks. Even with little exposure to government bonds, the bank’s primary fear is inflation outpacing monetary tightening. “Although we expect the adjustment of monetary policies to be gentle, we remain cautious as we enter uncharted territory,” Tellier says.

CREDIT SUISSE KEY FIGURES

Asian AUM US$154.0bn Asian RM Headcount 490

KEY INVESTMENT ACTIVITIES • Monitoring emerging market bonds for tactical opportunities • Advising clients to invest in the Credit Suissemanufactured Global Dividend Solution • Rolling out an additional dividend solution, focused on Asian markets

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“Both existing clients and those who have had poor recent experience in trading are beginning to buy into the idea,” says Lena Teoh, head of asset allocation, Asia Pacific, explaining the 25% yearon-year increase in Credit Suisse’s discretionary assets under management. Teoh worries that a divergence in monetary policies could produce unexpected results, such as European equities benefitting from a Fed rate hike. The bank predicts further uncertainty ahead of correlations falling off within equities and, even within sectors. Thus it has been introducing clients to its best-performing alternative investments, with a focus on alpha generation. The bank launched an Asian version of the VIX index, CS SPEAR Dynamic Asia for notes investors, raising US$900 million in early-2014 and is looking to replicate that success with a call on defensive stocks via its Global Defensive Dividend Solution.

The bank has been advising clients on its top alternative investments, with a focus on alpha generation

“We developed this in 2013 using a very stringent rule-based methodology; we screen for the top 30 global high-yielding stocks to invest in,” Teoh explains. The bank is also rolling out Asian dividend-yielding solutions including Japan and Australia equities. Credit Suisse remains selective in bond markets, although it believes there are tactical opportunities, particularly in high yield. The bank advised clients to buy in 2014 following a heavy sell-off in US high yields - many of which were heavily dependent on oil and gas.

DEUTSCHE AWM KEY FIGURES

Asian AUM US$105.0bn Asian RM Headcount 200

KEY INVESTMENT ACTIVITIES • On-boarding Asia high-yield funds • Advise clients to buy equity neutral and global macro hedge fund strategies • Considering the introduction of a risk overlay feature to existing discretionary portfolios

Deutsche AWM is among a few private banks looking at emerging market credit. Its newly anointed head of Emerging Market equities, Sean Taylor, says,“Volatility will be especially higher for emerging market credit immediately after the Fed hike and we recommend buying on that.” The bank’s head of global funds solutions in Asia Pacific, Karen Tan, has on-boarded hard-currency Asia high-yield funds. The bank is also sourcing income from alternatives, such as multi-strategy funds with a very targeted risk-reward profile and private equity investments in European structured credit. Tan warns multi-asset managers that are selecting pure fixed-income solutions that specific yield targets are only likely to be satisfied by a few markets. “Timing the rotation is unlikely to be the immediate challenge for multi-asset managers. The biggest challenge will be correlation risk, especially in income-oriented strategies, because there’s a high probability that the fund is invested in a specific asset class,” says Tan.

Volatility will be especially higher for emerging market credit immediately after the Fed hike and we recommend buying on that

The bank’s Asia head of Discretionary Portfolio Management, Tuan Huynh, sees the transition as problematic, even without a rapid shift from bonds to equities. He wants to add an additional risk overlay management feature. “The idea is to customise portfolios and attempt to meet tolerable drawdown limits. Some clients are even asking for customisation to mitigate tail risks,” he says. Huynh believes that discretionary managers will be further tested even with a risk overlay, as passivity will cost portfolios dearly. “The buy-and-hold days are over”, he says, emphasising the need for dynamic asset allocation capabilities.

JULIUS BAER KEY FIGURES

Asian AUM US$78.7bn Asian RM Headcount 260

KEY INVESTMENT ACTIVITIES • Advising clients to buy reset bonds • Advising clients to diversify through REIT baskets, commodity funds and unconstrained bond funds • Advising clients to buy private equity in the energy sector

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Julius Baer emphasises market timing and the need to manage yield curve risk and liquidity risk. The bank is advising clients to invest in reset bonds - fixed income instruments with interest rates that adjust interest rates on specific dates to retain the bond’s original value. To further mitigate risk, the bank prefers managers that use derivatives to hedge downside risk and protect performance. Luigi Vignola, Julius Baer’s Asia head of markets and investment solutions group, says some clients are willing to sit on the sidelines and risk a cash drag until they find a better catch. “Many of our clients are very cash rich and they’ve watched trains go by again and again until they are confident with an opportunity,” Vignola says. “I believe we are going to see more of that.”

Some investors have been willing to give up liquidity in return for capital appreciation and good returns

However, one opportunity attracting interest, according to Vignola, is private equity invested in energy assets, which he describes as en vogue in private banking recently. “Some investors have been willing to give up liquidity in return for capital appreciation and good returns,” Vignola says. “But we recommend they invest with an open eye and screen available opportunities.”

UBS WEALTH MANAGEMENT KEY FIGURES

Asian AUM US$272.0bn Asian RM Headcount 1,186

KEY INVESTMENT ACTIVITIES • Managing portfolios’ FX risks, compared to domestic currencies • Diversifying portfolios with increased allocation in hedge funds

TO DELEGATE OR NOT, THAT IS THE QUESTION

Asia’s largest private bank by assets under management worries foreign exchange risk will eat into client returns as it believes “the path to a stronger dollar is unlikely to be a smooth one”. “FX volatility notwithstanding, UBS’ advice to investors would be to hedge their foreign investments back into their domestic currency,” says Patrick Grossholz, head, investment management, APAC. “This is a key part of our strategy when managing assets for clients invested in UBS discretionary mandates.” Grossholz is advising clients to maintain well-diversified portfolios and rebalance regularly, as the divergence in monetary policies will continue to make for a challenging investment environment over the short term. UBS is also optimistic about hedge funds, and, depending on risk appetites, its CIO has recommended a 14-18% allocation. Grossholz stresses the immediacy for wealth managers to balance both sides of

At Asian Private Banker’s recent Investment Advisory Summit in Hong Kong, a veteran private banker recalled the “good times” when concentrated - and often levered - bets paid off handsomely for many. “I still remember numerous cases when clients beat our house view by picking just five stocks,” he said

The path to a stronger dollar is unlikely to be a smooth one

the book – a risk he believes has not been given enough attention. “A potentially underestimated risk is the direct impact US monetary policy has on investors in Hong Kong and Singapore, where local interest rates are closely linked to US rates,” he says, taking note of possible risks in excessive leveraging. Grossholz says wealth managers often focus on the asset side of a client’s of balance sheet. “A complete view of your holistic investment policy will also need to include liabilities as well as assets when determining your investment strategy, and when assessing the risks you personally bear in the current environment.”

with a grin. Initiated into capital markets during these years of “easy money”, the region’s confident, self-made millionaires are reluctant to delegate investment decisions. Indeed, many Asian HNWIs are getting a taste for discretionary portfolio management for the first time. However, if investment performance pans out favourably, it will not be the last.

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INVESTMENT ADVISORY SUMMIT

View from the top Some of Asia’s most powerful bankers swap ideas and share knowledge

he CEO panel discussions at Asian Private Banker’s Investment Advisory Summits, held in Hong Kong and Singapore last month, are the summit’s most eagerly anticipated events. And it did not disappoint as it became a candid and spirited discussion with some of the most powerful leaders in the private banking industry. In Hong Kong the participants were: Claude Haberer (CH), CEO, Asia Pacific, Pictet Wealth Management, Ian Pollock (IP), head of private banking, North Asia, ABN AMRO Private Bank, Jean-Claude Humair (JCH), regional market manager, Hong Kong, UBS Wealth Management and Vincent Chiu (VC), head of Asia institutional equity distribution and private wealth management, Morgan Stanley. Shruti Advani (SA), editor of Asian Private Banker, moderated the roundtable. For a wrap-up of the Singapore discussion, please visit www.asianprivatebanker.com. SA: Where will the investment advisor (IA) fit in the value chain of private banking as it evolves, collectively and individually at your institutions? JCH: We are at a cross roads in the industry. As your theme suggests, we need to differentiate to thrive in this competitive environment. Clients are looking at portfolio performance and demanding more timely and relevant advice. And regulators around the world, particularly in Asia, are increasingly focusing on investment suitability and client protection. At the same time, over the past years, there has been a significant contraction on spreads. The wealth management industry can no longer rely solely on client transactions. Investment advice and how that advice is delivered will be increasingly important in differentiating wealth managers and, ultimately, in determining client satisfaction. VC: Investment advisors play a critical role in the value chain of wealth management services. The relationship managers (RMs) are the door openers, relationship builders and the trusted advisors. However, clients need expert investment advice to suit their needs in today’s volatile market environment, and that’s where IAs play their part. CH: We are at the stage where the advisor and the RM are both senior and need to work together. It is important to remember which RM model is in use when looking at where the investment advisor fits. The senior RMs are knowledgeable and have built a strong set of expertise in investments over the years. The hunter RM model is more on the road and is closer to clients. They will need an IA who can be closer to the client. SA: If the RM and IA have a synergetic relationship and both are equally important, how does the private bank differentiate its compensation for the two? Is there a significant gap between the way we evaluate and compensate them? 20 asian private banker

IP: I think inevitably, as the advisors become more involved in building and maintaining client relationships, the gap in compensation between the RM and the IAs will reduce. CH: Globally, yes there should be an equal share between the RM and the advisor. However it depends on the way the bank is structured. We all know that where RMs are judged on new money, for IAs it’s mainly how much additional revenue they can generate. JCH: RMs and IAs are remunerated differently. But I believe the gap will gradually narrow. It is important to remember that RMs and IAs have different responsibilities. The RM’s primary responsibility is to bring in new clients so, typically, their performance is dependent on their network, how much net new money they bring in, the extent to which they deepen the share of wallet of existing clients and client satisfaction. Their responsibility is more holistic, often, as well as know-your-client and anti-money laundering, they are required to deal with a range of needs beyond investment, including wealth and succession planning. The IA, on the other hand, is more focused on delivering tailor-made investment solutions and advice to the client. In light of the sharpened focus on performance, their roles can be expected to become increasingly important. VC: In any business, compensation depends on a complex set of factors but the most critical factor is how much value added an individual has created. As I am trained as an investment professional, I’d like to use the beta/alpha analogy. If the industry is doing well as a whole, everyone benefits from the beta factor. Alpha is about how the IA can contribute to the revenue generation, AUM expansion and relationship building. This involves working closely with the RMs and other product specialists, winning their trust and fostering partnerships with them, and delivering value to clients. SA: If not advice, what is your differentiator? IP: It’s in the quality of packaging, providing solutions that sometimes go beyond the in-house capabilities of the bank when meeting clients’ needs for investment opportunities and other services. JCH: Sustainable client performance is how UBS wants to differentiate itself. If you look at client performance for the past three years, only 10% of our clients globally have outperformed the house view (UBS reference portfolios) based on their respective investment profiles. This means that 90% of our clients have lower return per unit of risk compared to UBS reference portfolios. CH: Pictet only focuses on asset and wealth management without having an investment bank. We believe that having an investment bank

INVESTMENT ADVISORY SUMMIT

Claude Haberer, Pictet

Ian Pollock, ABN AMRO

Jean-Claude Humair, UBS

Vincent Chiu, Morgan Stanley

and a private bank under one roof creates a conflict of interest. Our differentiation is the independence of advice that we offer from being a specialised private bank.

SA: One way banks can show their quality of advice is to assess their ratio between advisory and front office. Ideally, where would you like to see the ratio between the RM and the advisor sit at?

VC: In Asia, our wealth management services are an integrated part of the institutional business of the firm. Our clients in the region benefit from top quality investment advice through our institutional platform locally and access to investment products and capital markets through both our institutional and wealth management platforms globally.

IP: With three booking centres, 130 RMs and 75 product specialists, we have a ratio of almost two bankers to one advisor/product specialist.

SA: With 90% of clients underperforming the house view (according to UBS), does this mean clients are more willing to pay for advice? If so, are private banks willing to compensate the advisory community accordingly? JCH: The attitude towards fees in Asia has changed recently. Following the huge success in Switzerland, we launched a new advisory solution platform, UBS Advice, a year ago in Asia. The client pays a flat fee for advice instead of transaction fees. So yes, Asian clients are increasingly willing to pay for advice especially relating to global markets that are less familiar to them and which have outperformed Asian markets for a number of years.

JCH: With a wide range of client segments served by in excess of 1,000 RMs in Asia, in general, we are not in a position to put an advisor with each RM. For UBS, the solution has been achieved through a combination of digitalisation and the optimal leverage on investment advisors and product specialists. CH: In Asia, we have a 1:4 ratio, but this is misleading as we have a number of specialists in Switzerland and they are in direct contact with clients in Asia for a number of specialities. We would love to increase this ratio as the RMs work well with advisors and volumes increase. VC: I think the ratio between IAs and RMs will trend higher. The market is volatile. Asia-based clients are becoming more and more sophisticated and their needs more global and multi-asset focused, hence their requirement for expert advice.

CH: I totally agree that the flat fee advisory model, for instance, is one way to avoid the transaction trap. One of the key issues going forward when looking at advising clients and getting paid for it is portfolio allocation. This blurs the line between discretionary and advisory and leads to both teams working together.

Question from the floor: Are you seeing DPM growing in Asia? What percentage of AUM is in DPM against advisory?

VC: Generally speaking, I do believe that clients are willing to pay for advice if we can demonstrate we add value and outperform the market. On the other hand, it is also a fact that commissions on the flow business continue to be on a downward trend. Electronic trading, as we have witnessed in the institutional business, will accelerate that trend. The flat fee model is probably one which will benefit both clients and the industry.

CH: We have 20% discretionary mandates in AUM in Asia. At a group level, we are at 40%. With discretionary mandates, the issue should be focused on what kind of allocation or strategy the client is asking for.

IP: The good news for the investment advisory community in Hong Kong is that the regulators are helping to make their jobs even more important. The best way for banks to reflect their duty of care to clients is to adopt the portfolio approach to advisory accounts. This requires a proper framework of advisory agreements and model portfolios to be in place to define the different levels of advice that will meet clientsâ&#x20AC;&#x2122; requirements.

VC: We see DPM as our highest growth area given market volatility and continued strong growth of wealth in the region.

JCH: In UBS, we have about 15% penetration rate in DPM globally. In Asia it is a bit lower. However in 2014, mandate sales in Asia have grown by 40% YoY. This has been underpinned by increasing demand for DPM and advisory flat fee products. IP: We are also seeing an increase in DPM as a proportion of AUM and revenue by 50% from a low base. I see it as an increasingly important part of the move to have a higher proportion of revenues coming from managed products, which is either discretionary portfolio management or funds.

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INVESTMENT ADVISORY SUMMIT

It’s a matter of trust Hong Kong and Singapore regulators are looking beyond company controls to transform corporate culture at private banks

ransforming corporate culture, ratcheting up expectations of quick and accurate reporting, and an emphasis on individual accountability, are key themes emerging from regional regulators, according to international law firm Clifford Chance. The growth of the mass affluent and high net worth markets in Asia in the past decade has been remarkable, and Japan is no exception. At the same time, there is an increasing number of affluent and high net worth Japanese living in Hong Kong, Singapore and other major Asian cities.

There are plenty of ‘sticks’ to deter unethical behaviour but creating ‘carrots’ to reward ethical behaviour is more difficult

Public trust of the banking industry has yet to recover from the global financial crisis, says Matthew Newick, partner, head of litigation & dispute resolution, Asia Pacific, at Clifford Chance. “Scandals such as facilitation of tax evasion, interest rates and FX benchmark-setting, and avoidance of economic sanctions have all dealt blows to the public’s perception of the financial industry,” he told the Asian Private Banker Investment Advisory Summit. Newick cited a poll in which 68% of respondents disagreed with the idea that those who work on Wall Street are as honest as those who work on Main Street. Another poll revealed that 71% of bankers thought that they might need “ethical flexibility” in order to advance professionally at a financial institution. To combat this lack of trust, Newick continues, regulators are looking beyond company controls to see if the internal culture supported these controls. “It is the culture [in a firm] which creates conduct risk,” says Newick. “This culture is led by senior members of the firm, however the middle-ranking, day to day decision-makers are equally important to this culture. There Nish Shetty are plenty of ‘sticks’ to deter un-

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ethical behaviour – dismissing people, clawing back bonuses, reducing compensation - but creating ‘carrots’, to reward ethical behaviour, is more difficult when behaving ethically should be a baseline requirement.” Nish Shetty, at partner at Clifford Chance Asia, based in Singapore, agreed. “There are strong similarities with the situation in Singapore. Regulators have been Matthew Newick targeting culture, expectations of reporting, and accountability,” he says. “The primary casualty of the GFC has been trust. Trust has been lost between regulators and the industry, amongst industry members, and between consumers and regulators. How do we get this trust back?” Shetty continued: “We are seeing a shift, however, in firms in the region. Attitudes are changing towards what you should be doing rather than what you can be doing.” The two panellists were asked whether there was any end game in sight within the framework of the constantly moving goalposts and updated rules coming from the regulators. “The key is the change in culture – there is no end game,” says Newick. “That having been said, the regulators will continue to push the envelope, and they can be challenged; however, the key is to pick those battles, and that will be a key question for banks in future.” Shetty continued: “Many times the investigation has to be retrospective. It cannot any longer be a case of ‘what can I get away with legally?’.”

Scandals ... have all dealt blows to the public’s perception of the financial industry

Clearly, the onus is now on senior management to effect change in the culture at their institutions. Rapid reporting, clear lines of responsibility and reporting, and creating means of rewarding staff for ethical behaviour as well as maintaining a strong stance on rooting out unethical behaviour are all key areas to focus on for Asia’s private banking heads.

CLIENT INVESTING

STRUCTURED PRODUCT PLAY OF THE WEEK PRINCIPAL PROTECTED SECURITIES

CHINESE TECH STOCK LINKED ELN

Clients having made 30% or more in the recent rally are showing interest in principal protected securities as a means of locking in those gains. We have seen a lot of interest in 90-95% downside principal protected structures with unlimited upside performance participation. Depending on the underlying, the tenor range is from three months to 12 months. Before the [Hong Kong Stock Exchange] rally, clients were interested in fixed coupon notes, but are now looking at capital gains - a reflection of an expanded risk appetite across the board.

Clients who bought the note were interested in “high” yield equity-linked notes with an exit strategy that is less leveraged than an accumulator, but has a similar risk and reward profile. The underlying equity is in Chinese technology stocks. The note pays 20% annualised coupon. How it works is that if the underlying rises by 5%, the note is redeemed early. If the underlying falls by 5% at maturity, the principal converts to stock at loss.

Rocky Cheung Head of investment advisory, wealth management, Hong Kong DBS Private Bank

Eugene Lee Head of financial products advisory, APAC Vontobel Investment Banking

WHAT’S SELLING AT PRIVATE BANKS STRONG DOLLAR STRATEGIES

ELNs IN HONG KONG H-SHARES

The US Federal Reserve last increased interest rates nine years ago. Since then, “unconventional monetary policies” have become “conventional” and the US economy has added net five million jobs, traversing the trough in employment. As such, with wage pressures now building, the advent of a rate hike this year points to the continuation of the “strong dollar” environment, whereby the euro and yen have room to stay weak, owing to the yield gap. The April downward correction in the dollar represents an opportune moment to build positions across asset classes that capitalise on resumption in the dollar’s previous appreciating trend. The outlier in this theme is the Chinese yuan, where we expect a gentle appreciation, as authorities will be likely to avoid currency devaluation as a measure to support growth.

We are still seeing clients opt for equity-linked structured products such as accumulators, ELNs and accrual notes. Flow products have been in demand in general given valuation in this part of the world has been favourable vis-à-vis the US. Underlying equity stocks are generally in H-Shares and Hong Kong blue chips.

Stefan Hofer Chief investment strategist, Asia BNP Paribas Wealth Management

Alfred Mak Head of investment products and advisory department Bank of East Asia

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TECHNOLOGY

Heavy hiring for private banking tech teams So much has been written, in this publication and in others, about the increasing use of technology at private banks to better service clients. These endeavours and the resultant boom in hiring budgets have put a never-before premium on technological talent

are more valuable than others. Wright claims that private his and other trends are apparent in the data collected banks are hiring in three areas: digital, data and security, and for Asian Private Banker’s Technology Headcount CRM and analytics. “There is a lot of competition for candiTable 2014, the first of its kind. The survey defines dates with technical skills and industry experience,” she says. technology teams as software developers, programmers, UX specialists dedicated to the private bank. They do not include IT Technology Headcount Table 2014 teams.

SINGAPORE HEADCOUNT AND SALARIES

Private banks in Singapore have hired, and continue to hire, in order to upgrade their technology platforms. “Yes, technology hiring in Singapore’s private banking sector has been one of the busiest areas this year, with a consistent demand for skilled professionals,” says Christine Wright, managing director of hiring professional firm, Hays in Asia. As a result, salaries in Singapore have been on an upward trajectory. The Hays Asia Salary Guide reveals that 59% of employers increased their salaries in their last review by 3% to 6%. 8% of employers gave staff an increase between 6% and 10% and a further 5% of employers increased salaries by more than 10%. “Finance technology salaries in private banking are roughly in line with these general trends,” Wright explains.

HIRING TRENDS

Not all fin-tech hires are homogenous and within the financial technology space, certain skill sets

Private bank

2014

2013

% change

UBS Wealth Management

+25%

Citi Private Bank

Julius Baer

+14%

BNP Paribas Wealth Management

+33%

Morgan Stanley Private Wealth Management

HSBC Private Bank

+50%

DBS Private Bank

+100%

Standard Chartered Private Bank

+33%

Deutsche Asset & Wealth Management

+60%

EFG

+7%

Goldman Sachs

+20%

J.P. Morgan Private Bank

+11%

Barclays

+100%

LGT

Pictet Wealth Management

+20%

357

291

+23%

Industry Total

Note: Technology headcount is defined as full-time staff that are developers, programmers, and UX specialists at the private bank. It does not include IT support teams. All figures are estimates.

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TECHNOLOGY

There is a lot of competition for candidates with technical skills and industry experience

As in every other area across the value chain, regulation has been a factor driving hiring in financial technology, Wright explains. “Cyber security and data protection are key areas for all banks due to increasing regulation and public concerns about how customers’ personal data is used,” she says, adding that for private banks in particular, there is more scrutiny. “Private banks have been hiring data management and security professionals to ensure [the robustness of] their systems and [the protection of their] customers.” In addition, the focus on “big data” and the belief it will lead to better investment decision making is creating a need for professionals with a sound background in analytics. “Private banking customers are changing and are busier and more technologically savvy than ever. Private banks are utilising big data and analytics to satisfy this appetite and to provide tailored recommendations to individual clients,” says Wright.

SHALLOW TALENT POOL

With bigger budgets for financial technology headcount than ever before, private banks are poised for the much-awaited digital transformation. However recruiting specialists remains a challenge, and finding staff skilled enough to handle the surge in external vendor operations and new systems, is particularly so. Wright says that banks are looking abroad as a solution. “As many private banks have implemented Avaloq, there is a shortage of candidates who can maintain and enhance these systems and private banks are increasingly looking overseas or to consulting partners for a supply of talent,” she says.

Private banking customers are changing and are busier and more technologically savvy than ever

What keeps CEOs awake at night?

Thomas Süssli, CEO, head of financial products, Vontobel Investment Banking

hat keeps my team and me awake at night is the decreasing margins and increasing efforts for producing structured products, which might eventually force some private banks to stop offering that popular product to their clients. Recently a friend of mine, he’s an executive at a private bank in Singapore, revealed his concerns about our industry to me. I think many other bankers will share his view. The relationship managers (RMs) in his bank spend 80% of their time on internal tasks, such as reporting, administration and price discovery for structured products. They are left with very little time for providing proactive advice to clients and have to react to their requests. This causes the client not to see any added value from the bank’s services and hence to become overly focused on pricing; a vicious circle. I’m a firm believer in the original private banking model in which the banker, also called a “Banquier”, is a trusted partner who knows everything about his client’s financial situation and provides tailored advice to protect and develop his wealth. Our vision at Vontobel is to empower the RM by refocusing their time on advising the client and become the “Banquier” again. For structured products we support the RM in developing custom made, tailored ideas, find the best price for his clients in an efficient manner and automate

post-trade to free up his resources to allow him to have time to talk to his clients again. We see this paradigm shift taking off right now and being part of it keeps us busy and often awake at night.

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PE O PL E MO V ES

MOVERS & SHAKERS

Movers & Shakers is a monthly compilation of the private banking industryâ&#x20AC;&#x2122;s key talent moves. For the full version of Movers & Shakers, login or register at:

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