Issue 89 July 2015 Lite

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ASIAN PRIVATE BANKER JULY 2015 ISSUE 89

Independent, Authoritative, Indispensable

THE ALTERNATIVE ROUTE TO ALTERNATIVES X-RAYED HEDGE FUNDS – THE NEW STANDARD?

THE SCOOP

LIGHTS, CAMERA, ACTION – THEATRICS IN THE WORLD OF PRIVATE BANKING

OPEN ARCHITECTURE...IN THEORY FUNDS CONTINUE TO BE CONCENTRATED TOWARDS IN-HOUSE PRODUCTS

THE BACK OFFICE

TO CONSOLIDATE OR OUTSOURCE, THAT IS THE QUESTION

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THE POWER TO PERFORM IN ANY MARKE T

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THE POWER TO PERFORM IN ANY MARKET

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JULY 2015

CONTENTS 4

Letter from the editor

5

The Scoop: Lights, cameras, action - theatrics in the world of private banking

6

Crow’s Nest: Singapore leads the private bank numbers game in Asia

9

Credit Suisse grew private banking AUMs in Japan by 60% per year

10

Grandfathering private banking certificates: What’s the point?

11

Hedge funds on hold

14

The alternative route to alternatives

17

Open architecture...in theory

18

To consolidate or outsource, that is the question

20

DBS Private Bank to go live with structured products platform in 2016

21

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

22

Movers & shakers

23

BOC Hong Kong makes plans for Southeast Asia expansion

PUBLISHER Andrew Shale

MANAGING DIRECTOR Paris Shepherd

DESIGN Simon Kay

EDITOR Shruti Advani

OPERATIONS Benjamin Yang, Sam Chan

PRODUCTION DG3

EDITORIAL Richard Otsuki, Priyanka Boghani, Fergus Herries, Daisy Wu

BUSINESS DEVELOPMENT Madhuri Chatterjee, Sonia Lam, Jennifer Lam, Jason Ng

ISSN NO. 2076-5320

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 01000010 01111001 01100101 00100000 01001010 01100101 01101110 01101110 01101001 01100110 01100101 01110010 00100001

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LETTER FROM THE EDITOR

Midsummer night’s dream

O

ne swallow does not a summer make, Aristotle said and he may as well have been addressing a roomful of Asian private banking CEOs. Heartened by first quarter volumes and revenue, many in our industry are heading into the second half of this year optimistic. The Scoop with Shruti (page 5) addresses some of the lead indicators that the region’s private banks are feeling bullish. But as one private banking CEO-friend put it, “The good news from 2014 was that we saw tremendous AUM growth. The bad news from 2014 was that we saw tremendous AUM growth.” Assuming no rest for the accomplishments of yesteryear, this CEO is sceptical about replicating double-digit percentage growth from this inflated base in the year to come.

This month’s lead story takes a similarly balanced view of alternative investments. Are they cult products whose time has come?

Or yet another example of an over-hyped investment idea destined to underwhelm? Find out on page 11.

For all those who have submitted feedback for the previous issue, I’d like to take this opportunity to extend my gratitude. For those of you who are picking up a copy of Asian Private Banker for the first time, I welcome you to join in on the conversation. Your feedback and comments are tremendously valuable and helps us to create the very magazine that you hold in your hands. Join the dialogue by emailing editor@asianprivatebanker.com. I look forward to hearing from you...

Until we meet again,

Shruti Advani Editor Asian Private Banker

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EDITORIAL

Lights, camera, action – theatrics in the world of private banking

I

made a promise last month to look beyond the unorthodox world of mergers and acquisitions amongst private banks and I intend to stick by it. But...the path to perdition is paved with good intentions. So here goes.

Julius Baer, a bank that until quite recently was considered a “boutique” wealth manager, has proved it can be more aggressive than its larger peers and is on the hunt again. This time though, the “deal” may take a different shape and form to its outright purchase of Merrill Lynch’s international private banking business.

CEO Boris Collardi and his merry band of dealmakers had set their sights on another Zurich-headquartered contemporary, smaller in size but not by so much that it would be insignificant.

Emboldened by the target’s shareholders wishing for a hiving-off of the private banking business from the asset management core, Julius Baer bid. The smaller bank bit. And a press release was prepared. Happy ending? Not quite.

Valuations turned contentious (as they are wont to do) and tempers flared as the numbers were revised. Walking away from the deal, senior executives vowed to “revisit it in 18 months”. Why do they believe valuations will be lower by then? Perhaps the answer lies with the worries of the target’s young but extremely capable CEO in Asia, as he/she must spend more than a few sleepless nights trying to retain bankers (and assets) that are being wooed away.

Elsewhere, things have taken a dramatic turn at RBS’ private bank in India. Another young but extremely capable CEO has mounted a management buyout for what I believe is the first time in Asia’s history of private banking. A financial partner has been elicited, and although I do not think RBS will raise any money from this “sale”, having someone to bankroll operations through the initial phase, is likely to comfort clients and bankers alike.

Meanwhile, Coutts bankers in Hong Kong and Singapore continue to acclimatise to life at UBP, with Eric Morin in the driver’s seat. A number of these bankers received their first “financial incentive”

from the bank on the 18th of June and, last I checked, none had used the emergency exit. Both Morin and Guy de Picciotto, CEO of the bank and scion of the family that owns it, have been in Asia several times over the last few months - a dramatic departure from the infrequent visits they made prior to the acquisition. Now UBP faces the not-so-insignificant task of getting a banking license in Hong Kong from the Monetary Authority, if it so desires.

Of more immediate concern for most bankers in Hong Kong is the HKMA investigation into alleged risk mismatching at one private bank. At last count, 30 relationship managers at the bank in question had been stopped from selling “anything but cash

..Julius Baer bid. The smaller bank bit.

And a press release was prepared.

Happy ending? Not quite.

equities,” said one of the group. No less than one of the “big four” accountancy firms have been called in to dredge through hours of conversations between RMs and clients in order to establish whether due process had been followed or not. Although there have been no casualties, as yet, there has been the usual shuffle of market heads to ensure that those on whose watch, any alleged mismatching may have taken place, are safely in charge of other teams now.

Even as we prepare for the annual exodus West in August, a dizzying amount of hiring and firing, with the occasional dose of private banking thrown in, continues. So do check in with me next month.

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EDITORIAL

Singapore leads the private bank numbers game in Asia Crow’s Nest was fascinated by a BCG report (Perspectives Global Wealth 2015: Winning the Growth Game) regarding offshore deposits that suggests Singapore leads Hong Kong as a destination for private banks. But, what other factors should CEOs observe on deciding their split of resources between the Fragrant Harbour and the Lion City?

A

recent BCG report suggests that offshore wealth booked in Singapore is twice the amount booked in Hong Kong at US$1 trillion versus US$500 billion, respectively. The encouraging news for private banks in the region is that those figures are set to more than double over the next 10 years to US$2.4 trillion for Singapore and US$1.2 trillion for Hong Kong. The question oft asked of Crow’s Nest by private bank CEOs in each jurisdiction is: where should resources be concentrated?

REMUNERATION

The big economic factors for both locations are clearly wages and rent. Let’s first look at wages. Speaking to various headhunters, Crow’s Nest has found that an average junior RM is paid a basic salary in Hong Kong of between US$6,500 to US$13,000 (an average of US$9,750), while their Singaporean counterparts earn between US$5,800 to US$11,700 (an average of US$8,750), a difference of roughly 10% in favour of Singapore in terms of cost savings. However, ac-

cording to a seasoned headhunter, and supported by government data, wage inflation in Singapore is outstripping Hong Kong.

“Hong Kong and Singapore bankers are well paid, however what I’ve seen since the crisis is that they are less likely to move banks for pure remuneration purposes,” says the headhunter. “I think the industry has matured a little faster as bankers realise that it’s the long term that counts and clients are less likely to move assets with them than they were 10 years

NOMINAL WAGE GROWTH & INFLATION (HONG KONG VS. SINGAPORE) 8.0% 6.0% 4.0% 2.0% 0.0% 2004

2005

HK Wages

2006

2007

2008

2009

2010

2011

2012

2013

2014

SG Wages

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EDITORIAL

ago. A good banker asks firstly about product and services when considering a move rather than: ‘How much will I get?’”

Inflationary data supports the fact that human resource costs continue to

plague private bank CEOs. According to government figures while actual inflation has risen at an average rate of 2.5% in Singapore over the last 10 years, wage inflation has risen at an average rate of 3.8%,

and, for bankers, headhunters inform me that base salaries since the crisis have increased at a considerable 10% per year.

In Hong Kong the average inflation rate over the last 10 years is 2.7% while wage

OFFSHORE WEALTH DESTINATION, 2014 TOTAL BOOKED IN CENTRE (US$)

HONG KONG

SINGAPORE

SWITZERLAND

2.4 tn

1.8 tn

4.9 tn

0.50 tn

1.04 tn

2.45 tn

% OF WEALTH BOOKED OFFSHORE TOTAL WEALTH BOOKED OFFSHORE

OFFSHORE WEALTH GROWTH PROJECTIONS (US$ TRILLIONS) 4

3.8

3.0

3

2.4

2.4

2

2.0 1.7

1.6

1

1.0 0.4

0

0.2

2004

0.7 0.3

2009

1.2 0.8

0.5

2014

2019

2024

Source: BCG Global Wealth Market-Sizing Database, 2015

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EDITORIAL

COST PER SQUARE FOOT PER MONTH

US$8.0 Sources: Various real estate agents

inflation is 3.1%. Headhunters similarly informed Crow’s Nest that bankers’ base salaries have risen at an average rate of slightly below 10% per annum.

(Singapore: 1 | Hong Kong: 0)

OFFICE SPACE

Until recently, rents in Hong Kong were double those in Singapore and, while the gap has closed, the Fragrant Harbour continues to charge higher rents. Core central rents in the Lion City jumped a gigantic 45.9% in 2007 just before the global financial crisis and 38.1% again in 2010. While Hong Kong has been consistently more expensive, with rents at Grade A offices rising an average 11.1% year-on-year (compared to 10.2% for Singapore), it now offers comparable alternatives. While office space at IFC2 in Hong Kong remains astronomical at an average of US$20/sq ft per month, ICC – which houses amongst others – Morgan Stanley, Deutsche Bank and Credit Suisse, is half that cost at US$10/ sq ft per month. By comparison, One Raffles Quay is roughly US$11/sq ft per

month while Asia Square is US$11.5/sq ft per month.

Where the rental gap remains significant is the cost of back office space.

Quarry Bay rents, where many banks house their back offices in Hong Kong, are US$8/sq ft per month while Changi Business Park in Singapore rent rates are less than half that at US$3.8/sq ft per month.

(Singapore: 2 | Hong Kong: 0)

SCHOOL FEES

If the bank is also going to subsidise its employees’ private education fees, it may be unpleasant reading to find that both jurisdictions are equally expensive.

Hong Kong International School fees are between US$2,200 to US$2,400 per month while Singapore’s Tanglin Trust School fees range between US$1,900 to US$2,500 per month.

(Singapore: 3 | Hong Kong: 1)

TECHNOLOGY

Lastly, Singapore has also forged ahead with its technology innovation. At the

moment, Citibank, DBS Bank, Credit Suisse and most recently UBS have innovation labs where internal technology developers work with external vendors on the banks’ digital strategies, based in the city. As a result of many private banks heading their Asia Pacific technology operations from Singapore, the financial technology space (fintech) has also grown rapidly. The city’s fintechs are also receiving a boost from MAS in terms of funding, pushing it ahead of Hong Kong.

(Singapore: 4 | Hong Kong: 1) Clearly, in terms of offshore wealth growth, Singapore has taken the lead.

While regulatory influences will be discussed in a future Crow’s Nest, anecdotal evidence suggests that there is a shift of business for private banks towards Singapore. Of the 25 plus private bank CEOs I’ve met since the start of the year, more than half have expressed a desire to increase booking business in the Lion City.

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INDUSTRY

Credit Suisse grew private banking AUMs in Japan by 60% per year Assets under management (AUMs) at Credit Suisse’s onshore private banking unit in Japan grew 60% per year since its launch in 2009.

A Hans-Ulrich Meister head of private banking & wealth management and CEO region Switzerland Credit Suisse

ccording to the Swiss wealth manager, relationship manager count grew eight-fold during the same period and with coverage that spans Osaka and Nagoya. The bank now claims to capture more than 80% of the total wealth pool in a nation of 2.3 million high net worth individuals (HNWIs).

The stellar growth coincides with a recently held networking event, Private Innovation Circle, held for the first time in Japan.

The event featured eight companies to showcase innovations in satellite technology, robotics, cybersecurity, big data, logistics, and recycling and renewables. The event was attended by 50 select private banking clients globally, as well as opinion leaders and influential individuals.

“The Private Innovation Circle is an expression of our common belief that innovation is a great lever to transform the world, that economic value can be unlocked anywhere and that effective networks can be enabled across countries, regions and corporations,” Hans-Ulrich Meister, head of private banking & wealth management and CEO region Switzerland commented.

“Through open, insightful dialogue, guests have the opportunity to exchange ideas with the entrepreneurs, and gain first-hand, first-class insights into the power of innovation, as well as new inspirations.”

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TRAINING

Grandfathering private banking certificates: What’s the point?

Is the process a positive step to further Hong Kong’s competitiveness as a private banking hub or another sign of over-regulation? Asian Private Banker investigates.

U

nder the PWMA’s supervision, qualified practitioners have the option of grandfathering their private banking certification through Hong Kong’s Private Wealth Management Association (PWMA) examination and competency benchmarks. Private bankers can fast-track or grandfather the process with a minimum of 12 Continuous Professional Training (CPT) points. Every licensed individual has to fulfill at least five hours of CPT for each type of regulated activity. The new process demands the completion of an exam.

Sceptics say the examination is another sign of over-regulation in the industry. “The exam is a good start and it is very relevant for relationship managers who need to constantly update themselves with the latest regulations however it feels like a military drill,” one senior banker confessed.

However with the industry evolving at a rapid pace, some believe that it is a necessary step. “The grandfathering process is a positive step. In fact, relationship managers should be tested every day given the way the industry is moving,” a top management professional at a private bank said. While another industry

source recognises the added incentive the grandfathering process adds, he believes that both module 1 and module 2 should be taken by everyone regardless of the number of years of experience that they hold.

The PWMA are beginning to see an increase in the number of practitioners opting to go through the process. “Over the past few months, PWMA has seen an increase number of qualified practitioners being certified as CPWP and by end of 2015, PWMA expects there will be around 2,000 practitioners being certified in Hong Kong,” says Joanne Leung, managing director at PWMA. In June 2014, the PWMA introduced a common competency benchmark for private bankers in Hong Kong to help recognise and certify experienced practitioners with the Certified Private Wealth Professional (CPWP) qualification. Under the framework, practitioners are eligible for grandfathering on a one-off basis if they have at least ten years of relevant work experience on or before 31 December 2014. The work experience should include at least five years of private wealth management client-facing experience. Those that are grandfathered can skip training programmes and exams on technical, industry and product knowledge.

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HEDGE FUND SPECIAL

Hedge funds on hold The one-way rise in hedge fund sales from 2012 to 2014 is losing momentum slowly but definitively in the first half of 2015. Asian Private Banker asks gatekeepers at private banks: what’s holding the industry back?

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HEDGE FUND SPECIAL

I

ronically, a tear-away US$6.5 trillion market rally in Chinese equities over the last 12 months has made Asian investors question what additional benefits investing through a fund may provide.

“Since 2014, hedge fund activity levels have been static however people have been more worried about where markets are heading given the China equity market and the foreign exchange trading,” says Roger Bacon, Citi Private Bank’s head of managed investments platform. Bacon says clients have not changed their allocation – hedge funds continue to make up 10% of overall portfolios. In a 2014 interview with Asian Private Banker, Bacon had said hedge fund allocations were between 5% to 10%, double what they were in 2012.

Stagnant allocations, are in part due to the more transactional nature of Asian clients, negating the long term commitment hedge funds typically require.“Many clients who are buying and selling hedge funds are trading them more actively than we prefer. We ask them to be more patient and allocate for at least one to three years. But clients in Asia have a short-term mindset and are chopping and changing allocations within one year, particularly when they see a series of drawdowns,” explains Bacon.

Surmounting such systemic resistance remains a challenge for the industry.

At the moment, clients are still grappling with ways to diversify their hedge fund-related risks, Bacon says. “Another challenge is making clients understand that they should be allocated to not just one hedge fund but a small basket of funds to diversify their risk,” he says. Ideally, clients should be holding between four and ten managers.

“In the second half of 2014, sales were eight times what it was in 2012. The sales run-rate is slightly below 2014 at the moment,” Bacon comments. He adds that hedge fund sales are still a small slice of the private banking business. “In the context of broader sales in the private bank, hedge funds have been a smaller percentage – considerably less than 10% of total funds – compared to what it was last year.”

Clients have not changed their allocation – hedge funds continue to make up 10% of overall portfolios

However, some banks claim to have had better luck than others.

Jean-Paul Churchouse, head of the alternative capital markets business in Asia at Goldman Sachs Private Wealth Management is seeing an uptake in hedge funds from Asian clients. He attributes the increase in demand to the asset class positive performance in uncertain capital markets. “What’s driving the increased interest is that high net worth individuals in Asia have come to value hedge funds as they generate relatively high risk-adjusted returns and provide “fixed income like” volatility in a risky market environment,” says Churchouse.

As a result of uncorrelated returns from equity and fixed income, Churchouse has seen clients increase their hedge fund

AVERAGE INVESTOR ALLOCATION TO HEDGE FUNDS AS A PERCENTAGE OF OVERALL PORTFOLIO UBS Wealth Management

Citi Private Bank

Deutsche AWM

5%

15%

25% Source: Asian Private Banker

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HEDGE FUND SPECIAL

TYPES OF END-INVESTORS OF HEDGE FUNDS AT PRIVATE BANKS Maturity level

Investor has a broad and general interest in the asset class

Investor is actively diversifying their portfolio through the usage of hedge funds

Investor is investing from an asset allocation and risk modeling standpoint and/or has a strategic mandate to allocate to hedge funds Source: Synpulse

allocations. “Some clients have also increased their allocations to hedge funds with the aim of generating extra alpha and uncorrelated returns from equity and fixed income through distressed debt, multi-strategy relative value and tactical trading strategies,” he says. Karim Ghannam, head of alternatives and fund solutions, Asia Pacific, Deutsche Asset & Wealth Management agrees, stating that in 2015, HNWIs have increased their hedge fund allocations by almost 100%, year-on-year. He explains that the

Roger Bacon head of managed investments, Asia Pacific Citi Private Bank

reason for this is that clients are expecting positive returns and low volatility.

The majority of private banks in the region remain convinced that hedge funds will remain both – an important differentiator of their platforms as well as an investment class favoured by the region’s elite. However, despite an impressive uptick post-crisis, allocations are slowing down and are far from the double-digit teens they were in before 2008.

Kharim Ghannan head of alternatives and fund solutions, Asia Pacific Deutsche Asset & Wealth Management

Jean-Paul Churchouse head of alternative capital markets business, Asia Goldman Sachs Private Wealth Management

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HEDGE FUND SPECIAL

The alternative route to alternatives Remember the days when wealthy individuals eagerly handed their cash over to “black box” hedge funds, willing to sacrifice transparency and liquidity in return for alpha?

Not anymore. Acceding to the demands of clients and regulators alike, fund managers and consequently, fund selectors at private banks, are focussing on strategies that are both liquid and transparent.

C

ue liquid alternatives – strategies that are available through alternative investment vehicles such as mutual funds, ETFs, closed-end funds, etc. that provide daily liquidity – which came into being through an act of the US Congress in 1940 but have recently acquired cult status.

“It is difficult to put an actual figure on the year-on-year growth, but there has been increasing demand for hedge funds in Asia, particularly for liquid alternative vehicles,” says Roberto Giuffrida, head of international business development at Permal Group which claims to manage US$21 billion in investments.

The strategies that offer daily liquidity have been popular among private banks, observes Carol Wong, managing director at Old Mutual Global Investors (OMGI). “Private banks have increased their clients’ allocation to liquid alternatives over the past three years,” says Wong. She adds that liquid alternatives have offered returns of 6-7% year-on-year.

Roberto Giuffrida head of international business development Permal Group

Retail-friendly because they are repackaged to comply with the regulatory framework governing mutual funds, liquid alternatives are low-volatility fund structures that also offer investors an alternative to pooled hedge fund investments. They have thus helped make hedge funds – often considered an elite investment vehicle for the ultra wealthy – accessible.

Indeed, Giuffrida believes that liquid alternatives are mutually beneficial to investors and private banks because of the way they are regulated. “They have a big future, driven by investors requirements for liquidity, regulation, lower costs and transparency, along with no compliance risks for banks,” he explains.

“We are seeing increasing interest in liquid alternatives,” says Karen Tan, head of global wealth solutions, Asia Pacific at Deutsche Asset & Wealth Management.

Dan Mannix, partner at RWC, another fund manager, agrees.

“For long-short equity hedge funds, the demand has recovered

Carol Wong managing director Old Mutual Global Investors

Dan Mannix partner RWC

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HEDGE FUND SPECIAL

to pre-crisis levels in Asia, albeit through UCITS [Undertakings for Collective Investment in Transferable Securities] structures rather than Cayman,” he says.

The smaller ticket size of UCITS hedge funds makes them particularly popular in Asia according to Andrew Au, head of business development, Greater China and Southeast Asia at Lyxor Asset Management, Société Générale’s hedge fund arm, which manages US$12.7 billion AUM in their managed account platforms globally. “UCITS [hedge funds] have a lower minimum investment of US$10,000 compared to traditional hedge funds with a minimum ticket size of US$1,000,000,” he says.

Chandrima Das, managing director and head of fund solutions at Bank of Singapore believes that for clients looking for de-correlated returns, liquid alternatives has been a preferred hedge fund strategy. “After scouting the full universe of numerous liquid alternative strategies, we found one that invested into rates, FX and credit. Since clients used to be willing to allocate to 20% of fixed income risk budgets into govies [government bonds], we suggested perhaps shifting the allocation into some lower volatility hedge fund strategies,” she says.

Indeed, UCITS hedge funds have served the global hedge fund community well in the aftermath of the financial crisis.

UCITS hedge funds’ global AUMs jumped from US$59 billion to US$252 billion as the number of funds more than doubled from 392 to 894 from 2008 to 2011, according to Eurekahedge data.

Why then, are some fund selectors at Asia’s private banks, ambiguous at best about these funds?

Distribution of liquid alternatives is yet to reach critical mass and this is challenging the industry, according to some.

“We see a low appetite for liquid alternatives,” says Roger Bacon, Citi Private Bank’s head of managed investments platform, sceptical of the product. The lack of critical mass is one reason Bacon is not a believer. “We think many of the funds that have been launched in the UCITS hedge fund space need a bit more time in the markets.” Mannix agrees. “At the moment distribution remains difficult for smaller unestablished managers,” he says.

Compromised returns when using UCITS structures – a price Bacon believes investors pay for not having the confidence to invest directly – diminish many gatekeepers’ enthusiasm for them. “We remain concerned that you give up too much return for the increase in liquidity,” he says. 2015, in particular, has been a difficult year from a returns perspective.

“RWC’s European long-short fund has returned 4-5% in 2015 YTD. The US long-short equity funds returned 1% in 2015 YTD while the global long short equity fund has generated around 5.5% in returns YTD,” Mannix says.

Wong adds that there is a dearth of education surrounding liquid alternatives and this has made Asian investors turn to other asset classes that are perceptively easier. “Asian investors tend to take high risk and seek high returns of 10-15%,” she says.

Belying some of the hype surrounding them, liquid alternatives are surprisingly hard products to distribute. But in the hands of the right private bank or investment consultant, they could assuage many of the concerns Asian clients have with alternative investments – liquidity and transparency being primary amongst them.

HEDGE FUND PERFORMANCE (2015 YTD)

5-8% return

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HEDGE FUND SPECIAL

WHAT’S TRENDING? The most popular hedge fund products and strategies in 2015, with comments from sources from alternative investment desks at private banks

Product Structured products linked to hedge funds What is it?

Structured products linked to hedge fund returns derive their value from that of an underlying managed account, a fund of hedge funds or a hedge fund index. Some of these products lower the risk to the investor by giving up some of the returns to pay for principal protection. These are called principal protected structures. Others – so-called leveraged structures – allow the investor to increase risk in order to increase expected returns.

Liquid alternatives What is it?

Hedge fund strategies that have been repackaged to comply with mutual funds’ regulatory regimes such as the US’s 40 Act or Europe’s UCITS, requiring the product to have less leverage, daily liquidity and greater transparency.

Why? “An interesting trend that has emerged over the last year is renewed demand for structured products around hedge funds. Capital protected structures in particular have gained a lot of interest among investors with year-on-year growth in the double digits. The main driver for this is investor interest in structured products overall.”

“With its greater transparency and more tightly regulated feature, liquid alts are certainly helping investors sleep better at night. It is also be priced closer to its mutual fund counterparts, ridding clients of the traditional 2-20 fee structures – key to winning market share from traditional hedge funds.”

The most popular hedge fund strategies among Asian investors

Strategy Long-short equity What is it?

When hedge fund managers purchase stocks that are undervalued or sell short stocks they deem to be overvalued to gain positive exposure in the equity markets.

Event driven What is it?

A strategy that seeks to exploit pricing inefficiencies that may occur before or after a corporate event.

Commodity traded advisors (CTAs) What is it?

A strategy that includes investment in the buying and selling of futures contracts, options on futures, or certain foreign exchange contracts.

Why? “Equity long-short strategies and more recently credit specialists who provide traditional bond investors an alternative to credit through diversification and hedged strategies have been popular among high net worths.”

“The event-driven bucket has been a popular strategy among Asian HNWIs with more M&A announcements driven by historic cash levels on corporate balance sheets.”

“There is interest in CTA hedge funds due to its good performance over the last year [2014].”

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FUND SELECTION

Open architecture...in theory Independent advice may well be a mantra for private banks in Asia, but Asian Private Banker found that assets, especially in the funds space, continue to be concentrated towards in-house products.

“

U

p to 60% of [a major European private bank’s] fund assets are invested in internal products,” notes a Hong Kong-based head of advisory at a Swiss pure play. “There is much more motivation to push internal products than external ones not only for personal incentives but also from a compliance, marketing and management perspective.

Not to mention, the cost of replacing all of these internal products with external ones is very significant.”

Multiple sources from both the private banking and asset management industries, confirm this. Anecdotal evidence points to at least three banks where in-house funds represented 40% or more of clients’ fund assets. A Hong Kong-based head of advisory, who wished to remain anonymous, admits to being constantly goaded by management to sell in-house funds, although it is not an explicit requirement.

“It may not be formulaic or explicit but these soft demands may or may not play a role in career progression,” she elaborates.

“As a gatekeeper, one may feel obliged to have a certain level [of] assets invested in internal funds to satisfy management even if they claim it’s not required.”

The trend persists across investment products and is not just limited to funds.

According to one structured products provider at an American bank, there are cases where traders would sell derivatives to the internal private bank with zero spreads with the promise of future business.

The banking industry has worked long and hard to slowly regain the trust of investors, evidenced by a gradual growth in discretionary assets – believed to have reached an average of 7% in Asia. Until performance is compromised, holdings in inter-

nally manufactured products are unlikely to be scrutinised by individual clients. But when and if it is, questions will be asked and confidence in the oft-advertised independence of private banks could take yet another hit.

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TECHNOLOGY

To consolidate or outsource, that is the question With private banks allocating, on average, US$20 billion to digital initiatives, many in the industry wonder whether it is time to return to good old outsourcing.

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rivate banks in Asia find themselves in a catch-22 situation with regards to their technology budgets.

On one hand, increasingly tech-savvy clients and the blatant increase in efficiencies from heavier digitalisation are priorities for virtually every bank (Asian Private Banker’s Tech Survey 2015 finds that private banking clients are a top priority for tech spend). On the other hand, up to 70% of a bank’s technology spend is typically injected into the back-end of banks, leaving little resources to its “run-the-bank” and “change-the-bank” mandates. However, in order to execute these operations successfully, a bank needs a robust back-office.

The solution? Outsource the back-office to a new business process outsourcing (BPO) model or consolidate, suggests Synpulse’s recently released Next Generation Private Banking 3rd Generation Operating Models report. While outsourcing back office operations like corporation actions or payment transactions is not new to banks, the evolved “3rd generation model” promises to shave off up to 30% of operating costs and help private banks stay light on their feet.

THE THIRD GENERATION MODEL

“Banks have to rethink the term BPO; previously used for labour cost arbitrage, BPO has now evolved towards industrialised operating models,” says Yves Roesti, co-author of the report.

A business that is pegged to be worth US$691 million by 2020 in Singapore alone, the industrialised BPO model involves reassigning non-front related activities from the back-office and middle-office to a third-party vendor. These processes are repeatable and have no customer touch-point such as onboarding clients, account opening, know-your-customer (KYC), anti-money laundering (AML) requirements and market prices and data.

Roesti believes that in addition to reducing operational costs significantly, using BPO centres will also empower the

relationship manager (RM). “In turn, the RM can also increase revenues with more focus on front-office operations,” he says.

One reason to switch to the new BPO model is the use of skilled labour that can handle complex trades such as structured products – a vast difference from existing models in markets such as the Philippines and India, the author says. “Private banks will benefit much more from the new BPO model, where highly skilled local talents industrialise the back-office processes working on a state-of-the art core banking system that enables straight-through processing (automation). They can handle even the most complex banking products in high volumes (e.g. lifecycle management of structured products). This is where efficiency and error-free processing will be achieved,” says Salomon Wettstein, co-author of the report.

“Looking at the growth rates the Asian wealth management market remains attractive – however the current operational inefficiencies are forcing many players into consolidation or to turn to an industrialised third-party operating model for survival,” says Roesti.

In addition, the wave of consolidations in the industry including the recent UBP-Coutts deal, outsourcing to BPO centres may provide a safer alternative, particularly for smaller private banks. Roesti estimates that banks with less than US$8 billion in AUM reporting an average cost-income ratio of 87% – higher than the average of 70% in Asia – will struggle to keep up with cost pressures and the digital initiatives of their larger peers.

TRIED AND TESTED?

A survey of Synpulse’s finds that the most efficient private banks in more industrialised markets such as Switzerland achieved cost-income ratios of less than 50% compared to the market average of 70%. These banks were able to reduce back-office and IT running costs by 50%.

In Asia, the report points to enormous potential. “In 2020, private banks in Singapore are expected to spend US$2.82 bil-

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TECHNOLOGY

lion on non-front related activities. We believe that most banks are able to cut these costs by 50% by 2020 by leveraging the third generation model,” it states. Similarly, in Hong Kong, US$1.45 billion is spent on non-front related activities.

To date, Deutsche Asset & Wealth Management (Deutsche AWM) is the only private bank in the region to try and test the new model. In September 2014, the German lender signed with Avaloq’s subsidiary, Avaloq Sourcing Asia Pacific in Singapore.

The bank is due to complete the integration by mid 2015.

THE FUTURE: OUTSOURCE OR CONSOLIDATE

The future for some private banks will fork at a critical junction, Wettstein says. “We anticipate that in the next ten years half of the small and medium-sized banks in Asia will either choose the BPO model or go through consolidation (M&A),” he predicts. Wettstein explains that private banks that do not have a retail banking presence to leverage economies of scale,

or are mid-to-small-sized, will find it difficult to cut back-office costs.

As a result of consolidation or outsourcing, the next five to ten years will see a network of BPO centres sprouting, Roesti envisions. “In the next 5-10 years, there will not just be one BPO centre but many industrialised players who are connected globally to provide private banking services,” he says. These third generation operating models will consist of service hubs dotted around the globe, connected through a network, sourcing banking products and services, Wettstein adds.

Indeed, private banks are working frenetically on front-office technology blueprints so banks are not seen as prehistoric by their largely entrepreneurial clients. A solution that can disentangle these banks from architecturally-heavy back-end processes without losing centrality would be ideal. But the slow and measured approach the industry is taking to technology disruption may not be the solution. Deutsche AWM may well become the litmus test for this new method.

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INDUSTRY

DBS Private Bank to go live with structured products platform in 2016

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newly launched structured products distribution platform with Avaloq, Leonteq, DBS and Numerix, will go live with its first pilot, DBS Private Bank, in 2016.

The Singaporean bank is currently on the platform’s sell side, distributing its equity derivative products. DBS Private Bank will now go-live in April 2016 on the buy-side.

“The IPDS platform is slated to be rolled out next year. We are really excited about this platform as we envisage it to be a game changer for us on the trading desk and our private banking colleagues,” says Calvin Yeap, head of equity derivatives trading at DBS Bank.

Investment Products Distribution System (IPDS), the partnership that was earlier dubbed Project LAND, was officially launched in March to provide a multi-dealer platform that automates the distribution of structured products to private banks. The platform rolled out with EFG, Raiffeisen as well as DBS. IPDS, in its initial phase, will focus on Asia with structured products including equity-linked notes (ELNs) and fixed coupon notes (FCNs).

IPDS was launched three months after another multi-dealer platform, that claims to be the most similar in structure, Contineo, entered the structured products distribution space.

Similar to Contineo, IPDS aims to grow in issuers and buyers, acting as a hub for structured product flow. It claims to differ from the industry-backed consortium in limiting technology vendors on its platform and concentrating on the post-trade processing of the products.

“We can all look forward to a vibrant “marketplace” with multiple buy and sell-side counterparties, improved pre-trade analytics for the buy-side participants, increased automation to reduce manual workflow, and straight-through processing (STP) from the front-end to back-end systems to provide a truly seamless one-stop-shop solution,” adds Yeap.

The IPDS platform is slated to be rolled out next year. We are really excited about this platform as we envisage it to be a game changer for us on the trading desk and our private banking colleagues.

Contineo has gone live with its sell-side roster of HSBC, Goldman Sachs, J.P. Morgan, Société Générale, BNP Paribas and Barclays and one private banking client, Julius Baer, this month.

Indeed, the market for technology that automates structured products distribution to private banks is growing increasingly crowded. IPDS joins AGDelta, FinIQ, Vontobel’s deritrade, Leonteq as well as, Contineo. Structured product heads at private banks remain measured in their participation in technologypowered systems for the products.

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CLIENT INVESTING

STRUCTURED PRODUCT PLAY OF THE WEEK EUROPEAN PHARMACEUTICAL STOCK LINKED ELN

Currently we see demand in ELNs that are linked to European pharmaceutical stocks. This allows clients to enjoy a better risk versus reward through a combination of auto-callable levels with a conditional coupon at a different level and a conditional protection on

the downside (European knock-in). The client can comfortably look for a higher yield with a lower correlated basket and achieve a lower risk profile through a different coupon level and a European knock-in put.

The ELN pays a 19% annualised coupon. If the underlying does not fall by 10%, the note is redeemed early and the investor receives the coupon. If the underlying falls by 15% at maturity, principal converts to stock at loss.

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

WHAT’S SELLING AT PRIVATE BANKS HONG KONG-RELATED ACCUMULATORS

We are seeing continuous interest in flow equity derivatives, with clients looking at accumulators and decumulators, and range accrual notes, focussed on domestic Hong Kong markets.

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

HONG KONG-LISTED ETFS

Clients are buying Hong Kong-listed China ETFs and H shares large caps such as China financial sector. With the Stock Connect scheme already in place, they have been looking at individual A-share stocks specifically in the TMT and healthcare sectors.

Belle Liang head of investment advisory Hang Seng Bank

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PE O PL E MO V ES

MOVERS & SHAKERS

Movers & Shakers is a monthly compilation of the private banking industry’s key talent moves.

For the full version of Movers & Shakers, login or register at:

asian private banker

INDUSTRY

BOC Hong Kong makes plans for Southeast Asia expansion

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ank of China (Hong Kong) Private Banking plans to expand its presence in Southeast Asia by buying the Southeast Asian assets of its parent company, Bank of China.

“Businesses in Southeast Asian countries will certainly make a big fortune for us,” BOCHK’s newly appointed vice chairman and chief executive Yue Yi said. He added that the acquisition will help the local private bank capitalise on the 29 million ethnic Chinese with the introduction of new products and wealth management services.

Yue plans to make the overseas market a key driver of growth. Over the last three years alone, overseas units at BOCHK reported 30% profit growth, overtaking the domes-

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tic business. Following the recent China market rally and the Shanghai-Hong Kong Stock Connect, the mutual cross-border recognition of funds and the upcoming Shenzhen scheme, Yue is also looking to boost the bank’s share price.

BOCHK is also planning to sell Nanyang Commercial Bank (NCB). The decision to dispose of NCB was due to the overlap in business in addition to freeing up capital for future acquisitions, Yue said. According to media reports, there are four buyers eyeing NCB, including Guangzhou-based Yuexiu Group which has recently applied for a US$8 billion syndicated loan. Other candidates include New China Life Insurance, China Cinda Asset Management and China Pacific Insurance.

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FROM CALL TO TRADE

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