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DPM Corner – Bank of Singapore whips up Yale-style discretionary strategy

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Bank of Singapore’s discretionary portfolio management (DPM) unit is developing a mandate inspired by a prestigious university’s endowment strategy that embraces alternative investments. And that’s not all – the bank’s flagship ESG mandate is outperforming, Grizelda Lee shares with Asian Private Banker.

“The bank is working on an endowment strategy inspired by Yale’s successful investment approach,” said the head of DPM, adding that their “World ESG mandate has outperformed the MSCI all-country World by approximately 2.5% as of end August.”

The Yale Endowment, known for its long-term return objective, allocates more to alternative investments due to their potential for delivering higher returns. The strategy has roughly US$40 billion in assets and earned about 1% returns for the 2022 financial year, earning US$266 million in investment gains.

Over the past 10 years, Yale’s endowment generated an average annual return of 12%. “That’s really strong,” Lee pointed out. “And to generate about 1% in their 2022 financial year is very impressive given the landscape last year. What they’ve done is to allocate at least 30% into alternatives since the 1980s.”

Endowment strategy

What Bank of Singapore aims to offer its clients with its endowment strategy is a flexible approach to transitioning between alternatives and public investments within DPM. The specific allocation to alternatives, however, will not necessarily be fixed at 30% and will depend on the client’s risk budget.

“Clients will dictate their risk budget,” Lee explained. “If they have higher risk budget, there’ll be more allocation into illiquid assets like private equity.”

“And if they have lower risk budget, they will invest a little bit more into evergreen private debt or liquid public assets. By public assets, it’s really more hedge funds and absolute return strategies.”

Lee’s primary objective is to provide clients with a good balance between private and public investments – a concept she feels is not very common in Asia because private investments within DPM have their own limitations.

For instance, clients requiring liquidity may have a challenge trying to exit investments, and this lack of flexibility can inconvenience clients seeking a DPM mandate with private allocations.

Think long term

As a result, clients must acknowledge the long-term commitment in investing, typically extending for 10 to 15 years, Lee emphasised, adding that the bank’s endowment strategy will be designed with ‘wealth transfer’ in mind.

The Yale Endowment fund, for example, provides an example of how this approach works. It serves the purpose of providing stable income to pay bills, compensate professors, and fund scholarships, while preserving the fund’s value for future generations, ensuring lasting spending power.

“So, it’s the same concept [for the bank’s endowment strategy], and that’s why it’s very applicable for intergenerational wealth transfer because it will probably work at its best if it’s in perpetuity,” the DPM head continued.

“Keep the investment running for at least 10 to 15 years, and in that way, you can ensure that you have enough money to cater to your future generations’ spending. That’s the income portion. And you also preserve that spending power for them for the next few generations,” she said.

The strategy is expected to launch next year. According to APB estimates, Bank of Singapore’s DPM penetration rate falls within the range of 5-10%.

Source: APB Insights

World ESG

In other developments, Lee shared that Bank of Singapore’s flagship ESG mandate, the World ESG, achieved an outperformance of approximately 2.5 to 3%, “which is quite decent, especially considering the overall strong market performance.”

What sets this mandate apart from the rest, according to Lee, is that other ESG mandates often focus on a single strategy, emphasising a particular theme, such as food scarcity, resource scarcity, or renewables.

The bank’s approach for World ESG , however, is “to amalgamate various sustainability mega trends, including data, resource scarcity, renewables, and ageing population, among others, into a single high-conviction portfolio. This portfolio consists of approximately 30 to 50 stocks, primarily centred on developed markets,” she said.

The preference for developed markets stems from the availability of ESG data and the concentration of ESG initiatives in these regions. As a result, Asia holds a smaller weight within this portfolio.

Bank of Singapore’s investment approach includes both leaders and laggards, with leaders primarily located in developed markets, Lee explained. “For our Asian investments, we tend to focus on transition names within more developed Asian markets, such as Singapore, Hong Kong, and China.”

According to APB estimates, Bank of Singapore managed about US$60 billion in sustainable investment assets as of end-2022.

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