Leading private banks shared their views on why discretionary portfolio management (DPM) still holds its value, despite challenging market conditions throughout 2022 and 2023, at Asian Private Banker‘s DPM Leaders Conversation 2023 in Hong Kong.

Juicy deposits won’t last forever

Over the past year, one of the significant challenges for product managers was the shift in client attention to cash deposits due to the higher interest rate environment. However, private bank DPM leaders argue that high rates will not last forever.

“We have to acknowledge that deposits are the new kid on the block for asset allocation and competing fiercely with equities and bonds,” said Stefan Lecher, regional head of Investments & Wealth Solutions (IWS), Asia Pacific, HSBC Global Private Banking and Wealth at the event at Hong Kong’s Mandarin Oriental, which was attended by a cross-section of the region’s leading fund selectors and heads of investments.

But Lecher asserted that it is also important to explain to clients that high-yielding time deposits cannot last forever. “At some point, if you kick the can down the road, you are going to have reinvestment risk. And the next second, you are going to have an issue with inflation. So it’s about finding that timing to get back into the markets.”

At HSBC, he said the bank spends a lot of time with clients on how to build up the risk curve again. The bank believes clients can start with short-term bonds or investment grade credit.

“There’s quite a few specific discretionary mandates where clients can actually get into. So the dialogue is a lot about how you get back up into the risk curve to protect your portfolio over the medium- to long-term to basically be ahead of inflation versus sitting back and enjoying the ride you have in deposits.”

Bonds gaining traction

Echoing Lecher, Adrian Zuercher also believes clients are unlikely to enjoy the same high rates next year and should look at short-term bonds.

“Our house view is clear that we will get interest rate cuts, probably the fourth quarter or the beginning of 2024. It’s tempting to put money into time deposits, but [we’re] pretty sure you will not get the same type of rate next year,” noted Zuercher, head of global asset allocation & co-head of global investment management APAC, UBS CIO.

He added that the conversation with clients is about locking in yields, not just for one year, but ideally for a more extended period.

“I see good traction in short-term duration bonds, but we actually like four or five-year buckets which is the standard duration in our portfolios, because we are probably going to be drifting into a world where interest rates have normalised again,” he said.

While many have been discussing short duration versus long, Zuercher noted that UBS recommends taking more duration risk than credit risk. He said that the bank likes to stay in high-quality bonds but takes the duration risk because the bank believes the direction of yields is already changing.

“If you want to renew your time deposit compared to three months ago, you get less. So people start to feel it and start to see that actually yields aren’t rolling over and therefore it’s probably time to buy something a bit more defensive.”

Choonshik Yi, head of DPM, North Asia at UBP, added that while the Swiss bank prefers active management of fixed income portfolios over the short term, it also sees some dynamic movement in the longer term.

“The direction is pretty much set. So we need to manage how much of this short-term yield movement [there] will be, compared to the longer-term strategical direction. Today we prefer shorter-term, but then we have the intention to increase the duration,” Yi said.

Private markets building blocks

Zuercher also highlighted that the bank is looking at integrating private markets into portfolios as clients are looking to increase their allocations to alternatives.

He said that many of UBS’s clients are looking for a 20% allocation into the alternatives space, while the reality is the bank is not quite there yet. UBS currently only offers to integrate private markets into portfolios for the higher and more sophisticated segments.

Similarly, HSBC has offered its private banking clients a dedicated hedge fund discretionary mandate. Clients can specify the parameters of the mandate in a similar way to the private market side.

Lecher explained that it is about building your own private markets portfolio, or a co-investment approach. “It’s not discretionary per se, but the client can still decide what they want to have in the portfolio. So we see this as a building blocks approach for hedge funds and private markets, and then they keep the liquid assets separate to it, but all can be discretionary.”