Using a multi-factor approach, Goldman Sachs Private Wealth Management is helping clients in Asia to iron out inefficiencies between their multi-bank discretionary portfolio management (DPM) strategies, says Jacky Tang, the bank’s head of portfolio management group and co-head of investment strategy group for Asia.
Rising DPM penetration rates, along with the tendency of Asian HNWIs to bank with several institutions, means wealthy clients in Asia often have DPM accounts with multiple private banks, covering numerous strategies.
With the belief that such behaviour can lead to hidden risks – such as offsetting effects between strategies and concentration risks – Goldman Sachs PWM’s solution aims to address such inefficiencies using a unique, customised approach to optimising clients’ total portfolios.
“Many family office and UHNW clients are sophisticated enough to execute various portfolio management duties in-house or allocate across multiple banks,” Tang says.
“We ask clients to share data about their overall asset allocation across the different private banks. Once we have an aggregated view, we apply our multi-factor asset allocation model and try to optimise the overall portfolio by rebalancing the assets the client has booked with us. We’ve been able to grow assets in these mandates 60-70% year-on-year,” Tang says.
According to Tang, the benefits of the multi-factor approach extend beyond just potential outperformance.
“There is much more historical data, optimisation is more robust and the implementation method is more customisable,” Tang says. “This is not the case for most traditional asset allocation models.”
Goldman Sachs sees strong DPM growth in Asia
“Five years ago, DPM penetration in our Asia business was in the low-single digits,” Tang recalls. “It has since grown 20-30% per year [since 2012], in line with our overall regional AUM [growth]. This growth has been driven by an increased focus on a core-satellite approach and having DPM as the core part of our portfolio strategy, while selectively providing differentiated transactional offerings for the satellite allocation.”
Not dissimilar to the bank’s competitors, multi-asset DPM portfolios have been key contributors to Goldman’s DPM asset growth in Asia. Over the past two years, the bank has also observed interest in fixed income-only mandates, including both investment-grade and high-yield mandates. And, cognisant of low equity appetite in the region, the bank has introduced option writing overlays to reduce volatility.
The bank is a proponent of passive instruments, which represent around half of its overall DPM assets in Asia. Tang explains that the bank’s active-passive conversion over the past three years has covered various asset classes, including fixed income – an asset class in which it makes use of passive index trackers, which offer better liquidity compared with ETFs.
“From a DPM portfolio perspective, other than emerging market equities, high-yield bonds and hedge funds, most other asset classes can be replaced by passives without significantly impacting performance. Currently, around half of our DPM assets are invested in passives,” he adds.
