Bank of Singapore’s discretionary assets have grown 23% year on year as of August 31 2018, in the face of turbulent financial markets, bringing its DPM penetration rate to 8% — just shy of the regional asset-weighted average and among the highest rates recorded by a local institution, according to Asian Private Banker data.
“Most of the growth has come from net new money,” explained Marc Van de Walle, global head of products at Bank of Singapore. “It is in contrast to last year when performance accounted for a larger part of asset growth.”
More specifically, 33% of Bank of Singapore’s DPM asset growth year-to-date is attributable to top-ups; and while the bank does not set fixed targets for such, Van de Walle expects DPM penetration rates to reach 15% with 40% in managed investments, including mutual funds in the near-to-mid-term.
Sustainability is key
But while private banks’ DPM businesses have maintained some momentum in 2018 following a blockbuster 2017 and to amid an industry-wide push for greater delegation, Van de Walle said sustainably growing the DPM business is more important than blind promotion. Accordingly, Bank of Singapore has opted not to implement a DPM-specific KPI scheme for relationship managers.
“I’m aware that some banks may put a KPI on bankers to sell DPM, but when you do that, as bankers react to the KPI, they may push the wrong client into DPM or sell it in the wrong way — and things reverse quickly when KPIs change,” Van de Walle explained.
“DPM is not about short-term trading. Instead, it aims at achieving long-term systematic performance. We don’t want clients to get out of it after a few years or switch across different mandates very often.”
In addition, Van de Walle noted there are three main pillars driving DPM in Asia: increasingly convinced RMs, next-generation clients, and DPM performance.
“If you want to convince your clients to invest in DPM, you have to convince RMs first. I think over the past years, RMs have realised DPM’s benefits,” he said, adding that by using DPM, RMs can save a significant amount of time, which they can use to engage with clients and build relationships rather than manage client portfolios.
Further, the bank believes Asia’s intergenerational wealth transfer bodes well for DPM on the whole as younger investors are more familiar with modern portfolio theory and open to long-term investing and asset allocation principles, as opposed to first generation investors, who tend to take concentrated trading bets.
“The most important reason is still simply performance,” he said.
“If we compare the performance of DPM and advisory clients with the same risk profiles, it’s very clear that DPM has outperformed over time. For example, if you take a balanced portfolio, in the last five years, the DPM clients have probably achieved a return of 6-7%, compared to 3-4% for advisory clients, on average.”
Factor investing picks up pace
Regarding the mandates available on Bank of Singapore’s platform, Van de Walle noted that demand for its factor-investing mandate, which the bank launched around two years ago, has grown faster than that of traditional DPM mandates over the past 12 months.
“If you look at traditional DPM portfolios, they are still correlated, to a large extent, to economic growth which is only one single factor,” he said. “For example, if global economic growth plummets, your portfolio will go down and the diversification across different asset classes or geographies won’t work so well as the correlation of different asset classes increases when markets see a crisis.”
In this increasingly volatile and rising rates environment, he believes factor investing portfolios suit investors better due to diversification across a wider range of factors, such as real interest rates, inflation, and credit spreads.
“We see it as complementary to the core traditional mandates,” he said.
In addition, and despite the recent market downturn, Asian Private Banker learnt that the bank has launched a new DPM product — DPM BOSI funds — which has so far raised more than US$250 million in net new money.
In terms of trades, Van de Walle said the bank has recently increased its cash allocation, given the sufficient possibility of market downside.
The bank also considers buying tail protection — such as ‘deep out of the money’ put options — but Van de Walle said it’s “always difficult” to convince clients about the merits of these trades as a premium outflow might drag down overall performance if markets don’t experience downside.
“Another trade that has been gaining traction is covered call, and we have used it in some of our mandates to generate income for our clients,” he said. “It’s ideally used in the situation where you think that the market is not going to collapse, but there are limited upside potentials.”