Michael Blake, Asia CEO, Union Bancaire Privée shares his views with Asian Private Banker in ‘The Final Word’, a year in review by the region’s private banking leaders as they share their thoughts and opinions on key issues around industry trends, investments, regulations, and technology in 2021, as well as providing their predictions for 2022.
The previous 12 months have proved that private banks can draw in significant amounts of net new assets and client accounts as the industry has adapted to widespread travel restriction due to COVID-19. With the potential easing of these restrictions in 2022, new variants aside, to what extent will private banks return to their pre-pandemic methods of sourcing clients and gathering assets?
We can finally look forward to a certain resumption of travel in 2022. Our client facing teams will travel as soon as it is safe and possible to do so, and I believe this will be welcomed by clients and prospects alike. At its heart, managing the wealth of a family is an intensely personal relationship that cannot be replaced entirely by technology. Increased travel and meeting in person will help to renew that special bond with existing clients and will also enable us to build new relationships.
At the same time, there will be no reversal in the digitisation that has taken place during the COVID-19 pandemic. This process is well established and will accelerate. The question for wealth managers is how to deploy all the available technology. For UBP, the priority is using technology to enrich client relationships by simplifying client communication, removing pain points and providing RMs with more tools to provide better advice.
Given the majority of Asian wealth is located onshore, how should international private banks best target and differentiate themselves in these markets? For domestic regional private banks, what is the most effective strategy for competing with international players?
UBP’s Asia business is founded on a vibrant and fast-growing international wealth management franchise. This is our clear area of expertise and we strongly believe that the international wealth management market will grow with a focus on Hong Kong and Singapore. With our clear proposition, we are well placed to support clients in both jurisdictions.
Our approach to onshore markets outside of Hong Kong and Singapore is to focus on geographies where we believe we can establish a strong and meaningful business for the long term. China stands out in this context as the biggest opportunity across the region. In fact, I believe we are now approaching a golden age of wealth management development in China, where international investment expertise will become increasingly important and accessible to domestic clients. As always at UBP, we will lead with investment expertise, focusing on specific segments where we can add value.
The last 12 months have been volatile for investors in China, from the meltdown in the high-yield bond sector to regulatory actions targeting sectors such as technology. How are you advising clients to invest in the world’s second-biggest economy in 2022?
We believe that China’s ongoing economic transformation will offer long-term opportunities for international investors. We anticipate that improved visibility on the regulatory front and targeted policy support will provide some cyclical reprieve for Chinese asset classes in 2022. We are therefore advising clients to remain highly selective, with a preference for onshore over offshore equities.
Investors can benefit too from exposure to a number of sectors and themes that will be of strategic importance under the “Common Prosperity” drive. These include core innovation and companies with a focus on domestic consumption, a view we have held since the announcement of the 14th Five-Year Plan in March 2021.
What will be the key investment themes that shape both global markets and those in the region in 2022 and how is that feeding into how you advise clients?
Global markets are entering a new mini-cycle in 2022, after rebounding from a V-shaped recession. Economic growth is set to slow, while global inflation should remain elevated throughout the first half of the year. This landscape will create some challenges for global investors driven by rising long-term yields and heightened volatility. Despite these headwinds, investors should expect lower, but still largely positive returns on equities, with larger drawdowns.
In this context, we are focusing on proactive risk management, with an emphasis on quality earnings and long-cycle transformational themes, such as the energy transition. Alternatives such as hedge funds can also present useful asymmetrical exposure should volatility rise in 2022.
One of the most-repeated views over 2021 was that the ‘60/40’ portfolio is dead, given the ultra-low to negative yields offered in many parts of the sovereign bond markets. From alternatives to commodities to private credit, how are you helping investors to allocate assets in what was traditionally the fixed income part of their portfolios?
With both nominal and real interest rates at ultra-low levels, traditional fixed income no longer offers the diversification benefits it used to offer in a conventional 60/40 portfolio. What’s more, one of the key pillars underpinning the strong equity market performance since the global financial crisis of 2008 has been the unconventional monetary policy of quantitative easing. This makes risky assets generally susceptible to increases in interest rates, so that a traditional fixed income allocation becomes somewhat positively correlated to equity markets. This acts to reduce the diversification benefits in a conventional 60/40 portfolio.
During this cycle, we have used innovative ways to bypass the limitations resulting from the conventional 60/40 allocation. That is why we have chosen to be overweight equities at the expense of fixed income, as we find more value in the former. The role of risk reducer — which conventional fixed income used to play in volatile times for equity markets in a 60/40 portfolio — has now been replaced in our portfolios with downside protection derivative strategies and structured products. With volatility at relatively low levels, these strategies offer reasonably cost-effective downside protection. We also use lower beta, alpha generating exposure via alternatives to help mitigate risk in portfolios.
Turning to our fixed income allocation, our reduced exposure to the asset class over the last few years has primarily comprised various sub asset-classes within fixed income which correlate more positively with the business and economic cycle. This includes areas such as high yield, hybrid capital structure securities, senior loans, emerging market debt and convertibles.
With these sub-assets now starting to look expensive, we are increasingly looking to use more alternative long/ short credit strategies within portfolios as a partial substitute. We have tactically entered and then exited sovereign bond market exposure to trade the range which yields have largely moved within. Whenever client investment objectives and risk appetite permit, we advocate the use of private debt and other yield generating private market exposure.
Sustainability is higher up the agenda for investors than ever, with last year’s United Nations COP26 event underscoring the scale of effort needed to achieve global net zero emissions by the middle of this century. How are you helping your clients to remove ESG risk from their portfolios and embrace sustainability in their investment strategy?
Sustainability really matters at UBP. We are increasingly integrating sustainability factors into our investment decisions to protect our clients’ wealth from new risks and to grow it by tapping into fresh market opportunities. This involves raising awareness of sustainability risk through enhanced client reporting, by adjusting our preferred investment universe and through a range of market-leading sustainable strategies, both liquid and alternative.
Specifically, we have developed a sustainable and impact fund offering, which includes investment opportunities in climate solutions. Our latest launch of a biodiversity restoration strategy should help embrace investments that contribute to the fight against climate change, as both biodiversity and climate are interlinked.
In addition, UBP Asset Management (Europe), our primary management company for UBP’s Luxembourg-domiciled funds, has signed up to the Net Zero Asset Managers Initiative. This means that we are committed to reducing the carbon emissions of our funds — which are distributed to private clients in Asia — and encourage investments in climate solutions to reach net zero emissions by 2050 or sooner.
The past two years or so have accelerated the rate of technological and digital adoption at private banks across the region, given the restrictions imposed by the COVID-19 pandemic. From hyper-personalisation to digital onboarding and KYC, what will be the biggest focus in terms of tech deployment for the industry in 2022 and where do the gaps lie?
Current discussions around technology are much more nuanced and granular than before. Five years ago, technology’s impact on wealth management was presented as a zero-sum game, as a binary choice between digital or human engagement. The debate has clearly moved on and we certainly see a strong possibility for a hybrid model, where technology enables richer conversations with clients. It may encompass digital communication channels, involve AI-assisted investment insights and asset allocation, or simply be about removing some of the pain factors in the way that clients interact with us. Precisely targeted technology can have a transformative impact on client relationships by supporting, rather than removing, the role of the relationship manager.
For the mass affluent wealth business, there’s a much stronger argument for a lighter touch but higher volume model, which is largely digitally driven. However, for us as a pure private bank player, human interaction remains the core which we build around, so we see technology as an enabler, boosting our proposition, enhancing our investment capabilities and improving delivery.
Sourcing talent in the region’s private bank industry is becoming tougher than ever, pushing up hiring costs across the region. How can private banks ensure they have adequate access to the talented relationship managers and other front-line staff over the coming years? What is the key to attracting the right candidates?
At UBP, we are actively looking for a small number of highly skilled individuals, those with advisory experience of between 10 and 20 years, who want to work with a bank where they can manage clients and, if they wish, build a team. People who join us are often drawn to a bank that takes a balanced commercial approach, that is less hierarchical, and where they can really build durable relationships with clients.
There is a trend too towards some lateral hiring from other parts of the finance industry. We are not only interviewing private bankers, but also talking to corporate bankers who are attracted to the wealth management industry, as well as investment consultants, investment advisors, specialists who have worked in family offices and those with experience in the growing segment of private markets. There is a broad talent pool and there is no shortage of candidates — quite the opposite actually — but it just comes down to finding the right fit for both parties.
How important is governments’ support to ensuring family office industry prospers in the region? What is at the top of your wish list for how governments in Hong Kong and Singapore can support the private wealth management industry’s development (e.g. less travel restrictions, more tax incentives, review/relax on a particular regulation)?
In both Hong Kong and Singapore, we have seen strong support for development of the family office ecosystem and the policy framework for family offices compares favourably to jurisdictions outside of Asia.
Looking at the development of the wealth management industry more generally, we have seen strong support from governments in the critical fields of talent, training and technology, and we will see continued support in these areas. For Hong Kong, the development of the Greater Bay Area presents a generational opportunity for the industry. The authorities have demonstrated their willingness to give more support to this initiative, which will be a critical success factor for Hong Kong in the coming years.
In the course of 2021, many private banks have grown their business presence in Singapore as the industry saw more business opportunities among Greater China clients in the city state. What is your private bank’s business split across Hong Kong and Singapore now compared to 12 months ago? Do you think the shift of gravity in business across Hong Kong and Singapore has reached an equilibrium?
Our focus is on providing clients with flexible solutions to meet their investment and jurisdictional requirements. Growth rates in both the Hong Kong and Singapore businesses were robust in 2021 and we see strong demand from clients for both locations. As we look to the future, we expect this trend to continue.
Meet 2021’s industry leaders in the full round up of of Asian Private Banker‘s The Final Word 2021.