Tee Fong Seng, CEO Asia-Pacific, Pictet Wealth Management 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?
The private banking industry in the region, including Pictet Wealth Management Asia, has grown in the past year in spite of the disruptions by COVID-19. No doubt this was partly on the back of market performance, as well as banks riding on existing client relationships and new bankers onboarding clients they already know without as much a need for face-to-face meetings.
In addition, regulators in Singapore and Hong Kong have been facilitating the implementation of virtual or remote client onboarding, through clear articulation of regulatory expectations and guidelines (for Hong Kong, only for virtual/remote onboarding of HKID card holder clients).
Singapore has increased the use of non-face-to-face measures with additional controls (e.g. performed liveness checks to detect impersonation) and technologies (such as integrating the use of Myinfo, biometrics technologies, liveness detection technologies, document authenticity verification tools, etc.) as part of customer due diligence.
The reality is the shutdown of cross-border travel did hinder business development at private banks. The biggest takeaway from the pandemic is that while we can still do business without travelling, travelling remains a critical component in the industry’s business development and client acquisition efforts.
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?
Even before the pandemic, with the advent of Common Reporting Standards (CRS) and Automatic Exchange of Information (AEOI), the wealth management hubs of Singapore and Hong Kong had been upscaling in terms of client segment focus, targeting more sophisticated clients.
The governments in Hong Kong and Singapore have initiated programmes to facilitate this transition. InvestHK and the Hong Kong Monetary Authority, as well as the Monetary Authority of Singapore and Economic Development Board in Singapore have incentivised and attracted UHNW clients to set up family offices (FOs) in the both cities. The introduction of the Variable Capital Company (VCC) highlights how the Singapore regulator is incentivising FOs to use a fund structure for their longer term wealth succession planning. Hong Kong too has introduced various tax incentive regimes to attract setting up of funds in the city.
While some international players are establishing domestic branches or subsidiaries onshore, we have seen a trend among regional and domestic banks of collaborating with international private banks through strategic alliances, partnerships or joint ventures, to bring international wealth management capabilities onshore.
For instance, in November 2019 Thailand’s regulator relaxed foreign trading and exchange regulations and Thai nationals can now invest offshore. Pictet has taken a long-term positive view of the Thai market and has forged an alliance with Bangkok Bank. As Pictet prides itself on best-in-class investment solutions and platforms, combined with the distribution network of Bangkok Bank, we believe this is a “win-win-win” for Pictet, Bangkok Bank, and Thai clients.
Since our collaboration agreement last year, a few hundred million dollars has been invested into Pictet funds and managed products distributed by Bangkok Bank.
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?
Two of our investment themes for 2022 directly take this into account:
China and the US are treading increasingly divergent paths, whether in terms of monetary policy, COVID-19 or growth momentum. Depending on how the growth slowdown pans out in China, we see potential for the relative performance of ASEAN equities to improve. Undervalued ASEAN stocks represent a way to play attempts to revive Chinese growth, without taking direct exposure to China. In the longer run, they could benefit from the ongoing relocation of major manufacturing facilities away from China.
Meanwhile, the Chinese economy is going through considerable upheaval, with over-leveraged real-estate companies in the line of fire. How things play out will have implications for domestic consumption. In effect, construction and property-related activity account for a high share of Chinese GDP (close to 30% by some estimates) and housing-related spending for a much bigger percentage of personal consumption than in the US. We believe the sector is ‘too big to fail’, with signs the authorities are subtly moving to contain damage from the problems incurred at the most highly indebted real-estate companies. Noticeable, however, has been the lack of contagion from Chinese high-yield to the rest of the Asian credit complex. We continue to see potential for superior risk-adjusted returns in Asian credit, particularly investment-grade.
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?
After three years of double-digit returns for major stock indices, 2022 could be a decisive year for markets even if COVID-19 concerns recede, and also a delicate one for investors. To survive and prosper, they may have to change their behaviour as circumstances dictate.
Firstly, some central banks are withdrawing liquidity support and winding down quantitative easing schemes. Markets will be doubly challenged when the Federal Reserve starts raising rates. How far monetary tightening goes will largely depend on the inflation outlook, and one will have to distinguish which price rises will prove to be transitory and which ones are structural. Supply-chain problems could ease quickly in certain sectors, but labour shortages are here to stay. In any case, the economic cycle could become volatile, especially if inflation concerns induce central banks into making policy mistakes and new COVID-19 waves force partial shutdowns. A renewed pandemic wave could keep workers at home, worsening labour market tightness.
The range of possible market outcomes in 2022 is unusually wide and the gains of the past three years are unlikely to be repeated. We still see areas of opportunity as the recovery continues, but picking the right spots will call for exceptional nimbleness. The road ahead may not be a smooth one, and such fragile conditions justify an active-management approach to investing.
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?
A classic 60/40 portfolio may be suboptimal at times of higher inflation. From a strategic asset allocation perspective, the expected rise in inflationary pressure, in part because of energy-transition policies over the next ten years, is a further argument in favour of endowment-style investing, i.e. the multi-asset approach adopted by endowment funds which include a range of real assets (private equity infrastructure, real estate, commodities and gold) that may protect against inflation.
We believe that alternatives, including real estate and private equity, will continue to grow this year. Super-low interest rates and rising inflation fears mean the yields offered by traditional assets have plummeted, increasing the number of investors willing to exchange some liquidity for the higher returns offered by private investments. In alternatives this year, we like real assets that can cushion against inflation, private equity as a growing asset class with low correlation to listed assets, as well as hedge fund solutions such as M&A, event-driven, and macro strategies.
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?
Initial conversations on ESG started with institutional investors, and as such were much based on risk mitigation. With time, the conversation has become less about reducing risk and more about finding the right opportunities for investing in the future we would like to see. As such, private clients are becoming more interested in solutions to climate change, sustainable agriculture, responsible consumption and a circular economy.
All of our discretionary portfolio mandates (DPM) integrate ESG considerations and we are targeting 100% ESG integration by 2022 for DPM and Advisory. Toolkits we use include our proprietary ESG Scorecard to provide a focused view of ESG risks and opportunities for corporate issuers and our ESG Due Diligence Questionnaire to monitor ESG risks and opportunities for our investments in funds. We are planning to launch solutions focusing on positive impact, starting with climate action.
In addition, we are going above and beyond the product shelf, by understanding how ESG characteristics influence our economic forecasts. One of our main focus points for this year and this decade is to quantify and acknowledge the rapidly growing importance that climate change-related issues will have on economies and financial markets dynamics. We have conceptualised this as the “price of the future”. This concept forms one of the cornerstones of our forecasts as governments and central banks steadily integrate climate-related issues into their policy making. This involves internalising a range of climate change-related externalities into production processes and consumption.
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?
For Pictet, it is critical that we attract the right candidates who can thrive on our distinctive platform and business model. We have been steadily growing our RM base by around 50% in the past three years and our AUM base by 40% in the past two years.
Pictet has an established and distinct brand as a private partnership for 216 years with a combination of members of the founding families and outsiders jointly running the firm in a consensual model. We believe our governance model is the best and most client-focused way to run an investment firm. Unencumbered by shareholder pressure, we can take a long-term view and our goal is never to maximise the short term at the expense of clients or the future.
Pictet has always placed a premium not just on being a stable and financially strong firm, but also an investment leader for its clients, across both wealth and asset management franchises. Our wealth management business in Asia has an industry high penetration rate of over 50% of our assets in managed solutions including discretionary and advisory mandates and funds, so the focus of Pictet and of our RMs is to bring Pictet’s investment leadership, our asset allocation expertise and investment performance to clients, especially the UHNW segments and family offices, delivering high-quality assets and revenues for the firm.
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)?
As mentioned above, the initiatives by the governments in Hong Kong and Singapore over the years in incentivizing and strengthening the infrastructure and ecosystem to attract family offices have played an instrumental role in building up the two locations as family office hubs. These efforts will remain critical as an increasing number of family offices around the world are looking to set up in Asia with the main objective of accessing the private market and direct investment opportunities in the region.
Other priorities will be the management and hopefully stabilisation of the COVID pandemic and gradual opening of borders. The ability to travel and engage with clients face-to-face remains one of the key factors for private banks in delivering the best client service and solutions, and growing their business, as well as for the regional private banking industry to be able to develop in the long run.
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?
For Pictet Wealth Management, our business is distributed equally between Hong Kong and Singapore – in terms of human resources, RMs, and volume of business. To a large extent, private banking is about having the adeptness and agility to manage and capitalise on opportunities rather than achieving an equilibrium.
At Pictet Wealth Management Asia, we monitor and follow the developments, capitalise on market opportunities and are focusing on Greater China market in both our Hong Kong and Singapore locations. In the past year we expanded our front office, by onboarding teams of experienced relationship managers in both locations who are experts in covering Greater China markets and clients.
Meet 2021’s industry leaders in the full round up of of Asian Private Banker‘s The Final Word 2021.
