How to bolster product shelves against market volatility with a greater range of alternative solutions was a key topic discussed by private bank fund selectors at Asian Private Banker‘s 9th Fund Selection Nexus in Hong Kong.

On a keynote panel entitled The Quest for Resilience and Diversification in Asian Portfolios, leading private banks debated how best to manage client expectations and generate sustainable portfolio returns with asset classes ranging from semi-liquid private markets and relative value hedge funds, to short-duration bonds.

For many private banks, 2022 has been a year in which they have had to tear up the script. A surge in inflation and geopolitical upheaval has prompted a sell-off across major equity and bond markets, leading industry players to scrutinise their fund offerings.

Hoarding wealth in cash

Julie Koo, managing director and global head of third-party manager solutions, Asia-Pacific, Citi Global Wealth Investments, compared evaluating the US bank’s product shelf to managing a supermarket.

“We’ve really thought about what kind of store we had as we headed into this year, and how we might need to arrange that,” she told delegates at the event. “It meant that we had to go back into the warehouse and pull out some stuff that was probably collecting dust. Certainly nothing that makes people overly excited when they wake up in the morning.”

Such strategies include “really boring stuff” such as US treasuries and investment-grade bonds, she continued, while focusing on “high quality, more stable returns” on the equity side in sectors such as healthcare and consumer staples.

However, the bank admitted that it had endured a tough time encouraging clients to re-invest their cash. “We started the year with a lot of clients massively deleveraging and sitting on cash,” she explained. “But we really have to handle the clients to think about keeping a reserve for when the opportunity presents itself — as we see more stability, and hopefully more growth, coming into the markets.”

Stronger demand for alternatives

Morgan Stanley Private Wealth Management Asia (Morgan Stanley PWM Asia) is another private bank that has looked closely at its product shelf this year.

Christina Au-Yeung, co-head of investment management services, said that volatility had made the bank cancel some of its product launches and react much more quickly to changing market dynamics and risk appetite.

For example, she said, the bank has reduced some of its exposure to Asia private equity, as uncertainty around COVID-19 in the region had made clients more reluctant to put their capital to work in longer-term structures. “We have had to reduce a lot of our directional growth exposure and pivot more to market neutrality and relative value opportunities,” she explained. “We have also put a lot of emphasis on types of income — and this has been a way for us to help clients to hedge an inflation environment.”

For both banks, alternatives have become a crucial part of their offering. Morgan Stanley PWM Asia has been “extremely focused on bringing back hedge funds that have been out of favour for the last 12 to 24 months”, explained Au-Yeung. These include both blue-chip managers and emerging managers, across strategies including multi-strategy and relative value.

Koo said that Citi had enjoyed a ‘record year’ across hedge funds and private markets as clients sought to hedge against volatility, and the bank had launched a number of strategies across these lines.

At HSBC Global Private Banking, Lina Lim, regional head of discretionary and funds, Asia Pacific, noted that “most clients are increasingly interested in building an allocation in alternatives”. Lim added: “We have seen strong demand for private equity. Every deal that we roll out tends to be oversubscribed.” Clients of HSBC GPB are increasingly looking at hedge funds, more as a way to manage volatility rather than generate returns, she added.

Tough conversations

Aside from investments, client communication and managing expectations had been key this year, noted Jaye Chiu, head of investment products and advisory, Bank of East Asia. “This year is not so much about major product launches and massive campaigns but more about handling clients, and making sure that you do portfolio review with the clients one-by-one to see to it that they are positioned well in the markets,” he explained. Chiu added that few would have started the year expecting US dollar money market funds to be among the top performers.

Chiu added that diversification had been essential, as was persuading clients to move away from their home bias — particularly in their exposure to Chinese high-yield credit. “To those clients who listened [about diversifying away from Chinese high-yield credit]: ‘Congratulations’. And of those who did not, it is about managing expectations and handling those clients,”
Chiu added.

Capital-protected, interest-linked structures have been among BEA’s top performing products this year. In addition, the bank has repored a strong increase in FX and FX-linked trading revenues.

However, while HSBC GPB’s Lim admitted that many conversations with clients this year had been difficult, one of the key messages was that market opportunities were likely to present themselves in the coming months.

“We have tough, tough conversations with clients, in terms of their portfolio reviews, or expectations of returns,” she said. It is about “managing expectations and … going back to the basic understanding of what clients’ goals and objectives are.”