Fear is now the main driver of investment behaviour
People are either moving away from equity-related instruments or are treating them with caution, says Michael Benz at UBS Wealth Management.
Michael Benz is regional head of products and services for Asia-Pacific at UBS Wealth Management, and has been based in Hong Kong since 2003. He joined the bank in 1993 and was head of group treasury for Asia-Pacific in Singapore and Tokyo from 1997 until 2000. Before moving to Hong Kong, he was head of investment solutions and wholesale clients at UBS Global Asset Management in Zurich in 2001. He spoke with AsianInvestor about the factors driving investment behaviour and what UBS is doing to meet the needs of its private banking clients.
Could you give us the history of your private banking operations in the region?
Benz: UBS Wealth Management has been in Asia-Pacific for more than 40 years, providing a comprehensive range of financial services from 18 locations across six markets in the region. UBS Wealth Management was established in Hong Kong in 1964; 1972 in Singapore; 1995 in Australia; 1999 in Taiwan; 2004 in Japan and China with the opening of UBS Bank Branch in Beijing and in mid-2007 with UBS Securities in China.
UBS Wealth Management offers discretionary and non-discretionary mandates. Clients can also trade in the full range of financial instruments û from single securities to structured products and alternative investments.
Central to our approach is the æUBS client experienceÆ, which is based on the premise that wealth management is not only about products but about advice. The UBS client experience is delivered through a four-step advisory process where we gain a thorough understanding of their needs before structuring customized solutions. We would conduct regular reviews with clients to ensure investment goals are achieved.
Which markets in Asia are you most active in the private banking arena?
Asia-Pacific is a very diverse region with different cultures, a mix of developed and emerging economies and diverse regulatory regimes. The importance of Asia-Pacific is expected to increase. By 2030, four of the worldÆs largest economies are expected to be in Asia-Pacific.
Asia-Pacific is the fastest growing wealth management market in the world. According to UBS estimates, liquid assets held by wealthy individuals in the region excluding Japan, will grow by 9.7% annually until 2009, compared to less than 6% globally over the same period.
Almost every country in the region excluding Japan, is expected to post higher GDP growth than either the US or Europe over the next five years. And as per capita GDP grows, household financial assets also tend to increase as a share of GDP causing a multiplier effect. Market growth will be further fuelled by the conversion of non-financial wealth into financial assets as increasingly sophisticated clients seek growth in more developed financial markets. At the same time, ageing populations, combined with underdeveloped retirement programs, increase the need to save. By 2021, Asia is expected to have six workers to each retiree, down from 10 to one in 2001. While for Japan, the ratio is two workers to each retiree by 2021, compared to four to one in 2001.
Driven by robust economic growth and growing affluence in Asia, the wealth management industry has developed and flourished in the last few years. Clients have become increasing sophisticated and the call for professional wealth management services has risen. To tap into this opportunity, UBS Wealth Management was early to adopt a country-focused growth approach in a select group of Asia-Pacific markets. Today, UBS Wealth Management is active in six markets in Asia including Australia, China, Hong Kong, Japan, Singapore and Taiwan.
What asset classes, products or portfolios are you offering your clients?
It is probably best to answer this in the context of where we are this year compared to the climate 12 months ago. Last year marked the end of a multi-year bull-run in which investors became increasingly risk averse. They were content with a very low risk premium for relatively risky bets. But those days are now gone with the turning point in July/August last year. It was also an extremely active market. In simple terms, you could say there was some degree of greed.
Since then, triggered by the subprime crisis abroad, there has been a re-pricing of risk across all asset classes. There is a very high degree of uncertainty as a result of concern regarding the macro economy, inflation and growth.
In short, you could say that greed has disappeared and fear has become the predominant driver of behaviour.
More specifically, in terms of asset classes, many people are either moving away from equity-related instruments or are very cautious with the way they are handling them. In some cases, they continue to suffer from situations which they cannot exit. A typical investor is reluctant to cut losses; itÆs one of those deeply-rooted behaviours.
What are in demand among your clients now?
A clear trend over the past eight months has been the move out of equities into FX, credit and interest rate-related investments.
How are your clients getting their exposure to FX credit and interest rate-related investments?
It depends on what extent a client wants to be involved in the investment decision. If the client is content to delegate the decision to a professional, then the portfolio is likely to be centred on fixed-income and credit-related strategies. If they prefer to make the investment decisions themselves, they will probably go with any form of structured product solution that is linked to FX, credit, or interest rates.
Do you find that your private banking clients would now prefer that you make all the decisions yourselves?
One of the major themes to emerge last year is diversification. In the past six months, the advantages of diversification have become more apparent. Historically in Asia and in Hong Kong specifically, many investors have been exposed to only with a handful of local stocks. While many of them have made a great deal of money, there has also been a tendency to overlook how risky that kind of investment is. The benefit of diversification has become very clear.
A lot of activity has centred on restructuring portfolios to add diversification. I would not say that more clients are interested in completely giving up control of the investment decisions in this environment. However, it makes a lot of sense in any portfolio to have a certain portion delegated to investment professionals even if itÆs just in the interests of adequate diversification.
What is certainly true is the need and the demand for advice has increased significantly. This is not surprising because a rising tide lifts all boats.
Has it increased only in terms of asking you for specific ideas or in terms of wanting you to advice on specific products?
It goes all the way, starting with the general but can include requests for highly specific advice.
What are the more interesting investment themes now?
It depends on what you already have in your portfolio. Something that is very appealing to one client may not fit with another client because he/she may already have a lot of it.
It is important to structure portfolios with a reasonable degree of diversification. Given the current uncertainty, many products or solutions tend to be more defensive today than they were 12 to 18 months ago û typically, whether principal is fully protected or there is partial downside protection.
Are you looking for specific innovative products?
Yes of course. It is one of the primary concerns of our clients. For example, we have very specific products that mitigate inflation risk, be it inflation-linked bonds, inflation-linked bond funds, or structured products.
How much of an open architecture do you have?
One has to differentiate along product types. I think the most important aspect is the value proposition that you want to deliver to the client.
We believe in the guided open architecture. We work with a large number of leading global and local investment banks to structure and source structured products. This list of providers is reviewed and monitored constantly. Should any no longer meet our selection criteria as a result of concerns regarding service, pricing, or credit issue then we may stop doing business with them.
When it comes to third party fund management products, what is your criteria in selecting the fund managers and products?
We do not believe in a blind, simplistic, pure quantitative screening process. We feel thatÆs clearly not enough. It should be part of a broader equation.
We have a dedicated investment fund research team a part of which sits in Asia. In addition to screening funds through a very structured process, the team seeks to understand what a fund manager is doing, the managerÆs performance under different scenarios as well as his/her strengths and weaknesses.
The September edition of AsianInvestor magazine contains a feature on private banking trends in Asia.
Could you give us the history of your private banking operations in the region?
Benz: UBS Wealth Management has been in Asia-Pacific for more than 40 years, providing a comprehensive range of financial services from 18 locations across six markets in the region. UBS Wealth Management was established in Hong Kong in 1964; 1972 in Singapore; 1995 in Australia; 1999 in Taiwan; 2004 in Japan and China with the opening of UBS Bank Branch in Beijing and in mid-2007 with UBS Securities in China.
UBS Wealth Management offers discretionary and non-discretionary mandates. Clients can also trade in the full range of financial instruments û from single securities to structured products and alternative investments.
Central to our approach is the æUBS client experienceÆ, which is based on the premise that wealth management is not only about products but about advice. The UBS client experience is delivered through a four-step advisory process where we gain a thorough understanding of their needs before structuring customized solutions. We would conduct regular reviews with clients to ensure investment goals are achieved.
Which markets in Asia are you most active in the private banking arena?
Asia-Pacific is a very diverse region with different cultures, a mix of developed and emerging economies and diverse regulatory regimes. The importance of Asia-Pacific is expected to increase. By 2030, four of the worldÆs largest economies are expected to be in Asia-Pacific.
Asia-Pacific is the fastest growing wealth management market in the world. According to UBS estimates, liquid assets held by wealthy individuals in the region excluding Japan, will grow by 9.7% annually until 2009, compared to less than 6% globally over the same period.
Almost every country in the region excluding Japan, is expected to post higher GDP growth than either the US or Europe over the next five years. And as per capita GDP grows, household financial assets also tend to increase as a share of GDP causing a multiplier effect. Market growth will be further fuelled by the conversion of non-financial wealth into financial assets as increasingly sophisticated clients seek growth in more developed financial markets. At the same time, ageing populations, combined with underdeveloped retirement programs, increase the need to save. By 2021, Asia is expected to have six workers to each retiree, down from 10 to one in 2001. While for Japan, the ratio is two workers to each retiree by 2021, compared to four to one in 2001.
Driven by robust economic growth and growing affluence in Asia, the wealth management industry has developed and flourished in the last few years. Clients have become increasing sophisticated and the call for professional wealth management services has risen. To tap into this opportunity, UBS Wealth Management was early to adopt a country-focused growth approach in a select group of Asia-Pacific markets. Today, UBS Wealth Management is active in six markets in Asia including Australia, China, Hong Kong, Japan, Singapore and Taiwan.
What asset classes, products or portfolios are you offering your clients?
It is probably best to answer this in the context of where we are this year compared to the climate 12 months ago. Last year marked the end of a multi-year bull-run in which investors became increasingly risk averse. They were content with a very low risk premium for relatively risky bets. But those days are now gone with the turning point in July/August last year. It was also an extremely active market. In simple terms, you could say there was some degree of greed.
Since then, triggered by the subprime crisis abroad, there has been a re-pricing of risk across all asset classes. There is a very high degree of uncertainty as a result of concern regarding the macro economy, inflation and growth.
In short, you could say that greed has disappeared and fear has become the predominant driver of behaviour.
More specifically, in terms of asset classes, many people are either moving away from equity-related instruments or are very cautious with the way they are handling them. In some cases, they continue to suffer from situations which they cannot exit. A typical investor is reluctant to cut losses; itÆs one of those deeply-rooted behaviours.
What are in demand among your clients now?
A clear trend over the past eight months has been the move out of equities into FX, credit and interest rate-related investments.
How are your clients getting their exposure to FX credit and interest rate-related investments?
It depends on what extent a client wants to be involved in the investment decision. If the client is content to delegate the decision to a professional, then the portfolio is likely to be centred on fixed-income and credit-related strategies. If they prefer to make the investment decisions themselves, they will probably go with any form of structured product solution that is linked to FX, credit, or interest rates.
Do you find that your private banking clients would now prefer that you make all the decisions yourselves?
One of the major themes to emerge last year is diversification. In the past six months, the advantages of diversification have become more apparent. Historically in Asia and in Hong Kong specifically, many investors have been exposed to only with a handful of local stocks. While many of them have made a great deal of money, there has also been a tendency to overlook how risky that kind of investment is. The benefit of diversification has become very clear.
A lot of activity has centred on restructuring portfolios to add diversification. I would not say that more clients are interested in completely giving up control of the investment decisions in this environment. However, it makes a lot of sense in any portfolio to have a certain portion delegated to investment professionals even if itÆs just in the interests of adequate diversification.
What is certainly true is the need and the demand for advice has increased significantly. This is not surprising because a rising tide lifts all boats.
Has it increased only in terms of asking you for specific ideas or in terms of wanting you to advice on specific products?
It goes all the way, starting with the general but can include requests for highly specific advice.
What are the more interesting investment themes now?
It depends on what you already have in your portfolio. Something that is very appealing to one client may not fit with another client because he/she may already have a lot of it.
It is important to structure portfolios with a reasonable degree of diversification. Given the current uncertainty, many products or solutions tend to be more defensive today than they were 12 to 18 months ago û typically, whether principal is fully protected or there is partial downside protection.
Are you looking for specific innovative products?
Yes of course. It is one of the primary concerns of our clients. For example, we have very specific products that mitigate inflation risk, be it inflation-linked bonds, inflation-linked bond funds, or structured products.
How much of an open architecture do you have?
One has to differentiate along product types. I think the most important aspect is the value proposition that you want to deliver to the client.
We believe in the guided open architecture. We work with a large number of leading global and local investment banks to structure and source structured products. This list of providers is reviewed and monitored constantly. Should any no longer meet our selection criteria as a result of concerns regarding service, pricing, or credit issue then we may stop doing business with them.
When it comes to third party fund management products, what is your criteria in selecting the fund managers and products?
We do not believe in a blind, simplistic, pure quantitative screening process. We feel thatÆs clearly not enough. It should be part of a broader equation.
We have a dedicated investment fund research team a part of which sits in Asia. In addition to screening funds through a very structured process, the team seeks to understand what a fund manager is doing, the managerÆs performance under different scenarios as well as his/her strengths and weaknesses.
The September edition of AsianInvestor magazine contains a feature on private banking trends in Asia.
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