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What asset classes, products or portfolios you are offering your clients right now?
Tay: We have a very wide set of products ranging from traditional investments to alternatives. We are extremely well-known in the market for our alternative offerings û hedge funds, private equity, and real estate type of investments. We have an open architecture platform following a business swap that Citi did with Legg Mason a couple of years ago. Whatever we present to the clients must be already pre-selected and approved to be on our product list. Even if our consumer bank would like to offer something, we would run our own due diligence on the manager.
If itÆs a new manager, the due diligence could run from six months to nine months. Due diligence involves reviewing in detail the asset management firm, how it operates, its strategies, its trading books, how true the firm is to its strategy and its performance track record in good times and in bad.
Is product selection done centrally?
It used to be centrally done out of New York and London. Increasingly, if we look at Asian offerings, we do actually originate some of the managers for the global team.
What asset classes, products and portfolios are you keen to push right now given the market environment?
What we are facing right now is an environment of great uncertainty and volatility. In this kind of environment, we are focusing less on the traditional and very correlated-to-the-market type of investments. We are actually looking at less correlated returns and absolute returns that are generally found in alternative investments.
We tend to be guided more by what will worry clients, and what is really worrying them now is slowing growth and rising inflation. In this environment, what makes sense is investing in real assets that will hold their value over time and not so much the financial assets like fixed income that will lose their value. We look at commodities as a store of value. Immediately there could be pullbacks. ThatÆs why we prefer a suite of commodities hedge funds instead of long-only funds that invest in commodities.
We also look at distressed assets because in an environment where you have slowing growth, rising defaults, and people losing their jobs, banks provide less liquidity. There are a lot of distressed opportunities out there û not necessarily from poor companies but from situations where investment banks need to unload.
We are also looking at utilities and infrastructure. A lot of what is driving growth in countries like emerging markets where the demand for materials has gone up so much is in a need to invest in utilities and infrastructure.
Where you see the most opportunities for distressed assets?
The opportunities in distressed assets lie mainly in the areas of managers who focus on shorting credits, purchasing bank debt, corporate debt and securities. These opportunities will increase as the economy slows further and liquidity continues to dry up.
How do you recommend that your clients get exposure in these themes?
There are a variety of ways to actually address the themes but currently weÆre not so comfortable with the traditional offerings. We tend to recommend participation through hedge funds and private equity. Recently, we just closed a very interesting offering on China real estate with CapitaLand. This is an example of how we can invest in real assets to hedge against inflation and to capitalise on the growth trends in China not through the public markets. Another example would be IDFC, where we worked with IDFC on an infrastructure fund focusing on India.
For commodities, rather than focusing on the metals mining complex and energy, we look at food-related, agriculture, and also precious metals. ItÆs the whole complex. It cannot be looked at as only one area.
In the area of utilities infrastructure, weÆre looking at the very old and decaying infrastructure in the developed world and insufficient infrastructure in developing countries.
Are there any particular markets where you see the opportunities?
ItÆs not so much that the opportunities are not there. ItÆs finding the right managers because in utilities, for example, itÆs easier to find a good manager in the hedge fund space that focuses on the US and Europe rather than Asia. For utilities, the way you invest in special situations is you need to buy privatised assets. You need a very good relationship with the government. You need consistent regulations. You need legal structures. The manager has to have all that.
In developing markets in Asia, you donÆt find the legal frameworks and government structure that you find in the developed world. So we tend to focus currently on the hedge funds that tend to focus on the developed world û particularly the US, Europe, and the UK û for utilities and infrastructure specialty hedge funds.
In the distressed space, we are looking for distressed real assets, also distressed financial assets that are being unloaded by financials, banks, securities firms, and the like. Fundamental situations are still sound but you know liquidity is required. We tend to focus on managers who have been in the business for a long time, from 1990 onwards.
Do your clients have a preference for their home market?
Clients have two pools of money. They have their offshore money which they keep in foreign currencies. If you talk to Indonesian clients, having seen 1998 and how the rupiah declined from 2,600 against the US dollar to 16,700 overnight, they have learned their lesson. They prefer to keep their nest egg in US dollars. If you are addressing that pool, you need your offshore products.
But thereÆs also a need to look at the growing currency deposits that they need for their business and they find it very hard û a lot of these countries have exchange controls û to move the money offshore. So we also need to look at our onshore offerings and beef up our offerings.
Are structured products still popular among your clients?
There is still pretty strong demand because itÆs a very versatile product. What worked last year may not work this year, so it takes a different form now.
Without Legg Mason and Citigroup Asset Management, is everything outsourced now?
Almost our entire product set is managed by external managers. We tend to work with the best in class, which means that a lot of managers are willing to work with Citi Global Wealth Management because of the our huge distribution and credibility with clients & because of the pre-approved due diligence process that we have. Clients recognise that whatever we show them is not off the shelf.
Is capacity a major problem for Asian managers?
So far the managers who are closed are the very successful ones with good track records, and those are the ones we want to access. Generally speaking, there is a dearth of credible Asian focused hedge fund managers, compared with those who invest in US and Europe, and many have relatively short track records.
Would you give start-up hedge funds a chance?
We have fund of fund structures where they actually seed hedge funds that are starting out, either they are experienced teams who are just starting their own fund or they are completely new investment teams, so there is a room for that. It becomes more like a private equity fund investing in hedge funds. The return profile is different.
Generally if itÆs a new hedge fund, to bring it on board as a standalone would be more difficult. They would need at least a three year track record.
What are the challenges you are facing now?
The main challenge that we face is gaining access to managers. The better managers are all closed to new investors. We find it very hard to source good products with Asian managers for alternatives
What will change that?
We would rather wait it out and participate through fund of funds at the moment, where the fund of fund manager actually oversees a group of fund managers
Are most of the assets of your clients allocated to alternative investments?
I would say a good proportion of the assets do go into alternatives, maybe higher than what you have seen in other private banks. ThatÆs purely because of the selection and the quality that we have. The other thing that we have is our ability to access on a global basis and we donÆt have any ties to our own internal asset management, which a lot of other private banks have.
What happens when markets turn again, will you still recommend alternatives?
I think alternative investments are for all time. But if there is a recovery then we will tend to put more back in the core portfolios, the traditional investments .We need to be nimble, and be able to reallocate when needed.
Is there a consensus among your clients in terms of the level of their risk appetite?
Everything we do is driven by what the client wants and needs. We have an investment objective setting with each client so that we understand what kind of risks they can take. I can tell you that most clients in Asia are loss intolerant. No matter what you tell them in objectives setting, you have to understand how much risk or loss the client can take.
When you say loss intolerant, do you mean they are cautious or unforgiving when you donÆt produce huge returns?
All they want is absolute returns. They can forgive a couple of months or half a year of underperformance, but eventually you must perform well because it is their nest egg that you are dealing with
The September edition of AsianInvestor magazine contains a feature on private banking trends in Asia.
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