DBS's Hong Kong business is aiming to double mutual fund penetration among its clients over the next 12 months, said Rocky Cheung, head of investment product and advisory for wealth management in Hong Kong.

“Given the increasing complexity of regulations and the need to maintain stability in client AUMs, we have shifted our focus to improving the fund penetration rate, and encouraging discretionary portfolio management [DPM] services,” Cheung told AsianInvestor. 

He said the penetration level – the proportion of client assets parked in investment funds – was low compared to DBS's peers in Hong Kong, but he declined to provide a figure.

Indeed, estimates suggest fund penetration levels are low for many private banks in the region, ranging from single digits to around 30%. Single stocks and bonds still account for a majority – often 60% or more – of the portfolios of most Asian investors, said wealth managers.

However, in recent years, several banks have started to more heavily promote mutual funds and DPM, which incorporates funds in the asset allocation process.

Wealth managers see fee-based offerings, such as DPM and advisory services, as less volatile streams of income generation than simply executing trades for clients, which is a lower-margin and more competitive business.

Private banks, especially the smaller players, are in even greater need of more sticky, stable income given the rise in competition and tightening regulation in recent years.

Boosting fund focus

Cheung said DBS was stepping up efforts to educate clients on the importance of using mutual funds as a tool for diversification.

“We are encouraging clients to shift from single-bond holdings to bond funds, for instance,” he noted. "It’s difficult to monitor 100 underlyings, so we encourage the use of funds as it is a more efficient way of diversification.”

Moreover, researching and trading individual securities is more cost- and labour-intensive than employing fund managers to do it. 

In addition, Asian investors have high exposure to fixed income, Cheung pointed out, often with relatively high leverage levels. As interest rates rise, he added, investors are likely to reduce their bond allocations, which will lead to a rise in volatility.

The US has been raising rates gradually since December 2015 and after two hikes this year market observers believe the federal funds rate will go up at least once more in 2017. 

Hence, for investors with relatively high bond allocations – 50% or above – the bank is recommending shifting a portion of assets into equities.

Since March, however, DBS’s Asia-based clients have been less aggressive about investing in US stocks, noted Cheung, opting instead to shift money towards Europe and China. Hong Kong-based investors pulled a net $140 million out of locally registered US equity funds in the first half of this year, according to the Hong Kong Investment Funds Association.

Still, the S&P 500 index has continued to rally throughout 2017 and hit new record highs in recent weeks, leading to widespread expectations that a correction is coming. The main US equity benchmark has risen 18% since Donald Trump was elected as US president in November. It has a projected price-to-earnings ratio of 18.04, and trailing 12-month figure of 23.56.

“There are some concerns about valuations of US equities,” said Cheung, “although the fact is if the US market reverses, European and Asian markets are likely to tumble as well.”

A Bank of America Merrill Lynch global fund manager report released on August 15, echoed worries about the US: it indicated the biggest underweight to US equities since January 2008 – a net 22% underweight, up from a 20% underweight last month.

China calling

For investors looking for investment ideas, he has one piece of advice: look at China. The inclusion of mainland A-shares in the MSCI emerging-market indices from June 2018 will bring about revolutionary changes, he said.

Every country opens its capital markets once in a lifetime: China, already the world’s second largest by market capitalisation, offers immense opportunities for investors, he said.