Tan Wei Mei leads the portfolio solutions team at Credit Suisse Private Banking Asia Pacific, which focuses on acquiring and retaining discretionary and advisory mandates. Tan helps the private bank’s clients structure their investment portfolios.

Discretionary mandates in Asia for Credit Suisse have grown at a compounded annual growth rate of 30% over the past three years, but the private bank declined to provide exact numbers.

AsianInvestor spoke to Tan recently to find out more about why the discretionary portfolio mandates are growing so fast, and how alternatives fit into client options. She at the private bank are constructed and the use of alternatives. 

Q Could you describe your asset allocation process?

We first utilise the chief investment office (CIO) house view, which is the basis of the foundation of our asset allocation for discretionary portfolio mandates.

Every year, our CIO revises their capital market assumptions. Our research analyst team delivers return estimates across markets, sectors, asset classes over a five-year timeframe.

Based on the risk profile of clients, we will align strategic asset allocations with those house views. Tactical allocations are made on an ongoing basis, typically twice a month.

When specific events—like a crucial election—happen, the global investment committee will hold a meeting to decide if a change in tactical allocation is needed, which then flows through to the implementation of discretionary portfolios.

The second level of construction comes with country allocation and the third level would be the instruments used to make the allocation. We use direct stocks, bonds, mutual funds, ETFs and hedge funds to create discretionary portfolios.

Q How are investors using mutual funds in their portfolios?

Clients with relatively lower assets, such as $10 million or lower, are keen on utilising mutual funds as they see it as the most efficient way to achieve diversification, compared to direct bonds or equity investing.

With mutual funds, they don’t need to look at single stock or bond positions and the due diligence is done by the fund manager.

From a cost standpoint, we have seen fee compression across the wealth industry and funds are becoming more attractive compared to when fees were generally higher. One of the drivers globally has been the ban on retrocession fees. With the ban, there is no mark-up on funds and hence more clients are willing to consider funds-only discretionary portfolio mandates.

Clients with more investable wealth (more than $10 million) prefer a mix of funds and other instruments such as single stocks and bonds.

They typically use funds for specific markets but which markets is not always clear cut—for instance, in Asia, active managers can generate alpha and there is an asymmetry of information so investors may choose to go with funds.

Q Do you use ETFs (exchange-traded funds) in investor portfolios?

We do use ETFs in our discretionary portfolios; we also have pure ETFs-only discretionary mandates. Such mandates have been exceptionally popular in Europe and Switzerland but less so in Asia, where investors are not as cost-conscious.

We rarely have clients coming up to us and saying that they want a portfolio that costs them the least amount of money. Instead, they want a portfolio that gives them specific return target—for instance, 5% net of fees.

We typically make use of smart-beta ETFs. We make use of single-factor funds, such as minimum volatility or high dividends, but don’t use multi-factor funds.

Q What about private equity and alternatives overall?

We don’t use private equity because you need to invest money for seven to 10 years and there is almost no secondary market.

Especially for those using discretionary portfolios, their share of private equity may be too small to warrant a bid in the secondary market. Institutional clients can access the market more easily and liquidate positions more easily compared to individual investors.

We use Ucits hedge funds that have high liquidity, with monthly or quarterly redemptions. Typically, for most investors, alternatives would not be more than 15% of the portfolio. For those who are interested in hedge funds, the portfolio can be made entirely of hedge funds. 

This article is part of a longer interview that will feature in AsianInvestor's forthcoming December 2017/January 2018 magazine. Look out for it in the coming weeks.