There has been a brain drain in the provision of smart solutions for private clients, with a heavy focus on vanilla business and too few investment ideas being introduced to the market, laments Stefan Bollinger of Goldman Sachs.
Bollinger was promoted to head of regional corporate sales in Goldman’s securities division at the start of this year, in addition to his role as head of its private investor product group (PIPG). This month Isaac Wong was also promoted to PIPG sales head for Asia Pacific (ex-Japan).
This forms part of a push by the US investment bank to eliminate overlaps and better coordinate the provision of investment solutions and services between wealthy individuals and corporate clients globally.
Bollinger's promotion also follows the retirement of Dimitrios Kavvathas, former head of Asia-Pacific structuring and co-head of Asia-Pacific ex-Japan securities distribution, who oversaw areas including corporate sales.
Talking from a product perspective, Bollinger points out that many banks have been focused on new capital requirements and balance sheet reduction in the past few years. As a result, there are more plain vanilla products instead of bespoke solutions to address clients’ issues. That, in part, is also a reflection of investors’ lack of conviction in a volatile market.
This has led to a loss of talent as firms that bulked up in anticipation of increased business have been forced to downsize on the back of continued risk aversion last year in an event-driven market.
Reading between the lines, Bollinger also appears to be suggesting that solution providers have too readily settled for vanilla business and could be doing more to deliver innovative investment ideas.
“The fact is capacity has been taken out of the system,” he notes. “In terms of the knowhow to come up with good ideas for the high-net-worth (HNW) community, there has been a bit of a brain drain.”
Bollinger says one evolving theme from last year which investors are worried about now is a potential credit bubble and what happens when the outlook for the asset class becomes more challenged.
“Personally I feel the credit market feels a bit bubbly in high yield, and the risk-return is not always what we would like it to be,” he notes.
While short-term rates are forecast to remain low for a while, it’s clear there will be a run-up at some point, hurting the performance of long-duration fixed income instruments.
“If rates go up just one percentage point, you are 7-8 basis points under water in a 10-year instrument,” Bollinger says. “With reduced balance sheet and capital, dealers’ ability to absorb large amounts of credit buybacks has diminished. This can potentially lead to more volatility in the secondary market once people start selling.”
While Bollinger confirms there is still investor interest in credit exposure and Goldman continues to offer credit risk to clients “in a way that conforms with our market views”, nevertheless investors have been seeking to monetise profits on bonds trading above par and to rotate into equities.
“The two main markets where we have seen risk-on is FX and equities,” says Bollinger, pointing to Japan, China and Hong Kong for Asian equities, US stocks and luxury and consumer-focused firms in Europe.
But he adds: “We have to be a bit smarter on how we structure these solutions because equity volatility is low. Traditional structures may not be the optimal way to get best return.”
He says Japan is a very momentum-driven market and there are concerns over how much further it has to go given that it is policy rather than fundamentals that has changed. “When you invest at relatively lofty levels, you probably don’t want a leveraged long position, you might want a call spread type of investment.
“That is where we spend a huge amount of time, looking at specific market opportunities, or repackaging a product that has historically not been accessible to an ultra high-net-worth investor so it has a better risk-return profile than you would find in the public market.”
Asked what Goldman is working on now, he points to positioning clients for higher interest rates with a positive (or small negative) carry, while also trying to provide equity upside with limited downside.
AsianInvestor interviewed Bollinger in 2010 when he relocated to build out Goldman’s start-up PIPG business. He says it has grown around 50% annually since then, from a low base, and has added an on-the-ground sales presence in both Taipei and Seoul.
The unit now has around 50 people in functions including sales, trading, origination, technology, operations, legal and compliance. Globally, PIPG offers about 150,000 products.
Asked what the next step for the business is, he says the big question revolves around the return of investor risk appetite, which would trigger a more concerted business expansion.