Prince Max, chief executive of Liechtenstein-based asset management and private banking firm LGT Group, spoke to AsianInvestor about some of the big issues facing firms such as his own.
The company celebrates its 25th anniversary in Asia this year. The private bank started booking assets in Hong Kong in August, and the alternative asset-management arm is soon to open a Beijing office, as reported by AsianInvestor. There is around $10 billion under management across the group in the region.
LGT doesn't have as high-profile a brand as some global players. Is that something you'd like to change?
Brand is important and is carried by the people, the relationship managers. We don't rely so much on walk-in clients, people coming from the street; most come through our network of private bankers. We try to target senior bankers with a good client portfolio.
But even with this type of business model, a strong brand helps?
I agree we need to raise LGT's profile and better establish it as a brand in Asia. Still, despite the attraction by Asian clients to the big global brands, they realised from the last crisis that the size of the brand doesn't necessarily correlate with the quality and security they expected, and they've been shocked by the correlation between size and complexity and the losses incurred.
As we now find ourselves in an environment that is more stressed and carries more risk, clients are looking for banks that are well capitalised, have a history and track record of profitability and stability and have business models that are straightforward and sustainable. It helps that LGT focuses on private banking and asset management and has a tier-one ratio of 20%.
LGT touts its manager-selection capability as a big strength, but fund-of-funds and multi-manager models are not so much in favour after the financial crisis and the Madoff blow-up. Have you changed your approach as a consequence?
Madoff was a major failure in the hedge fund industry, and in any case we looked at it but didn't take any exposure. Yes, there have been some outflows from multi-manager funds since the crisis, but we are still convinced that multi-manager funds are the best approach for risk diversification.
However, it is a skill that requires experience – you can't select funds globally with just a couple of guys. You need people in New York to understand the funds there, in China you need people speaking Mandarin to understand some of the strategies that China-orientated hedge funds are pursuing.
To be frank, I’m surprised we are one of the very few private banks that run a large manager-selection effort. Most banks should come to the conclusion that risk diversification is a good thing – which is the basis of all portfolio and investment management theory.
What about passive products such as exchange-traded funds – does LGT use them on the asset-management side or sell them through the private bank?
Yes, we think they can make sense both for our asset managers and our private clients. In some sub-segments we think working with ETFs is fine, as long as you select the right ones and you understand what risks the managers take. I don't have an issue with them in terms of accessing and exiting markets. They can be useful for short-term tactical trading strategies.
But what they don't do – which we can provide – is offer fund manager due diligence. We think we can identify active managers and generate long-term value, but the difficulty is that the mentality of many asset managers is short term and tactical.
How about mutual funds? Do you sell them through your private bank?
Yes, and I think mutual funds to an extent have an undeservedly bad reputation. People say 'I don't want to buy that mutual fund because it lost me money last time', but you won't lose year in, year out.
What’s your take on the talent war going on, particularly in Asia, among private banks?
On the one hand you have a lot of demand for talent in the financial services industry, and on the other ultimately if you look at profitability of the banking industry it is on more of a downturn than an upturn. Those are the two key drivers for financial-services salaries – demand and profitability.
There is still a lot of movement between private banks even amid the downturn – surely that's not a good thing for clients?
At a certain point in your career, after having jumped around two or three times, you typically start to take a longer-term perspective and you look for something that is more predictable, and that realisation works in our favour.
We work for an industry that is long-term in nature – private banking and asset management are industries where clients want long-term, stable relationships. If a relationship manager has jumped around two or three times already, we don't want to have him anymore.
But it will most likely keep happening in any case?
Well, I don't think it's getting worse, because the relationship managers and the clients are getting fed up with it, and there's only so much you want and can afford to pay for staff. Finding the right talent will continue to be a major challenge.
What about regulation in Asia, which has tightened up here, as elsewhere, for the investment industry?
Regulation is an issue, but we have found that regulation in Asia is forward-looking and business-orientated, and I have no reason to believe that will change. Is it an issue? Yes. Would we like to see changes here? Yes. But, overall, regulators in the region are becoming increasingly business-orientated and long-term-orientated in their approach.