Forbes Asia, December 2011
Private wealth clients in Asia are facing intense market volatility and uncertainty for the second time in three years. The bad news is that almost all investment classes – equities both global and local, debt, property and commodities, everywhere from the US to Europe, Japan to China – face a deeply unclear and likely negative outlook. The good news is that compared to the global financial crisis of 2008, clients are much better prepared this time.
“There is a very marked contrast between what we’re seeing this time and what we went through in 2008 with private clients,” says Arjuna Mahendran, managing director and head of investment strategy at HSBC. “At the retail end of the market, they are going through the same experience as 2008: huge redemptions, forced selling, and a general state of panic. But high net worth clients are different. Because a lot of them used derivative instruments in 2008 and got burned, they learned their lessons and have deleveraged.” That leaves them less exposed this time, with more liquid investments and lower risk.”Most of them are looking at this as a guarded opportunity to pick things up fairly cheaply.”
Alongside the ructions of today’s market, there are other, longer-term trends at work in Asia private banking. Many of them stem from a key theme in Asia: the first generation who have built wealth approaching the end of their working lives and pondering how, or if, to pass the management of that wealth to the next generation. There are numerous knock-on effects of this trend, discussed in more detail in this report. Among them are an increasing professionalism in the way people manage wealth: corporate structures, family offices, more diversified portfolios, and a greater use of financial advice.
To see the report as it ran in the magazine, click here: Forbes Wealth Management v2
Another is an increased interest in estate planning, from straightforward wills and probate to training younger generations about wealth management – even including children. And a third is a more hands-on approach to philanthropy, often among newly wealthy individuals who have first-hand experience, and a clear memory, of genuine poverty.
One thing’s for sure: Asia is increasingly the engine of wealth generation, and correspondingly an important focus for wealth management. In October, Merrill Lynch Global Wealth Management and Cap Gemini released their closely-watched Asia Pacific Wealth Report, which found that Asia had overtaken Europe as the world’s second biggest market of high net worth individuals, measured either by population or combined wealth; on either measure, it’s only a matter of time before it overtakes North America for the top spot. One week later, the Credit Suisse Research Institute released its Global Wealth Report, finding that Asia Pacific accounts for 36% of all global wealth creation since 2000, and 54% since January 2010.
In this changing environment, there is a need for tailored, individual wealth management advice that does more than push a product. “The first question should not be: do you need life insurance, or a trust structure,” says Hugues Delcourt, CEO for private banking for Asia at ABN Amro. “It should be: what are your goals, your objectives, your constraints? What do you want to achieve? Then we can start talking about solutions.”
PART 1: INVESTMENT
Older and wiser, Asian private banking clients are approaching today’s market volatility with caution. But bankers say there is still a willingness to engage in markets and take a long-term view.
“Those with a strong opinion on a company or sector are seeing an opportunity to enter, in a gradual fashion,” says Arjuna Mahendran at HSBC. “But they don’t throw all their eggs in one basket.”
It’s largely a safety first environment. “With falling macro momentum and an expectation of choppy markets, UBS has recommended clients to position more defensively for quite some time,” says Alexander Kobler, Head of Investment Products & Services, Asia Pacific, UBS Wealth Management. “High dividend and high yield stocks are an ideal way to gain defensive equity exposure, with the security of a stable income stream in demand from investors right now.” He favours rebalancing cyclical exposure towards defensive sectors such as telecoms, healthcare and consumer staples, and focusing on companies with stable earnings, solid balance sheets and high dividends. “In addition, hedge funds can benefit in this environment,” he adds. “Given the current market volatility as well as the speed and magnitude of directional changes, we prefer trading strategies within the hedge funds space.” It is not a universal view: some are tired of hedge funds failing to deliver.
One particular challenge in this environment is working out where the safe havens are for investment. In some ways, the answer is simple. “The best safe haven is to be properly diversified,” says Hugues Delcourt at ABN Amro. “Yes, have a little bit of your wealth in gold, or treasury notes, but putting everything there? That would not be very wise. In these difficult times we ought to come back to the real fundamentals: risk profile, investment horizons and diversification.”
But it’s also arguable that safe havens have never been harder to find. “Safety is very costly nowadays, be it in terms of close to zero returns or high costs of protection strategies,” notes Kobler.
Throughout this year, the answer has typically been gold, but even that fell dramatically in October, albeit from all time highs. “Our advice is that gold was bound to have a bit of a correction, because it was becoming exponential in terms of price appreciation in the last few months,” says Mahendran. “But our basic advice is to start accumulating below US$1500 for another burst upwards. Gold remains in demand as central banks are debasing their currencies and facing inflation.”
Some felt gold had simply become too highly valued to be a sensible investment anyway. Speaking just before the major price decline, Lee Boon Keng of Julius Baer said gold was “somewhat overplayed” as a safe haven. “Gold and other precious metals are no longer safe havens but speculated commodities. Would I put gold as an important part of my portfolio right now? At these prices [$1800 at the time of the interview] probably not.”
But it does have good fundamentals. “Right now, strategic investors are still encouraged to build up exposure to gold as a means of diversification and portfolio insurance,” Kobler says. “Compared to the Swiss franc and Japanese yen, gold does not have a central bank that tries to prevent further appreciation. Thus, the metal can be viewed as the purest-play hedge against prevailing sovereign and currency risks.” Corrections in the gold price simply provide good opportunities to enter, he says.
In terms of currencies, two in Asia stand out: the Singapore dollar and the Chinese RMB. The Singapore dollar is expected to benefit from the fact that the Swiss franc, the traditional safe haven currency, has now been capped against the euro. “We are telling our clients that amidst all these uncertainties, we need to focus on the things that are the least uncertain,” says Lee. “One is that after the SNB fixed the Swiss franc, we will see the establishment of a replacement as a safe haven currency, and that is likely to be the Singapore dollar. The make-up of the economy is fairly similar, both have the rule of law, they are key financial centres and have similarly high governance standards. That is going to make the Singapore dollar a very attractive currency to have over the course of the next couple of years.” What to do with the Singapore dollars is a different question: Lee advises clients to look at high yielding Singapore stocks, including real estate investment trusts (REITs).
The RMB is a different story. While still not fully convertible, it is becoming an increasingly internationalised currency, with the so-called dim sum bond market thriving (with a few dips and glitches) in Hong Kong, and RMB bank accounts appearing both there and increasingly in Singapore. “Our clients have been building positions in RMB,” says Mahendran. Lee at Julius Baer argues that problems in Europe and the US will prompt China to increase the speed of the internationalization of the currency, which ought to mean it will appreciate steadily; over time, as investment products for offshore RMB develop, they are likely to prove extremely popular with overseas clients. Julius Baer itself is launching a China equity fund, and has combined with Singapore’s DBS to create a product investing in dim sum bonds. And a host of mutual funds for offshore RMB have sprung up in the last 18 months, including big asset management names such as HSBC, UBS, Schroders, Barclays Capital, Singapore’s Fullerton Asset Management, and – soon – BlackRock.
One problem with assessing a client’s risk tolerance is that it’s one thing to explain a possible decline, another to experience it. “Risk tolerance is not a discussion that takes 20 minutes and then you fill out the forms,” says Delcourt. “It’s very different to say to a client: ‘can you take a 20% decrease in your portfolio?’ and then the decrease actually happening. Nobody likes losing money, but when you are confronted with the reality of losing 20% of your portfolio, you may realise there were a few things you were hoping to do and can’t do anymore.”A proper understanding of a client’s true risk appetite is key.
That said, the dangers for private wealth clients do not seem so acute this time. “2008 basically pointed out the perils of leverage and derivatives: those were considered the two most toxic elements,” says Mahendran. “So everything else is considered relatively safe.” Within that, clearly emerging markets appear to have the better economic prospects, so advisers tend to suggest allocations to Asia on both the debt and equity side. While Asian equities tend to be hit with those in the developed world – unfair as that might seem – Asian debt has remained more resilient. “Asian debt in general is managing this volatility quite well,” says Mahendran. “Spreads haven’t widened as much as in 2008.”
Hedge funds, he says, are out of favour since they have not performed well; long-only funds are fine, but clients have a greater need to understand exactly how they operate. “The client wants to understand intrinsically what a long only fund is investing in, rather than plunging in.”
But no matter how bad the markets, investors have to do something. “You can’t remain uninvested when Asia is running at historically high levels of inflation,” says Mahendran. “In Singapore inflation is running at 9.5%. Clients realise they can’t just keep their money in cash; they’ve got to make their assets work for them to keep pace with inflation so they don’t lose the value of their wealth in real terms.”
And as Kobler says: “The time will come over the next months where the higher risks will also be rewarded with higher returns.” Timing is everything.
PART 2: FAMILY OFFICE/ESTATE PLANNING SECTION
In recent years many banks, such as UBS, Credit Suisse and Citi, have launched dedicated family office business units; others, whether or not they have separate units, report an increase in the amount of business in this segment. It’s no surprise: family wealth drives Asia.
In October Credit Suisse launched a comprehensive study of family-owned companies (not family office wealth management, but the corporate growth at a family level that drives the trend). Everyone knows the heavyweights – the Mittals, the Tatas, the Samsungs, the members of Li Ka-Shing’s family – but in fact across Asia’s 10 major markets there are more than 3,500 family-owned companies with a market capitalization of more than $50 million. 1,279 of them have a market cap of greater than $500 million. All told, family businesses account for 34% of Asian nominal GDP, and 32% of market capitalization, but in some markets the figure is far higher: 83.2% of the Philippines market cap, for example, with Singapore and South Korea both over 50% too.
“An interesting difference to Europe is that these are businesses that are relatively young,” says Nanette Hechler-Fayd’herbe, head of global financial markets research for private banking at Credit Suisse. “38% of them were listed after 2000. Many of them are first-generation led, whereas in Europe there have usually been several generations. They are at the early stage of their life cycle compared to their peers in Europe.” That in turn means more family office investment structures. “As family businesses grow and create wealth for the family, there is a movement towards a more professional investment approach as well. It goes hand in hand.”
Naturally, this is all linked to the succession theme too. “Succession from one generation to the next will accelerate over the next decade,” says Agnes Au-yeung, Head of Family Wealth Advisory, HSBC Private Bank. “The new generation of family offices will have to adapt to the needs and values of the baby-boomer entrepreneurs, who cherish new ideas and values, and who are concerned about continuity and leaving a legacy.”
Amy Lo, Head of Ultra High Net Worth for Asia Pacific at UBS Wealth Management, agrees. “One of the main reasons for this change [growing interest in family offices] is generational transition,” she says. “While we see many family businesses being successfully handed over to the younger generation, some families decide to divest and continue the legacy in the form of investments of philanthropic activities, transforming from a business family into a wealth management family, while staying entrepreneurial and continuing to look for new opportunities.”
But it’s not an area where many people appear satisfied with what they’ve done. A recent UBS Family Advisory study surveyed 120 ultra high net worth families globally, finding that 76% were concerned about protecting their wealth, but only 25% considered the way they approached the issue to be sufficient. “32% said that lack of know-how was the biggest show-stopper in putting a structured approach to family wealth protection in place,” says Lo. Good estate planning, she says, should involve not just the senior generation but junior ones too, “in a dialogue about the core values of the family and what the family wants to achieve in the long run. Many families make the mistake of limiting their efforts to the legal structuring, while missing the point of the true reason of such a structure. Successful legacy building involves a clear long term family strategy and thought through governance system,” which might include the drafting of a family constitution or the creation of a family council, she says.
A big part of family office advice is structural. “For those that want to get started, we help them with the structure and definition of governance,” says Marcel Kreis, head of private banking for Asia Pacific at Credit Suisse. “That is crucial to the success of the operation. We discuss issues of legacy and asset protection, help them with the formulation of investment policy if that’s required, and provide any financial services they need.” Kreis’s colleague Hans-Ulrich Meister, CEO for private banking globally, adds: “All over the world, with family offices, you have to push them on succession. If succession is not timely you can lose everything you built up in the last 30 to 40 years. It is such an important part, especially in companies who might need years preparing for a successful transition.”
But investment advice is naturally crucial too. Banks report that with more formal structures, risk management becomes more sophisticated and time horizons for investment tend to grow – perhaps allowing people to invest in illiquid asset classes like infrastructure, which improve diversification. That said, many family offices did lose a lot in the financial crisis from illiquid alternative investments. “Form these lessons many families have started to define risk buckets,” says Au-Yeung. “They may set aside a bucket as a nest-egg, or the start-over-again fund, while managing another bucket with a higher risk level or a thematic focus so that that combined buckets meet the aggregate needs of the family.”
For banks, this is growing business, as more and more institutions broaden from a traditional focus on investment management to a far more rounded sense of partnership with family wealth. “I look at the relationship manager as being a conductor, being able to play with a number of musicians,” says Hugues Delcourt at ABN Amro. “An orchestra without a conductor plays a cacophony. A conductor without musicians doesn’t entertain his audience. I believe in a private bank that is a partner to our clients: not only to advise on whether an investment should or should not be made, but to structure wealth in a way to achieve their objectives.
“The private banking model of the recent past in Asia was much more transaction-oriented,” he adds. “It still is, to a large extent. We ought to move to a more client service approach, and wealth structuring is fundamental part of that advisory scope we need to provide.”
Family office structures can take a variety of forms, “ranging from a trusted assistant to a virtual family office managed by an ex-senior banker, and in more mature cases to an entity with an independent legal status and staffed by well-qualified professionals,” says Au-Yeung. Such professionals can be in high demand: Credit Suisse’s most significant private banking hire this year was Bernard Fung, who formerly managed the wealth of the UK’s Sainsbury family.
Lo at UBS distinguishes three separate groups. There are ultra high-net worth families in Hong Kong and Singapore, who are sophisticated and have reached a natural point where it makes sense to separate business interests from financial assets; they use investment specialists who coordinate sourcing and screening of investment opportunities. Then there are clients in China and India. “They are quickly picking up in terms of professionalizing their wealth management and are very active in enhancing their knowledge as well as seeking ways of adapting the western family office concept to their business driven, high growth environment,” she says. “One of the main challenges for UHNW families in these countries is the fact that most of the family wealth is tied to a family business. In such a situation, the first critical step in creating a family office usually lies in diversifying this concentration risk and adopting an asset allocation approach to managing their wealth for the long term.” And the third group is European family offices establishing a presence in Asia in order to be in a better position to gain suitable exposure to the Asian growth story, typically through a Hong Kong or Singapore hub.
It can be a tricky market to service. “In our experience, single-family office clients require a much higher level of service and attention,” says Au-Yeung; HSBC services them through its HSBC Private Wealth Solutions business, which manages over US$100 billion of these assets worldwide. “Family members can be quite hands-on, especially with investment decisions.” There is perhaps a suspicion that needs to be addressed too. “Our advisers need to continually validate our objectivity to client families. To assure their independence, our advisers are not incentivised by product sales, nor measured by asset gathering.” And advice has to be customised – it’s not a one-size-fits-all sort of market. Lo says: “Due to the highly personal nature of the work, we have found that most families prefer to set up their own, bespoke, family office with a combination of their own trusted employees (often having served the family business for many years) and external experts with specialist skills,” including lawyers, accountants and tax advisors as well as investment professionals.
That said, it’s still an industry in its infancy. “The family office is a relatively new concept, with many still studying, comparing, developing and evolving their models,” says Au-yeung, who adds that family offices in Asia typically follow a US and European-style pattern. She says more and more families are using this approach, but says it is unclear how widespread they will become. “The definition is vague, and family offices tend to be very private,” she says. “We expect families to lean towards single-family offices as they prefer their affairs to be managed internally and separately from other wealthy families.”
Another theme that often comes from family wealth management is the impact on the family itself. “As an administrative centre supporting the family’s governance structure, the family office provides a unique platform to improve and promote communication and harmony among family members.” Perhaps this is one reason that multi-family office structures are relatively rare in Asia. But they do have some merit. “Rising costs, a difficult investment climate, and a desire for a breadth of services tend to drive families to partner with larger multi-family offices,” says Au-Yeung. Lo says multi-family offices serve the needs of, at most, six or seven families; this sort of model is more common than third party-owned commercial service providers branded as family offices (multi client family offices, as Lo calls them), which can serve as many as 50 families – a model that is common in the United States.
Above all, though, Asia is characterised by a stronger sense of possibility, and of momentum in new wealth generation. Delcourt summarizes it like this. “Europe has a tendency to look at tomorrow as a zone of risk. Asia has a tendency to look at tomorrow as a zone of opportunity.”
PART 3: PHILANTHROPY
Like family office structures, philanthropy is professionalising in Asia. “There are increased expectations of transparency and accountability and evidence of social impact,” says Cynthia D’anjou-Brown, senior philanthropy and governance advisor, HSBC Private Bank, which manages more than US$1 billion in assets and handled US$50 million of donations on behalf of clients in 2010. She says the definition of what constitutes philanthropy is broadening, from informal charity to structured grant-making, to investments with social value. The young generation is having an impact here. “There appears to be a high engagement of donors at a younger age and a trend towards working with family members,” she says.
Philanthropy in Asia differs from the rest of the world in some crucial ways. One is the dominance of education in giving programs. A recent study by UBS and INSEAD found that education is likely to account for 35% of giving in Asia in 2011; the next biggest cause – poverty alleviation – accounts for just 12%. “These are strong cultural roots that support education, tied to Confucian, Hindu and other Asian traditions,” says Jenny Santi at UBS Philanthropy Services. And many who have risen from poverty recall either their lack of education or the gift of being the first in their family to receive it. “One of the most deep seated reflections they have is that they were deprived of a high quality education, so want to give back in that sector; or they recall that the only reason they were successful was because somebody gave them a handout and made a difference in their lives,” she says.
Other banks confirm this: D’anjou-Brown says nearly half of the donations HSBC administered on behalf of charitable trusts and foundations in Hong Kong over the period from July 2010 to June 2011 were allocated to educational projects, compared to one fifth for social services and one tenth to health and medical services. Few philanthropists in Asia donate to environment or conservation themes, animal protection or culture.
One can argue that the Asian cultural emphasis on family is also relevant to the way people give, and distinguishes it from more individualist approaches in North America. “In Asia the older dominant religions, the social structure of the clan, and collectivism breed a culture of caring for the large extended family and community,” says D’anjou-Brown.
The UBS study found that giving was chiefly domestic, although D’anjou-Brown says there is a trend towards giving internationally – particularly what she calls “diaspora giving”. In particular she sees a growth in donations to mainland China.
As with estate planning, much of the important advice given around philanthropy is structural: choosing the legal entity for giving and ensuring it is properly set up in terms of succession, flexibility, tax advantages, liability, privacy and compliance. “A charitable trust or foundation managed by a professional or corporation trustee is an excellent choice because it provides better succession arrangement and need not rely solely on individual directors as in the case of a company,” says D’anjou-Brown. It is vital to be clear on what a donor wants to achieve, and how to measure it. Measurable results are a renewed focus in Asian giving.
The rise of governance also has an impact on philanthropy. CSR Asia says that 87% of family businesses participate in CSR activities, though only 53% have a policy and 39% have clear CSR goals and targets.
Many banks report an increasing insistence on direct involvement in charitable initiatives. “Rather than ‘I donate so much to such and such an organization’, people want to be able to help advise on a philanthropic project, and to get involved,” says Delcourt. “It’s not just about a financial return, but for people to get their own return – to see that what they do has a positive influence, and a multiplying factor. We continue to support a number of institutions which are applying the private equity way of thinking to philanthropy.”