Issue 121 October 2018 Lite

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Issue 121

ST E A DY ASCENT F O R D PM I N ASI A — PENETR ATI O N

BY ASSETS NEARS 10% Private banks ramp up equity DPM product development in Asia P 3 4 ESG: Examining shallow growth — scrutinising sustainable investing at Asia's private banks P 1 3

INSIDE Regulations September Regulatory Round-up

Industry Inside HSBC Private Banking's silent renaissance

Industry LO: Strategic partnerships to relieve local bank pressures

Industry All quiet on the Eastern front as consolidation slows

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CONTENTS ISSUE 121

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Letter from the Editor

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Echo Chamber Industry CITIC Securities Brokerage (HK) launches new WM account for “sweet spot” clients

CEO Andrew Shale Editor Sebastian Enberg Editorial Richard Otsuki Benjamin Yang Charlene Cong Alice So Tin Tin Sze Rebecca Isjwara Tiffany Hopkins Gigi Lam Managing Director Paris Shepherd Research Stratos Pourzitakis Lisa Cheng Shunta Kamba Business Development Sonia Lam Sam Chan Olaide Ogungbesan Charis Tse

Digital Tristan Watkins Alice Wong Sanya Amin Marketing Yasna Mostofi Vivian Chong Evy Cheung Jacqueline Kwok Events Koye Sun Aleck Kwok Gerard Timbol Finance & Operations Karman Wu Martina Ngai Sandy Lau Yuki Chan Xenia So Director Europe Madhuri Chatterjee (Actaea Consultants) Production DG3

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ISSN NO. 2076-5320

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Regulations September Regulatory Round-up: MAS lists enforcement priorities; PWMA suggests PWM codes for HK; online suitability a “huge challenge”

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Industry Inside HSBC Private Banking’s silent renaissance

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ESG ESG: Examining shallow growth — scrutinising sustainable investing at Asia’s private banks

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Hong Kong establishes Green Finance Association to engage private investments

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High barriers to SI adoption despite keen interest: UBS GWM

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DBS sees “encouraging” flows into SRI strategies

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Advertorial Sustainability investing to raise financial performance in the long run

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ESG Deutsche Bank WM eyes ESG DPM launch in Asia

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Investments Julius Baer raises US$450 million in seven days for FMP solution in Asia and Middle East

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91% of wealth managers in Asia confident about fund flow rebound in next 12 months

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Events Funds Selection Nexus 2018

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Regulations MAS’s new opt-in accredited investor regime to protect HNW investors

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CRS impact could be blunted by “broadly unorganised” data

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DPM Nomura to buy 40% stake in Julius Baer’s Japan business, gain access to DPM capabilities

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Private banks ramp up equity DPM product development in Asia

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Retro fee ban could prove double-edged sword for DPM

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HSBC Private Banking’s Asia DPM inflows grew five-fold in 2017

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UBS raises US$100m in Asia for new ‘fund selection’ discretionary mandate

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EFG in two-pronged recurring revenue push

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Regional DPM expansion in the offing for CIMB

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Events Asian Fixed Income Forum

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A case for strategic allocation to Asian LC bonds

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Industry Lombard Odier: Strategic partnerships to relieve pressures of local banks

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DBS takes root to bank Indonesia’s rising affluence

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Technology APIs expose FIs to greater cybersecurity threats: MAS’s CSAP

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Asia at the epicentre of Deutsche Bank WM’s tech ambitions

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HNWIs' preference for instant messaging is "a pain point unique to Asia": FinChat

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Industry All quiet on the Eastern front as private banking consolidation slows, but for how long?

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People Moves Movers & Shakers

Asian Private Banker looks forward to hosting you at one of our functions this year

25 Oct

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29 Nov

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HIGH CONVICTION: 2019 INVESTMENT IDEAS AND THEMES The most senior gathering of Asia-based fund selectors, CIOs, product gatekeepers from global and regional private banks in Asia, alongside established IAMs and family offices, examining 2019 investment ideas and product strategy.

16 Jan 2019

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CHINA INTERNATIONAL PRIVATE BANKING & WEALTH MANAGEMENT LEADERS - PRIVATE DIALOGUE The C-suite leadership of China-linked wealth managers and private banks convene for a leaders conversation to examine and debate the future of off-shore wealth management for Chinese clients.

5 Mar

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WOMEN OF WEALTH This milestone forum will study the decision making role of matriarchs in managing Asia’s family fortunes, and explore the current state of female leadership and empowerment in the wealth management industry.

9 Apr

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11 Apr

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DISCRETIONARY PORTFOLIO MANAGEMENT LEADERS CONVERSATION Key DPM leaders from private banks discuss and debate new products for their DPM mandates, and examine other key issues affecting DPM traction in Asia.

7 May

Singapore

1st Year

9 May

Hong Kong

ESG DIALOGUE Gathering of key families, product selectors & private bankers who are leading the ESG, SRI & impact investing change within Asia.

21 May

Hong Kong

23 May

Singapore

10th Year

APB SUMMIT The largest conference of senior private bankers held in Asia. Over 800 private bankers will participate in our flagship summits in 2019.

LETTER FROM THE EDITOR

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he past six months have served as a timely reminder to Asia’s private bankers that riding beta, placing concentrated bets, and trading in the short term will never be sufficient when the clouds gather, as they have now amid rising rates and heightening geopolitical tensions.

Accordingly, relationship managers who have built critical mass from core portfolios invested in discretionary mandates should be reaping the benefits, including stronger portfolio resistance to the downside, a base of recurring income to offset transactional lulls, and more time on hand for activities such as client prospecting and wealth planning.

The good news is that private banks in Asia did not allow 2017’s ‘easy run’ to derail their efforts to direct a greater share of client assets into managed solutions — incidentally, almost every substantive conversation I had with a PB or investments head touched on the importance of driving up DPM and contractual advisory penetration rates, which suggests to me that the industry remains committed to evolving the business model.

Our latest numbers show that Asia’s private banks collectively grew their DPM assets by 53% YoY as of 2017-end. That’s no small feat given that overall AUM grew a robust 30% over the same period. Amplified by strong returns and the reemergence of ‘animal spirits’ following Trump’s election victory, the industry in Asia achieved a 9.6% penetration rate compared to 8% in 2016 (more details on page 34). And while the gap between Asia and its western counterparts remains pronounced, the fact that Asia is now closing in on double digits is praiseworthy, considering that in 2012, the average penetration rate was just 4.9%.

Back then, the goal of convincing Asian HNWIs on the benefits of delegation in general — let alone DPM — seemed unreachable. But driven by top-down commitment, the repetition of key messages (internally and externally), and product innovation, the industry has managed to double its penetration rate, even before regulators ban trailer fees and shift fund distribution to DPM businesses.

This year alone, private banks have increased their focus on product development in DPM. In particular, we are seeing new techniques for equity security selection, increased efforts to access a wider range of fixed income underliers, and the development and launch of ESG-related solutions (see more on page 13 for our deep-dive into ESG investing).

We congratulate the industry for its bold and valiant efforts to resist the (short-term) path of least resistance, to better align interests with clients and, to stay the course no matter the environment.

Sebastian Enberg Editor Asian Private Banker

Richard Otsuki Deputy Editor & Head of Investment Coverage Asian Private Banker 5

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INDUSTRY

e ch o cham be r The industry somehow accepts that taking a month or two to onboard is acceptable, which is insane because if we were to walk into any other service provider in our walk of life to open something, it would not take two months.

Lok Yim, head of emerging markets, wealth management, Deutsche Bank Despite the keen interest, high barriers to adoption of sustainable investing remain.

Education is key to reduce the barriers to sustainable adoption.

Tan Min Lan, head of CIO office, APAC at UBS GWM Because the growth in the region is so exciting, and because our market share in Asia is below what it should be, if you marry our ambition to rectify this with the underlying growth, you can work out where we are heading as a business.

Peter Boyles, chief executive, global private banking, HSBC The regulators are now looking into raising the game for EAMs to ensure a level playing field for all participants. It is no doubt that increasing surveillance activities will lead to increasing costs, and we may be looking at an industry consolidation in the future.

Sascha Zehnter, head of EAMs, APAC, Credit Suisse PB I think a substantial part of our competition will have issues to deal with in terms of regulations. That presents us with an opportunity to consolidate even more client relationships. But in the long run, we believe that the whole market will benefit from the normalised regulation and leading companies like Noah will stand out eventually.

Kenny Lam, group president, Noah Holdings Our aim is to provide banking services that are embedded in our customers’ everyday lives while maintaining client privacy and keeping to our rigorous security requirements. With DBS Wealth Chat, we can now meet both the communication needs of our clients and regulatory requirements.

Tan Su Shan, group head of consumer banking and wealth management, DBS

CITIC Securities Brokerage (HK) launches new WM account for “sweet spot” clients

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ITIC Securities Brokerage (HK), CITIC Securities Company Limited’s wealth management arm, has launched a new wealth management account, CITICS Plus, which offers HNWIs a range of financial products and services across mutual funds, bonds, and structured products.

Chinese customers in Northern, Southern, and Eastern China, with liaison points in key provinces and cities, and CITICS Plus will enable us to expand our footprint. The launch of CITICS Plus is in line with CITIC Securities Company Limited’s strategy to offer both onshore and offshore products and services.”

According to the firm, the new account has been designed to satisfy the region’s HNW client appetite for product diversity as well as financing flexibility provided by a margin ratio of up to 70% on selected products.

Leung added that the fast-growing Chinese HNW segment — specifically those with assets between HK$5 million and HK$12 million — is the firm’s “sweet spot”, as it is often neglected by private banks with higher entry levels and under-serviced by retail banks whose products and services are not suitable or insufficiently sophisticated.

“CITIC Securities Brokerage HK is shifting its focus towards wealth management services,” said Tony Leung, CEO of CITIC Securities Brokerage Hong Kong.

“We have established a dedicated team of wealth managers to provide services to

As of August 2018, CITIC Securities Brokerage Hong Kong had HK$86.4 billion (US$11.1 billion) in assets under management, custody, and/or advice.

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R E G U L AT I O N S

September Regulatory Round-up: MAS lists enforcement priorities; PWMA suggests PWM codes for HK; online suitability a “huge challenge”

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eptember saw Singapore’s regulators roll up their sleeves and focus on enforcement priorities and Hong Kong’s industry participants call for more clarity on private wealth managementrelated regulations.

The Monetary Authority of Singapore (MAS) kicked off the month by releasing a consultation paper on ‘cyber hygiene’, suggesting a number of practices financial institutions should implement given the latest bout of cybersecurity threats, particularly the SingHealth data hack in July.

Moreover, the Singapore regulator published an update on its Enforcement monograph, outlining Singapore’s current enforcement landscape and listing the determinants of enforcement priorities. It also said ongoing investigations would not be announced publicly and that disclosure of closed cases would happen on a discretionary basis.

For instance, and according to industry practitioners, the Singapore regulator recently shifted its anti-money laundering and counterterrorist financing (AML/CTF) focus from private banks to independent asset managers (IAMs) and, as yet, has not announced this to the public.

PWMA seeks KYC utility, PWM code of conduct, and more clarity Meanwhile, the Private Wealth Management Association (PWMA) in Hong Kong recently published a white paper suggesting ways to accelerate growth and “facilitate industry development”, such as shortening onboarding time and drawing up a code of conduct specifically for the private banking industry.

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According to the PWMA’s annual Hong Kong Private Wealth Management Report released in September, the average time it takes to onboard private banking clients has increased from 30 days in 2016 to 40 days in 2018. Accordingly, 82% of the survey respondents support pooling resources to create a shared KYC utility, but the PWMA said it would not be a “panacea” because the functionality of a shared utility would rest on database design and usability.

“Key challenges around providing adequate documentation to prove source of wealth, a particular issue for Mainland Chinese HNWIs, will remain,” the PWMA white paper read.

Given that Hong Kong does not have a specific set of rules regulating the private wealth management industry, Peter Stein, managing director of the PWMA, told Asian Private Banker that investor segments are regulated by a similar set of requirements despite having different profiles and needs.

Case in point, Mark Parsons, a partner at Hogan Lovells, told Asian Private Banker that it would be a “huge challenge” for private banks to meet the online suitability requirements that are being implemented in April 2019 because, in Hong Kong, suitability is judged on both online and offline interactions, making it difficult for private banks to conduct suitability checks solely online.

In an effort to smooth online sales processes and shine a light on how offline sales of such products will likely be regulated in the future, the Hong Kong Monetary Authority (HKMA) said it would take a “risk-based approach” in regulating online transactions and refined its definition of ‘complex products’.

INDUSTRY

Inside HSBC Private Banking’s silent renaissance When Peter Boyles steps down as HSBC’s chief executive of global private banking at the end of this year, his successor, António Simões, will take the reins of a business that looks very different from that which Boyles inherited back in 2012.

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arnished by scandals and oddly disconnected from the rest of the group, HSBC’s private banking arm, in the past, has struggled to articulate its raison d’être. Its thick carapace and hands-off approach to the media haven’t helped matters, prompting many to blindly ask why HSBC bothers with a business whose contribution to the P&L is slight and the risk it brings significant.

But as it turns out, a quiet renaissance has been transforming the private bank from the inside out, and nowhere more so than here in Asia.

“We see ourselves as the glue that holds the entrepreneurs and next generation close to the bank,” Boyles told Asian Private Banker on the eve of his retirement notice and around the time the private bank announced a massive hiring drive in the region. It intends to bring in 120 new frontline staff by the end of this year and a staggering 700 additional full-timers over a five-year period amid plans to beat the market in terms of AUM growth.

“So we didn’t want to be overly vocal until we were absolutely confident we had really solid foundations, which required us to put every single client through a deep due diligence exercise, from both global compliance standards and tax transparency perspectives.”

Put crudely, this has meant shrinking the business in order to grow it.

The private bank has exited booking centres and markets, including in Latin America and Central Eastern Europe, shed client assets, and pushed through hefty structural changes. The Swiss holding company that held most of the private bank has been unpicked and, in line with the group-wide transition towards global business divisions set in motion by former group CEO Stuart Gulliver, HSBC Private Banking is no longer run on a standalone basis. Rather, it functions as an integral part of a universal banking group that is run as a global business supported by country management.

“We want to increase our market share because there is no reason why we shouldn’t given our extensive network — not just in Asia but also throughout the world,” added Siew Meng Tan, HSBC’s regional head of global private banking, APAC, and, notably, the individual responsible for setting a target so ambitious that Boyles himself challenged Tan’s vision.

Evidently, then, the private bank is back in growth mode — a year ahead of schedule no less — and it wants the market to know.

But why now and what has changed?

“We were intent on fixing issues and refocusing on core markets to the group in places where we had scale and a right to win — which usually means a fully universal banking presence — and focusing on clients from countries where we had a group presence and therefore were able to get comfortable with the background of the client,” said Boyles, addressing head-on the private bank’s silence in the market over the past four or five years.

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Siew Meng Tan, regional head of private banking, APAC HSBC “We’ve divisionalised and subsidiarised [the private bank] back into the mothership,” explained Boyles, alluding to why HSBC Private Bank became HSBC Private Banking last year — a change that would ordinarily be chalked up to bureaucratic fiddle, except, in this case, it is emblematic of a shift in both structure and mindset.

INDUSTRY “In Asia, we sold the private banking business back to the region and it is now a division of the Asia Pacific business,” he continued. “So everyone here has a stake in its success.”

Meanwhile, the product platform has been flushed out. Boyles said the private bank has reviewed all third-party suppliers to reduce the number of partners it works with down to a select core.

That’s important because effective universal banking requires a structure that incentivises cross-collaboration and, ultimately, institutionalises the alignment of interests across divisions and geographies. Boyles, a 43-year veteran of HSBC, is better placed than most to understand that this is “easier said than done”.

What all this suggests is that HSBC Private Banking, as an integrated business division, no longer considers uncoordinated, brute force growth a viable way forward. Rather, a decision has been made to do more with group-connected clients, especially those families and entrepreneurs that have relationships on the commercial and corporate sides of the bank.

And that’s meant introducing more ‘farmers’ to the mix. Especially here in Asia, the bold shift to an investment counselling (IC) model in 2017, overseen by Tan during her first year in the role, is beginning to pay off.

“There were some initial challenges in that every global business was focused on looking after their interests, but that was short-lived because there was a constant messaging that we needed to look outside our silos and think across,” he said.

“As with any change, there is always a certain level of resistance, but we were committed and we delivered,” she said. “And we are now seeing the benefits across investment revenues, transactions are getting bigger insofar as US$100 million-200 million client transactions are now regular, and we are seeing an increase in our share of wallet and client referrals.”

Boyles has also noticed an improvement in client satisfaction as a direct result of the team-based servicing they receive, which is driving up activity.

“When I joined this business it felt quite mercenary, but the beauty of this approach is that clients have become much more institutionalised and stickier,” Boyles said.

Peter Boyles, chief executive, global private banking HSBC Within the private banking division itself, the three regional heads, including Asia’s Tan, are expected to look beyond their own P&Ls and find opportunities to further connect clients. Wary of cultivating multiple baronies, Boyles’ goal is to achieve a global consistency in the business, but with regional nuances.

Accordingly, the private bank’s ambitious hiring plans extend to ICs — a rare breed in Asia — product specialists, and solutions specialists to supplement ICs in the ultra and family office space. Globally, too, HSBC Private Banking’s credit advisory team, whose strengths were traditionally concentrated in Switzerland, has undergone a significant transformation amid a drive to increase loans penetration.

“Overall, I’m very sensitive to regional differences and I am very sensitive to us not making the same mistakes others have,” Boyles said.

“In cases where you are a follower, the secret is not just to follow blindly but to listen, learn, and implement in a way that supports the business.”

Make no mistake: HSBC Private Banking remains a work in progress.

Boyles and Tan would say so themselves. But after four years of soul searching and tough decisions, a swagger has returned to the business and its ambitions remain global. The Swiss business, which went through the most significant remediation needs to return to profitability and will be built off its Middle East business; there are expectations that growth will strengthen in the UK, France, and Germany; and in the US, the private bank is repositioning.

In effect, then, there has been a wholesale shift away from setting hard targets to referral-driven business, which in turn has placed a premium on efficient information flows across divisions and geographies.

But it is here in Asia where HSBC Private Banking has the most to gain after losing ground on its home turf, and despite ranking as one of the region’s largest wealth managers by client assets.

The private bank’s investment in Avaloq and a digital wealth platform will go some way to achieving this. The core banking system has been rolled out in Switzerland, Luxembourg, and the Channel Islands, and will go live in the UK this year and Asia in 2019, where the bank has pledged to invest US$100 million on information technology and digital solutions.

“You might have thought we had exhausted our growth potential, but that’s not the case,” said Tan. “There’s still a lot of room for us to grow. Take China, for example, where the bank has invested massively.

Our brand resonates strongly there, so from the perspective of groupconnected clients, there is a tremendous opportunity for us to grow.”

Plans are also in place to link up the private bank’s digital systems with retail and wealth management, thereby providing clients with access to mobile technology used in Premier and Jade and a consolidated view of their positions.

Boyles, predictably, agrees: “Because the growth in the region is so exciting, and because our market share in Asia is below what it should be, if you marry our ambition to rectify this with the underlying growth, you can work out where we are heading as a business.”

HSBC Private Banking’s silent renaissance just got louder.

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INDUSTRY

ESG: Examining shallow growth — scrutinising sustainable investing at Asia’s private banks With sustainable and impact investing gaining unprecedented momentum globally, a number of private banks in the region have been proactively launching and promoting ESG strategies to their high net worth clients, either through discretionary mandates or advisory services.

However, from a capital flow perspective, most banks and asset managers admit that demand for ESG solutions — both ESG-thematic and ESG-integrated — among Asia’s wealthy, although slowly rising, remains at a modest level.

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ESG

Günter Tschiderer head of group networks, Asia Pacific BNP Paribas AM

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Jan Poser chief strategist and head of sustainability J. Safra Sarasin

Joost Bilkes head of impact advisory and finance, Asia Pacific Credit Suisse PB

o what are the current demands on ESG solutions, and what issues are hindering real flow during the distribution and advisory processes?

“The topic of ESG investing is entering the scene in a big way but it will take more time for it to become a significant component in client portfolios in Asia,” Joost Bilkes, head of impact advisory and finance, Asia Pacific at Credit Suisse Private Banking, told Asian Private Banker.

Kanol Pal, senior advisor, responsible investments, Asia at BNP Paribas Wealth Management, echoed Bilkes’ sentiments, saying ESG investing is a relatively new concept for Asian clients, many of whom still adopt a ‘wait and see’ attitude.

Even so, against a financial backdrop where rising short-term volatility and mounting interest rates have been increasingly challenging investors’ overall appetite for risky assets, private banks in the region have — more than ever before — been trying to promote longer-term themes which tend to be resilient and sustainable in this challenging financial market.

“When a private client asks for a mandate, our standard offering is a sustainable mandate,” said Jan Poser, chief strategist and head of sustainability at J. Safra Sarasin.

“We believe that all clients should benefit from the better risk-return profile enhanced by integrating ESG issues.”

Indeed, banks have witnessed achievements in both the DPM and fund advisory ESG spaces.

When a private client asks for a mandate, our standard offering is a sustainable mandate 14

Kanol Pal senior advisor, responsible investments, Asia BNP Paribas WM

Mischa Eckart managing director, head of client investment specialists, APAC UBS GWM

The topic of ESG investing is entering the scene in a big way but it will take more time for it to become a significant component in client portfolios in Asia For example, In January, UBS Global Wealth Management launched its sustainable mandate in Europe, and three months later, the mandate launched in APAC. Mischa Eckart, managing director, head of client investment specialists, APAC at the bank, said since the launch, the bank has raised more than CHF 200 million for the mandate from its Asian private clients.

In addition to the mandate, the Swiss bank has proactively explored sustainable investing in alternatives, especially in the private equity space. In 2016, UBS Global Wealth Management raised a record US$471 million for its Oncology Impact Fund, with half the AUM originating from its Asian clients. And in 2017, the bank raised US$325 million from its private clients for a TPG-led global impact fund, the RISE Fund.

ESG themes versus integration ESG investing tends to comprise two main groups: one which focuses on ESG-related thematic investing and the other on ESG-integrated solutions, which can be applied to a variety of financial products and investments.

“With regard to the current appetite, we already have seen significant demand for ESG-themed investments but ESG integration is something that will take more time in our view although, in time to come, it could become an essential part of investing,” Bilkes said.

Jan Poser, chief strategist and head of sustainability at J. Safra Sarasin shares a similar view, saying Asian investors — notably those in Hong

ESG

Markus Mueller global head of CIO office Deutsche Bank WM

Marc Lansonneur head of managed solutions and investment governance DBS Bank

Marc-Olivier Buffle senior client portfolio manager Pictet AM

Stephane Honig head of WM and family offices distribution and head of strategic equity solutions group BNP Paribas Global Markets

Tom Keenan head of wholesale distribution, Asia ex-Japan Robeco AM

Kong and Singapore — are “clearly responsive” to ESG themes, such as water, for example, as investors in both of the areas are heavily dependent on external water sources.

“Popular strategies among Asian private banking clients have been those that would benefit from certain sustainability trends such as electric mobility or the transition to clean energy,” Keenan said.

Interestingly, Deutsche Bank Wealth Management added that from a demand perspective, there’s more flow into high-beta stocks compared to defensive ones.

However, despite the demand around ESG themes, private banks still advise clients to look beyond thematic products and into high ESG rating solutions.

“Disproving the assumption that people interested in sustainable solutions don’t chase high returns, we see that ESG investors prefer ‘growth’ over ‘value’ stocks, and focus mainly on domestic ESG-rated companies that they know well,” said Markus Mueller, global head of CIO office at Deutsche Bank Wealth Management.

“ESG industry or sectors and ESG thematics are important but are only the first step to creating awareness. ESG investing’s true potential lies in the integration of ESG as a key criteria of the investment selection process,” said Marc Lansonneur, head of managed solutions and investment governance at DBS Bank.

“We observe that investors are more interested in ESG solutions in regions with specific ESG regulation and widely available data on ESG practices within companies,” he added.

He added that in order to engage clients and increase client awareness in this respect, promoting outperforming funds with high ESG ratings versus the traditional portfolios would be an efficient approach.

BNP Paribas Global Markets’ head of wealth management and family offices distribution and head of strategic equity solutions group, Stephane Honig, said the bank started engaging its Private Bank clients on ESG themes in June 2018 and that clients have been responsive.

Sales strategy: No trade-off between returns and ‘doing good’

“The stand-alone theme (energy transition) and related sub-themes — for example, renewables, green buildings, urban transport, electric mobility — resonate well with clients who are looking for tangible investments with measurable outcomes,” he said.

Tom Keenan, Robeco Asset Management’s head of wholesale distribution, Asia ex-Japan, agreed, adding that its private banking clients are currently most interested in thematic sustainability strategies.

ESG investing’s true potential lies in the integration of ESG as a key criteria of the investment selection process

Although there exist scepticism and mixed research conclusions over ESG-related strategies’ potential to outperform in the market, banks in the region have been promoting ESG-related strategies in a way that investors can potentially achieve higher risk-adjusted returns — or at least not sacrifice performance from a return perspective — while positively impacting society.

“We believe that there doesn’t need to be a trade-off between financial returns and social/environmental outcomes. Where you invest depends on your liquidity needs and risk profile in a portfolio context.

I would say that we would like to be in the category where we can achieve outperformance and make a positive social impact,” Credit Suisse’s Bilkes said.

BNP Paribas’s Pal added that generally speaking, equity-related products provide potential for outperformance and positive impact, while for fixed income products, the focus is more on minimising downside risks, but without sacrificing performance and still making a positive impact.

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INDUSTRY

Distribution challenges Despite the effort that banks and product providers have made to distribute ESG-related strategies, end-clients’ and frontline bankers’ concerns inhibit real flow.

Firstly, misunderstanding and disagreements around the definition of ESG still exist.

“There is still a lot of uncertainty about what ESG investing actually means,” Günter Tschiderer, head of group networks, Asia Pacific at BNP Paribas Asset Management said.

“This is confounded by the fact that there are different approaches to ESG amongst providers, and terminology is being used quite loosely at the moment.”

Pictet Asset Management’s senior client portfolio manager, MarcOlivier Buffle, agreed, saying clients’ misunderstanding stems partially from confusion arising from the absence of a uniformed definition of ESG terms.

“Many still perceive ESG or responsible investing means sacrificing return, when this is absolutely not the case,” Buffle said.

Additionally, a number of industry veterans noted that some fund providers offering ESG products merely ‘tick the box’ to prove they

There is still a lot of uncertainty about what ESG investing actually means...terminology is being used quite loosely at the moment 16

We are confident that there will be more thematic funds [in the ESG space], as we see many fund houses developing new products. However, abundant product offerings may not necessarily generate higher demand or appetite

have relevant strategies instead of genuinely aiming to offer clients high-quality ESG solutions.

“We are confident that there will be more thematic funds [in the ESG space], as we see many fund houses developing new products.

However, abundant product offerings may not necessarily generate higher demand or appetite,” DBS’s Lansonneur warned.

BNP Paribas Asset Management’s Tschiderer agreed, adding that some industry analysts see ESG as a trend, and thus use it as a gimmick to promote their funds and brand.

Additionally, measuring the impact of ESG strategies or setting ESG benchmarks and ratings is still easier said than done.

“Developing our own ESG product screening/rating methodology, or adopting external methodologies — such as those provided by scoring agencies — is still a complicated process,” Lansonneur added.

“Though several agencies have entered this growing sector, there is still a lack of benchmarks in ESG ratings.”

ESG

Hong Kong establishes Green Finance Association to engage private investments The Hong Kong Green Finance Association (HKGFA) officially launched on 21 September, gathering financial institutions, professional service providers, and the government in an effort to position Hong Kong as a green finance hub.

Ma Jun, chairman and president of the HKGFA and co-chair of the G20 Sustainable Finance Study Group, said in a media briefing in September that the association includes 84 financial institutions, of which 15 are major banks in Hong Kong.

A spokesperson for the association told Asian Private Banker that Natixis and HSBC are founding members; other banks — including Bank of China (Hong Kong), Standard Chartered, Deutsche Bank, BNP Paribas, and Goldman Sachs — have confirmed their membership. A few are still to confirm their participation.

“I think the work of this task force will be important to see how the Hong Kong banks as a group have addressed the risk aspects involved in the transition to a low-carbon economy,” said Jonathan Drew, managing director, infrastructure and real estate group, global banking Asia Pacific, HSBC.

“Banks will, therefore, have to deal with particular risks and work very closely with the Hong Kong Monetary Authority on regulatory aspects,” he said.

Drew added that green investments could tap into the pool of assets managed by private banks but more effort is required to “develop the right product” that will garner the attention of HNW clients.

Alain Gallois, Asia Pacific CEO of Natixis, told Asian Private Banker the private banking segment has always been an area where green investments should be promoted and that currently many private banks are participating in green investing via asset managers or ETF providers.

In the recent past, the private banking segments of HKGFA-confirmed banks have increased their focus on green investing.

As cases in point, HSBC Private Banking listed sustainable investing — including green bonds and ESG investing — as one of its top four investment themes for the second half of 2018, and BNP Paribas launched its ESG DPM solution in May last year.

17

ESG

High barriers to SI adoption despite keen interest: UBS GWM

A

sian HNWIs are not putting their money where their mouths are as a wide gap persists between the adoption rate of sustainable investing (SI) and private banking clients’ interest in ESG, according to data from UBS Global Wealth Management (GWM).

According to the latest UBS Investor Watch Study, 85% of HNWIs in both Singapore and Hong Kong are interested in the concept of SI, while neither jurisdiction has a real adoption rate above 35%.

“At the moment, despite very healthy interest and familiarity with sustainable investing among Hong Kong investors, the adoption in their investment decisions has yet to be reflected,” said Amy Lo, chairman and head of Greater China at UBS GWM. Interestingly, emerging markets such as China (60%), Brazil (53%), and the UAE (53%) recorded the highest rates of adoption for SI, while investors in the US (12%) and UK (20%) lag far behind.

Tan Min Lan, head of CIO office, APAC at UBS GWM, said the bank defines the adoption of sustainable investing as investors having more than 1% of their portfolios invested in ESG-related assets.

Broad divergence in adoption of sustainable investing Percentage of investors with at least 1% of their investable assets in sustainable investments Percentage who say they are invested sustainably

Average allocation to sustainable investments

39%

Overall

36% 60%

China

46%

Brazil

53%

44%

UAE

53%

31%

51%

Italy 42%

Germany

31% 29%

Singapore

35%

27%

Switzerland

35%

29%

34%

Hong Kong 20%

UK US

12%

41% 38% 49% Source: UBS Investor Watch, 2018 Volume 2

18

ESG

High barriers “Despite the keen interest, high barriers to adoption of sustainable investing remain,” Tan said.

Globally, Tan revealed that around 70% of respondents said they find SI terminology confusing, and in Singapore specifically, almost 80% said measuring the impact of SI is difficult, while 75% feel sustainable investments are not well established.

“Education is key to reduce the barriers to sustainable adoption,” Tan said.

“Sustainable investing is a complement to traditional investing.

It allows investors to pursue their financial objectives without compromising returns while generating a positive impact on the environment and society.”

According to the study, investors do not associate SI with diminished performance as only a few respondents from Singapore and Hong Kong, or globally, think sustainability means sacrificing returns.

In Singapore, 47% of the surveyed investors said they expect better returns from SI compared to traditional methods, while 36% expect returns to be roughly the same. Meanwhile, over 70% of investors in China and 50% in Hong Kong believe sustainable investments will outperform traditional investments.

“Entrepreneurs make up the majority of our Asian clients, and they are becoming more focused on sustainability because they have found that sustainable investments can generate equal or superior investment returns when compared to traditional investments,” said August Hatecke, head of wealth management South East Asia, UBS GWM. “It also helps to de-risk their businesses, and meets mounting consumer demand for sustainable solutions,” he added, citing the success of the bank’s first 100% sustainable investing mandate, the bank’s “flagship offering” in the ESG space.

UBS GWM’s sustainable solutions In January, the bank launched its sustainable mandate in Europe, and three months later, the mandate launched in APAC. Mischa Eckart, managing director, head of client investment specialists, APAC at the bank, pointed out that since the launch, the bank has raised more than CHF 200 million for the mandate from its Asian private clients.

In terms of performance, Eckart said the mandate has a balanced risk profile and has achieved about 2.7% in returns year-to-date, outperforming a traditional balanced portfolio by around 100bps.

In addition to the mandate, the Swiss bank has proactively explored sustainable investing in alternatives, especially in the private equity space.

In 2016, UBS Global Wealth Management raised a record US$471 million for its Oncology Impact Fund, with half the AUM originating from its Asian clients. And in 2017, the bank raised US$325 million from its private clients for a TPG-led global impact fund, the RISE Fund.

Expecting outperformance Percentage of all investors who expect sustainable investments to outperform 77%

72%

66% 51%

50%

50%

50%

47% 37% 19% US

UK

Germany

Singapore

Hong Kong

Italy

Switzerland

UAE

China

Brazil

Overall

27%

Source: UBS Investor Watch, 2018 Volume 2

19

ESG

DBS sees “encouraging” flows into SRI strategies

D

emand from DBS’s private clients for socially responsible innovation (SRI) strategies has risen steadily since the bank launched its first SRI fund in late2017, according to DBS’s head of fund selection, Pierre DeGagné.

Pierre DeGagné The bank’s foray into SRI and ESG director - investment funds investing mid-last year came at a fund selection & strategy time when many asset and wealth DBS Bank management firms – including DBS Private Bank – were ramping up their ‘sustainable’ offerings amid a benign market environment and heightened interest from regional investors, with DeGagné noting “encouraging flows into SRI” since 4Q17.

“It is also comforting to see clients who are strong advocates of the SRI story invest a good 10% of their portfolio into the fund,” he told Asian Private Banker.

Even so, DeGagné cautioned that the SRI sector remains complex and often misunderstood by investors, and therefore the onus falls upon fund selectors to conduct careful due diligence on strategies and managers.

“At the end of the day, we do not want our clients to sacrifice performance for SRI, which is why track record does come into play,” he said.

“We prefer a manager that has a long and demonstrable track record of at least keeping up with the benchmark, with the potential to deliver alpha going forward.”

His point speaks to clients’ lingering doubt over the relationship between performance and positive impact. DeGagné said many 20

clients still hold on to the premise that SRI and financial performance are two ends of a weighing scale, where one must give way to the other.

“Many of our clients are also curious about the ultimate social impact that can be effected with their investments,” he said. “Some are concerned that SRI will be [hit the hardest], in times of recession.”

In addition, DBS has warned that thematic funds, from a risk management perspective, are more susceptible and sensitive to volatility, as investor sentiment in a single investment theme can change rapidly.

Last year, the bank onboarded a global environment strategy from BNP Paribas Asset Management, which it believes has “widely diversified opportunity sets and long demonstrable track records”.

The strategy, named the Parvest Global Environment Fund, is an active equity portfolio with 50 to 65 companies focusing on new energy, sustainable food, water quality and waste management areas.

From a performance perspective, the fund has delivered 9.9% annualised returns, as of February 2018, since its inception nine years ago.

DBS is not the only bank in the region that is pushing into ESG or sustainable investing. Earlier this year, UBS Wealth Management launched the first fully sustainable cross-asset portfolio in Asia for private clients, and has since noted a positive reception. And BNP Paribas Wealth Management last year rolled out an ESG-compliant DPM mandate.

More recently, a poll conducted during Asian Private Banker’s Discretionary Portfolio Management (DPM) Leaders Conversation in April found that 72% of wealth managers have seen “fair interest” from clients for ESG-themed discretionary mandates.

ADVERTORIAL

Sustainability investing to raise financial performance in the long run “Social responsibility”, “green bonds”, “community investing”, “corporate engagement”, “ethical investing” – sustainability investing and its bucket of relevant terminology are among the hottest buzzwords in the investment community.

The fervour is clear as more than 230 constituents of the S&P 500 — almost half the index — were discussing core environmental and social issues in 2017, according to transcripts of quarterly earnings calls. 1 But with its esoteric roots reaching back to the green crusades of the sixties, is sustainability investing just hype, or is there now a compelling investment case for it?

Statistics point to the latter, indicating that sustainability investing is not only here to stay, but is also catching on fast in mainstream investing. The most targeted sustainable investment strategy is exclusionary screening, with US$15 trillion of assets in such strategies at the close of 2016, according to Robeco and RobecoSAM. This was followed by integrating environmental, social and governance (ESG) into mainstream strategies, with US$10.4 trillion of assets, and corporate engagement, with US$8.4 trillion.

In terms of geographies, Asia Pacific has been seeing a heavy focus on improving corporate governance, with Japan ranking as the region’s fastest-growing jurisdiction in sustainability investing between 2014 and 2016, followed by Australia and New Zealand, according to “The Big Book of SI” — a comprehensive sustainability report published

by Robeco.

No stranger to the approach, Robeco began adopting sustainability investing in the mid-nineties, strategically integrating it with their core asset management business in the mid-2000s with the acquisition of Sustainable Asset Management — now RobecoSAM. “The topic of sustainability arises within minutes of talking with clients,” says Gilbert Van Hassel, CEO of Robeco.

“I believe that we have reached an inflection point. It is already clear that taking a sustainable approach does not detract from performance.

We believe that using financially material ESG information leads to better-informed investment decisions and benefits society.”

Indeed, there is a growing sense of awareness and even urgency towards the value and indispensability of sustainability investing, as investors find themselves facing the investment risks and downsides concomitant with the benefits and upsides of accelerated economic growth in both emerging and developed markets.

This makes for an investment landscape that’s vastly altered from 20 years ago.

1

These risks are manifesting in the form of an increasingly uncertain regulatory and policy climate, intensifying environmental awareness and motivating social activism which bear the potential to alter consumer and investor behaviour, erode asset and investment value, raise compliance or remedial costs, and wreak reputational damage.

As world leaders move towards achieving the United Nations’ 17 Sustainable Development Goals (SDGs) by 2030, such risks have come into alignment with global awareness of the damaging consequences of unchecked economic progress and advancement, most notably in climate change, pollution, health epidemics, and resource scarcity.

It has become clear that while prioritising economic growth above environmental and socioeconomic concerns may yield higher financial returns in the short term, the longer-term prospects for such a strategy may hold a dimmer promise.

Forward-looking risk mitigation To avoid being blindsided by the myriad of risks associated with environmental and social backlash, the best approach is to proactively engage in sustainability investing — that is to integrate ESG principles into core investment strategies.

As such, portfolio managers are increasingly looking to create more sustainable portfolios to meet the demands of sponsors, participants, stakeholders, and regulators alike.

But how do investors go about taking sustainability into account in a tangible and measurable way?

As sustainable strategies widen from an environmental focus to encompass a broad range of current social issues — ranging from human rights to gender equality — it’s no wonder investors often feel hard-pressed to identify a clear-cut approach.

Using three megatrends to illustrate sustainability approaches Every sector has its own challenges, be they sustainable supply chains and the social risks of sugar consumption in the food industry, sensible pricing models and business ethics in healthcare, or risk culture and product stewardship in the financial sector. There are also sustainability issues to consider from a country perspective: the strength of institutions, investment in education, and access to natural resources to name but a few. Robeco has identified three important themes that specialists across the globe believe to be among the most important environmental (climate change), social (inequality), and governance (cybersecurity) matters of our time. Further, it has considered these challenges in its different sustainability approaches — such as exclusion, ESG integration, active ownership, sustainability thematic strategies, impact strategies, and sustainable strategies.

Goldman Sachs, “A Revolution Rising - From low chatter to loud roar”, 2018.

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ADVERTORIAL

Megatrend 1: Climate Change It is important for investors to assess the impact of climate change on asset class return expectations. The most significant physical impacts of climate change will be seen in the second half of this century, but the consequences for forward-looking asset markets may become apparent much sooner. When expectations for climate change are adjusted, the markets and asset prices will reflect these developments, possibly sooner than the physical changes of global warming make themselves felt.

impacted by climate change can be hedged through cross-industry and regional diversification.

As global warming is tackled in the coming decades, investors will need to know what to invest in — and what to avoid. This ranges from multi-billion-dollar projects harnessing renewable energy to new business models in traditional industries such as car manufacturing, utilities, and energy.

Tackling climate change The macroeconomic impact of climate change will be heavily influenced by environmental policies. It is impossible to calculate this impact with any degree of certainty, but based on a report by the University of Cambridge Institute for Sustainability Leadership, Robeco believes a plausible scenario is a world in which past trends essentially continue, with temperatures rising to 2.0-2.5°C above preindustrial levels by 2100. The world would succeed in slowly reducing its dependence on fossil fuel, but it would take longer for the positive benefits of the new low-carbon economy to make a noticeable impact.

Based on this scenario, the worst-performing sector in developed markets would be real estate, followed by basic materials, construction, and industrial manufacturing. The best-performing sectors would be transport, agriculture, and consumer retail. Investment risks can be mitigated by switching out of the worst-performing sectors and into the better performers.

The Cambridge study also reveals differences between countries in terms of the vulnerability of their economic fundamentals and how they respond to shocks. Brazilian stocks, for example, are reasonably resilient whereas the Chinese market fairs less well. The study concludes that in the end, slightly less than half of the returns 22

Robeco recognises the scientific consensus that human activities are responsible for increasing the amount of greenhouse gas in the earth’s atmosphere, thus causing climate change.

There are several ways investors can address climate change: 1. By integrating information on carbon strategies of companies into the investment process 2. By using active ownership to effect change 3. By decarbonising portfolios 4. By divesting from carbon-intensive thermal coal 5. By investing in clean energy and energy efficiency strategies

Megatrend 2: Rising Inequality Rising inequality has fuelled discussions on its economic, political and social implications. To date, however, the debate has been controversial and the economic literature inconclusive. Inequality can affect economic growth through different channels, potentially promoting growth as it provides sufficient incentives to accumulate capital, increase productivity and investment, and reward innovation and entrepreneurship. On the other hand, it causes poverty, contributes to a sub-optimal allocation of human resources (low-income groups have limited access to education and health care), reduces social mobility,

ADVERTORIAL

erodes social cohesion, leads to the concentration of political power, and boosts populist policies. All of these have a dampening effect on investment and productivity, undermine economic growth, and have the potential to cause macroeconomic and financial disruption. 2 There is considerable evidence that the potential for social and political unrest is higher in countries with relatively higher levels of inequality, and these countries are also considered to have inferior sovereign credit quality. Meanwhile, lower levels of inequality (as illustrated by the Gini coefficient) correspond with lower risk premiums and potential for unrest (as represented by sovereign CDS spreads and the Fund for Peace’s Fragile States Index, respectively), even though inequality is of course not the only explanatory factor.

Investors would be well advised to keep a close eye on the developments in inequality, which could result in subdued economic prospects, a higher level of social uncertainty, more volatile — and lower — investment returns, and a reduced number of attractive investment opportunities. A structured approach to incorporating country-specific ESG information in investment processes could help inform investment decisions.

Addressing the dilemma of rising inequality Robeco incorporates intra-country inequality into its country assessments for emerging equity and (emerging) fixed income government bonds investment processes. In its impact funds, it actively invests in companies that have a positive contribution to the SDGs — including those committed to reducing inequality.

Meanwhile, Robeco’s Fintech fund invests in companies that directly reduce inequality by providing access to the financial markets to groups that financial institutions previously would not serve.

Megatrend 3: Cybersecurity Cybersecurity spending is a fast-growing cost for many businesses, but for the moment it is unlikely to impact profit margins too severely. At less than 5% of total IT spending for most companies, the cost of cybersecurity can still be absorbed relatively easily. What is less predictable, and potentially much more devastating, is the cost associated with a ‘successful’ breach or data privacy issues, which can be reflected in sharp share price drops, as was seen after the Equifax breach and the Facebook/Cambridge Analytica scandal in 2018. It is therefore in investors’ interests to urge companies to enhance their cybersecurity measures and encourage them to improve not just their technology but also their behaviours.

The bright side of all this is that the rapid growth in cybersecurity spending is providing ample opportunities for solution providers to start successful businesses. The current marketplace is a mix of established, usually mature cybersecurity vendors that made their mark in older security products such as anti-virus software and

firewalls, and a new breed of companies that are rolling out nextgeneration cybersecurity products and services. The market’s quick growth is providing a welcome tailwind for everyone involved, but competition is fierce and success is not guaranteed, so investors need to take a highly active approach in this area.

Major opportunities in cybersecurity After starting an engagement theme related to data privacy in 2016, Robeco’s engagement team embarked on a three-year engagement focused exclusively on cybersecurity in 2018. Robeco’s engagement specialists work in close collaboration with portfolio managers to address the risks stemming from the world’s increasing dependence on computers and digital data. In its thematic funds, Robeco sees the increasing need for cybersecurity solutions as a major investment opportunity.

Sustainability and succession: Taking care of the next generation At the end of the day, the clarion call for sustainable investing has sounded, and it is up to shrewd investors to rise to the occasion, actively engage in the conversation, and chart a course of action that is right for their investment goals.

In the short run, sustainability investing alleviates risks both latent and manifest, separating prescient investment from the rest. In the long run, it engages in meeting the needs of the present generation without compromising those of generations to come, according to Robeco, which manages EUR 100 billion of integrated sustainability investing in equity, fixed income, and private equity.

Encapsulating and fusing the very philosophies of innovative value creation and succession planning, sustainability investing builds wealth and well-being for this generation and passes on a remarkable legacy to the next.

Founded on a unique sustainability culture that has evolved over the last 20 years, Robeco and RobecoSAM’s joint sustainability strategy is based on extensive in-house expertise in research, analytics, and investments. The firm offers a truly integrated investment approach across the asset classes stemming from the interaction between researchers, financial analysts and engagement specialists, paired with the ability to innovate quickly and offer clients bespoke solutions as sustainable investing evolves.

For further information, please email: robecohongkong@robeco.com (Hong Kong); robecosg@robeco.com (Singapore)

Important information Hong Kong Issued by Robeco Hong Kong Limited, licensed and regulated by Securities and Futures Commission of Hong Kong (SFC). The contents of this document have not been reviewed by the SFC. Investment involves risks. This information does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation for any security.

Singapore This information is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation. The contents of this document have not been reviewed by the Monetary Authority of Singapore (“MAS”). Robeco Singapore Private Limited holds a capital markets services licence for fund management issued by the MAS and is subject to certain clientele restrictions under such licence. An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

2

Grigoli, Francesco & Robles, Adrian: Inequality Overhang, IMF Working Paper 17/76, 2017

23

ESG

Deutsche Bank WM eyes ESG DPM launch in Asia

D

eutsche Bank Wealth Management is currently evaluating the potential for an ESG-themed discretionary portfolio management (DPM) mandate in Asia, and has earmarked 2019 as the year it will roll out the solution.

“There is still significant potential in Asia for providers to add more ESG strategies to their product shelves, either in the [discretionary] or mutual fund space,” Markus Mueller, head of global CIO office for the German private bank, told Asian Private Banker.

Markus Mueller global head of CIO office Deutsche Bank WM

Mueller said the relative lack of demand for ESG strategies among Asian clients at present is, to some extent, due to a lack of supply.

In Europe, the bank first added an ESG strategy to its discretionary shelf about a decade ago, with private client demand primarily coming from Germany, Italy, and Austria.

However, Mueller said he does not believe there are significant regional differences in ESG appetite — even as many industry players point to Asia’s relatively muted demand. Instead, he said “timing” is a key factor behind client uptake.

24

“There are differences in timing, in the sense that clients in some regions have started to take an interest in ESG investments earlier than those in others, but once they start, clients behave rather similarly,” he pointed out.

Mueller said the private bank is also targeting Asian clients across all age groups, despite research showing greater demand amongst younger or millennial clients.

“What is important is that each single client is advised on an overall investment strategy that best fits his or her financial situation, risk appetite and expectations,” Mueller said, adding that the bank will utilise its tailoring expertise to meet individual client needs in the ESG space.

In terms of the underlying holdings, Mueller said that single securities will initially play a major part of the ESG mandate, but the bank may eventually look to enhance the mandate through collaborations with fund providers.

Other recent promoters of ESG investing include UBS Global Wealth Management, which launched its first fully sustainable cross-asset portfolio in Asia in April, and DBS Private Bank, which told Asian Private Banker in January it is in the initial stages of developing ESG DPM solutions.

INVESTMENTS

Julius Baer raises US$450 million in seven days for FMP solution in Asia and Middle East Julius Baer has raised US$450 million in Asia and the Middle East for a fixed maturity bond fund in a mere seven business days.

Cheryl Tan Singapore head of fund specialists Julius Baer

The assets were raised by the pure play private bank through the two regions for a PIMCO four-year fixed maturity plan (FMP) solution, a source told Asian Private Banker on the condition of anonymity.

“Traditional fixed income funds, depending on underlying duration, will be sensitive to interest rate risk. We have already seen a number of fixed income investments suffer mark-to-market losses this year. A floating rate alternative with an attractive yield pick-up offered our clients an ideal solution for their fixed income allocation.”

Investor concerns about rising fixed income market volatility and potential realised losses have sparked renewed interest in portfolio solutions focused on yield and income distribution.

When contacted, a spokesperson for Julius Baer declined to comment on the specific product and amount raised.

Recently, Asian Private Banker reported that Credit Suisse had reopened an FMP solution in May before closing it again two months later after raising an additional US$500 million.

However, the bank’s Singapore head of fund specialists, Cheryl Tan, did note that FMP solutions were relatively attractive at this current juncture, given a backdrop of rising US rates and increasing mark-tomarket losses from traditional fixed income funds.

“The genesis of the first fixed maturity bond fund was to cater to clients’ needs for a more stable solution with a payout feature. Such a solution was attractive to clients as markets were volatile and pricing in a global slowdown,” said Rodolphe Larqué, APAC head of fund solutions, Credit Suisse Private Banking.

“With USD interest rates expected to trend higher in the coming years, we worked on an investment solution that offers our clients floating rate returns through an embedded interest rate swap in the FMP,” Tan explained.

“This year, the increased volatility across various markets was an opportunity to re-introduce this idea to clients. The timing of the launch was also important following the widening of credit spreads in 2Q2018.”

25

INV D EUSSTTM RE YN T S

91% of wealth managers in Asia confident about fund flow rebound in next 12 months

D

espite dented investor sentiment and increasing cash allocations, wealth managers are confident in a fund flow rebound in the coming 12 months, with 91% expecting positive change in inflows, according to a recent Asian Private Banker survey.

Of the 91% of respondents, 61% and 30% expect inflows to grow 0-20% and 20-40%, respectively, in the coming 12 months. Meanwhile, 6% of respondents expect a 0-20% decrease and 3% expect a decrease of more than 40%.

As reported by 73% of respondents, fund inflows for wealth managers in Asia year-to-date continue to register positive growth despite greater market uncertainty, but this pales in comparison to a strong 2017 when 90% registered positive growth.

The contrast is especially significant for wealth managers that accomplished very high growth last year — 43% and 11% of respondents saw 20-40% and more than 40% growth, respectively, compared to 2018’s 21% and 3%.

26

I N V EI N ST DM UE SN TR TY S

Although weaker markets play a dominant role in slowing fund flows, product mismatch could exacerbate the challenges. According to the survey, 53% of respondents claim that ‘better compatibility between product offering and local clientele’ is the area which asset managers should improve on the most — a 10 percentage point increase from 2017.

Asset managers’ overall understanding of Asian wealth management business needs has also deteriorated, with just 6% of respondents claiming the understanding is ‘excellent’ compared to 2017’s 17%.

The survey was conducted during Asian Private Banker’s Fund Selection Nexus in Hong Kong and Singapore with approximately 85 respondents from private banks, independent asset managers (IAMs), and family offices.

27

I NVDE U E N ST TS R Y

Funds Selection Nexus 2018 Asian Private Banker held its seventh annual Funds Selection Nexus in September, hosting 90 fund specialists across Hong Kong and Singapore for discussions around the implementation of thematics, the current demand for alternative solutions, and pertinent strategies around the needs of today’s private banking clients.

Special thanks to all attendees, speakers, and partners for their continued support. For full details of the event, please visit: http://apb.events/fsn2018

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INDUSTRY

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Now in its 8th year, the Asian Private Banker Awards for Distinction (AFD) is the preeminent benchmark for excellence in private banking and wealth management.

The Awards are recognised for the independence and rigour of the adjudication process, the calibre of the applicants, and the global acclaim that winning brings.

Launch cocktails September 13 (HK) & September 20 (SG) Submissions open September 14, 2018 Submissions close November 16, 2018 Winner announcements January 7, 2019 Awards for Distinction Gala Dinner February 21, 2019

Contact: awards@asianprivatebanker.com | +852 2529 4178

R E G U L AT I O N S

MAS’s new opt-in accredited investor regime to protect HNW investors The Monetary Authority of Singapore (MAS) has amended regulations covering ‘accredited investors’, changing the label to an opt-in categorisation in order to enhance investor protection.

According to the new rule, accredited investors can at “any time” withdraw their consent, following which, counterparties have to treat them as a retail investor — where more investor protection rules apply.

The Securities and Futures (Classes of Investors) Regulations 2018 now includes new standards for counterparties — including private banks and their representatives — for identifying accredited investors, and the new rules require private banks to issue a “general warning” to all such investors.

The amendments concerning both individual and corporate accredited investors will be implemented on 8 January 2019, while sections concerning the definition of ‘institutional investor’ were implemented on 8 October 2018.

“Accredited investors are assumed to be better informed, and better able to access resources to protect their own interests, and therefore require less regulatory protection,” the warning read. “Investors who agree to be treated as accredited investors therefore forgo the benefit of certain regulatory safeguards.”

According to a circular, the regulator has made other efforts to implement “greater regulatory safeguards” for investors, including extending the regulatory regime to non-conventional and over-thecounter (OTC) investment products.

These regulatory safeguards include certain “business conduct requirements” that intermediaries need to apply when dealing with retail investors. In cases where the investment offer is only available to accredited investors, intermediaries are also exempt from issuing a full prospectus registered with MAS. Further, private banks should notify clients that are being treated as accredited investors as well as obtain consent from clients that qualify to be treated as such.

The Singapore regulator has also significantly revamped the existing Securities and Futures Act (SFA). 67 pieces of regulatory amendments and notices have been “operational” since 8 October 2018, while another 10 sets of regulations and notices were issued previously to amend the Financial Advisors Act. Over and above amending the city-state’s financial regulations, MAS recently published an Enforcement monograph listing the determinants of enforcement priorities.

31

R E G U L AT I O N S

CRS impact could be blunted by “broadly unorganised” data

T

“With all the tax information collected, data protection is high on the agenda for regulators. As the information is only passed to the tax authority, it shouldn’t be an issue for financial institutions from a data secrecy perspective,” he said.

he “broadly unorganised” nature of data collected in accordance with the common reporting standard (CRS) regime could limit the impact of information exchanges between tax authorities, according to a legal expert.

While tax experts previously told Asian Private Banker that HNWIs will need to brace themselves for enquiries from tax authorities as the CRS exchange commences, Stefano Mariani, counsel at Deacons, believes the value of information collected — insofar as it can be utilised by the tax authorities — may have been overestimated.

“There is a subtle conceptual distinction between data and information. When information is exchanged under the common reporting standard, those data are broadly unorganised,” Mariani told Asian Private Banker.

Stefano Mariani counsel, head of tax and trusts Deacons

“It will take a great deal of manpower and man-hours to sort through those data and form a view. There is, I suppose, an element of overestimation as to actually how much useful information will be exchanged under CRS.”

On HNW clients’ concerns that CRS clashes with tax secrecy rules and rights to information privacy, Mariani said no tenable arguments can be made in that regard, as compliance with the regime is now written in the Inland Revenue Ordinance and secrecy and privacy concerns would have been considered prior to the legislation.

“Because AEOI is an exchange of information that doesn’t affect substantive liability to tax in the overwhelming majority of scenarios, the prudent view is that one should make one’s peace with it. Just accept that tax secrecy is dead — it is not coming back, at least in the foreseeable future,” he said.

Responding to concerns around data secrecy, Paul Ho, partner at EY, told Asian Private Banker the tax authorities will enquire on each others’ rules on data privacy before exchanging information and relevant infrastructure in developed financial centres like Hong Kong and Singapore are robust.

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Paul Ho financial services tax partner EY

Ho added that banks are also becoming subject to similar stringency in CRS reporting, as the Inland Revenue Department (IRD) plans to audit financial institutions’ CRS compliance practices.

“Increasing compliance requirements have already become BAU [business as usual] within the operating model of most banks,” he said.

“Before, some banks might worry that the different level of compliance stringency will cause clients to move to other banks, but nowadays banks are pretty much aware of what each other is doing so the level of compliance stringency is generally aligned.”

Tax authorities will be monitoring the completeness and validity of the exchanged information according to the local adaptation of the CRS rules in their respective jurisdictions.

“If the information submitted is incomplete or wrong, the tax authority which gathers the information will enforce its rules against the financial institution which supplies the information. In Hong Kong and Singapore, it is a criminal offence to deliberately avoid tax reporting,” Ho said.

As for the discovery of alleged tax evasion arising from the exchange, he said there are no rules regarding the punishment for tax avoidance and it is up to each jurisdiction to enforce its rules on its tax residents.

The first international automatic exchange of information (AEOI) commenced in most Asian jurisdictions in September. Hong Kong, for instance, became a signatory of the Multilateral Competent Authority Agreement (MCAA) and activated exchange relationships with multiple jurisdictions for AEOI purposes on 1 September.

DPM

Nomura to buy 40% stake in Julius Baer’s Japan business, gain access to DPM capabilities

N

Jimmy Lee head Asia Pacific Julius Baer

omura will purchase a 40% stake in Julius Baer’s Japan wealth management business and gain access to its discretionary portfolio management (DPM) capabilities, with plans to rename the Swiss pure play ‘Julius Baer Nomura Wealth Management’ to underline the strategic partnership.

Nomura-Julius Baer tie-up to enable DPM asset growth

According to a press release, Nomura will be able to leverage from Julius Baer’s DPM capabilities in Japan to “complement its comprehensive domestic product offering with the tailor-made international mandate services”. Julius Baer boasts a 20year track record for providing DPM services for Japan-based clients through a Zurich-based portfolio management team bolstered by senior relationship management professionals based in the Tokyo office.

Unique licence to service offshore assets in onshore Japan According to Julius Baer, its acquisition of TFM Asset Management in Japan four years ago enabled it to gain a licence allowing it to provide onshore servicing of Japanese clients’ offshore assets, rather than rely on offshore booking centres — a key differentiator for DPM businesses, especially given the risk of outflows during volatile markets.

“We are the only financial institution with this licence and it basically allows us to sit in a sushi bar in Tokyo or Osaka and talk about investments booked out of Switzerland,” said Jimmy Lee, APAC head of Julius Baer, in a conversation with Asian Private Banker.

On ambitions to capture a significant piece of the local wealth pie, Lee noted that whilst foreign banks may have an advantage on international needs, the local market is already sufficiently covered by domestic players, prompting Julius Baer to focus on gathering DPM assets rather than client relationships.

“The strategic partnership with Japan’s premier securities firm represents a major milestone in our business strategy for Japan,” said Bernhard Hodler, CEO of Julius Baer Group.

“For onshore needs, Japanese UHNWIs don’t need a foreign financial institution,” Lee said, sharing that there are numerous reputable local banks and securities companies servicing their domestic needs.

“Global financial markets are becoming increasingly complex, requiring skilful risk management, which is at the core of our offering in Japan. Working together with Nomura with its comprehensive domestic network and knowledge, we can best share our internationally diversified offering with a new audience and maximise the value of our presence in Japan.”

“But for offshore needs, we strongly believe Julius Baer has an edge to provide portfolio management capabilities based on a 20-year track record with Japan-based clients. We are coming into a partnership where we provide the product expertise and portfolio management best practices while Nomura brings an unbeatable network of Japanese UHNWIs.” 33

INDUSTRY

Private banks ramp up equity DPM product development in Asia Following a blockbuster 2017 that saw private banks firing from all cylinders including discretionary mandates, both in terms of performance and asset growth, the industry maintained momentum in 2018 and deployed significant resources to bulk up its discretionary portfolio management (DPM) shelves, especially for equity solutions.

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DPM

P

rivate banks have been actively launching new DPM solutions in Asia in the last 12 months, in what appears to be a diversification play away from conventional mainstream mandates focused on fundamental, bottom-up investing. A late-cycle economy and rising interest rates have the potential to challenge traditional investing, and private banks are bolstering their DPM offerings, particularly with a focus on taking a differentiated asset allocation or security selection approach to equities — an asset class that is facing disruption at multiple levels.

Thematic mandates dominate 4Q17/1Q18 Towards the end of a storied 2017 rally for global markets, it became apparent that looming correction risks were rising especially given the macroeconomic conditions and growing threats of a trade war. As of late August this year, the S&P 500’s bull run broke the all-time postWWII record buoyed by strong earnings and corporate tax cuts.

Private banks have responded early by expanding their DPM capabilities, not only to entice clients with differentiated approaches but also to secure performance through structural long-term trends, non-traditional underliers, and innovative alpha generation.

In early 2018, thematic mandate launches and fundraises dominated DPM headlines in Asia to diversify client exposure from traditional benchmark-linked beta. Deutsche Bank, for example, launched a new discretionary mandate in 4Q17 — a portfolio built on approximately equal-weighted exposure to its CIO office’s top ten themes following successful traction on an advisory basis.

“We received a lot of feedback from clients and bankers in Asia about how much they like our 10 themes, but they stressed that [these were] relatively difficult to implement into an advisory account and suggested that we wrap the ideas into a single portfolio,” Tuan Huynh, Deutsche Bank Wealth Management’s Asia CIO, told Asian Private Banker, as the solution was being showcased to clients in 1Q18, highlighting the importance of absolute returns in Asia.

"Interestingly, other regional offices have expressed interest in launching a similar DPM solution, and my counterparts in Europe are exploring opportunities for [their] clients, perhaps with an additional risk overlay to fit local needs.”

In a similar fashion, Credit Suisse Private Banking launched the sector-specific ‘Premium Asia Technology Mandate’, a concentrated

Editorial Picks: Recent notable DPM launches in Asia Credit Suisse Private Banking Major DPM rollout

BNP Paribas Wealth Management Strategic and tactical additions to equity mandate capabilities

Deutsche Bank Wealth Management Adding thematic and European exposure in Asia through DPM

• Launched the ‘Tailor-Made Global Equity — M&A Mandate’ in mid-2017, a benchmarkagnostic, bottom-up strategy focused on generating returns from prevailing M&A and restructuring trends. The bank noted that this is a satellite position due to risk premiums being rapidly priced in and idiosyncratic risks generated by a focus on bottom-up stock ideas • For the longer-term horizon, the bank launched a sustainable equity mandate in late 2017 in an effort to be at the forefront of ESG investing

• DB WM launched a thematic mandate in late 2017 to mirror its top ten investment themes in a discretionary capacity, allocating no more than 10% weighting to each theme • For further diversification within client portfolios in Asia, the bank launched a European equity mandate in 2H17 with a portfolio comprised of 40 stocks, predominantly large caps across the continental European market • The bank has earmarked 2019 to launch an ESG mandate in Asia

• From 2017 to 2018, CS PB’s DPM rollout included: SGD-denominated Private Mandate Global Balanced; Premium Asia Technology Mandate; Premium Fixed Income with Rolling Maturity Mandate; Premium Sustainability Mandate; and an AMC on its Global Yield Balanced Index • According to CS, the two most popular mandates in Asia were unsurprisingly yield-focused solutions: the Global Yield Balanced portfolio, due to outperformance amongst most balanced solutions, and the Rolling Maturity portfolio, due to clients switching out of fixed maturity solutions

EFG Bank The ‘Future Leaders’ equity approach

Goldman Sachs Private Wealth Management New stock-picking technique and new fixed income securities access

UBS Global Wealth Management Cross-asset sustainable investment mandate and fund selection mandate

• GS PWM catered to its UHNW clientele’s emerging need for new approaches to stock picking and a greater range of solutions to capture yield • Launched an equity mandate leveraging capabilities from its quantitative investment strategies team, which utilises consumer activity like web traffic or credit card data, AI to analyse news and research, and traditional bottom-up analysis • For fixed income, GS PWM launched an unconstrained mandate that blends middle market assets across direct lending, loan portfolios, and HY secured and unsecured loans to potentially capture yields of 6-7% or more

• Launched the first discretionary mandate based purely on an ESG framework in April and raised US$200 million for the mandate in August — a blip compared to the Swiss bank's gargantuan size, but nonetheless a lauded accomplishment given the region's lacklustre demand for an unfamiliar concept • The 'UBS Managed Advanced Fund Selection' mandate, a solution showcasing fund due diligence capabilities was launched in July, comprising a portfolio of 16 funds with a minimum ticket size of US$100,000; by September, UBS GWM raised US$100 million in Asia for the solution

• EFG launched its ‘Future Leaders’ series focused on lesser-owned mid-cap names which, in addition to traditional bottom-up analysis, leverages a proprietary framework built by a panel of experts from various fields including neuroscience, behavioural psychology, ESG, and more • Based on the ‘Future Leaders’ framework, the bank has already launched a ‘US Future Leaders’ mandate and will seek to launch a ‘European Future Leaders’ mandate in 2019

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DPM

equity portfolio based on five to seven structural investment themes with a multi-year horizon.

stock-picking based on various sources including web traffic, credit card data, and aggregated research reports.

Sector-focused strategies aside, other private banks are also capturing demand and returns from themes with a shorter-term time horizon.

BNP Paribas Wealth Management, for example, launched an M&Afocused mandate in mid-2017 titled ‘Tailor-Made Global Equity — M&A Mandate’ based on a benchmark-agnostic, bottom-up strategy focused on generating returns from prevailing M&A and restructuring trends.

"There’s always a need to focus on product development as client needs and market conditions change,” said Tan Wei Mei, head of portfolio solutions, private banking APAC at Credit Suisse.

According to the French bank, this DPM exposure should be positioned as a satellite due to correlations with economic and policy views, risk premiums being rapidly priced in, and idiosyncratic risks from bottom-up stock-picking.

Adopting new security selection approaches in equity mandates While demand for sustainable investing remains lacklustre in Asia relative to other regions where the concept is rapidly gaining mainstream acceptance, private banks are making efforts to develop their DPM offering either to include ESG overlays or build fully ESGcompliant portfolios from scratch.

UBS Global Wealth Management raised close to US$200 million by August 2018 in Asia for its cross-asset sustainable investment (SI) mandate — the first of its kind in the wealth management market, according to the private bank’s chairman and Greater China head, Amy Lo — which implements a fully fledged ESG framework that also includes World Bank bonds and green bonds, in addition to various inclusion and exclusion factors.

Last October, Asian Private Banker reported that BNP Paribas Wealth Management had launched a sustainable equity discretionary mandate in Asia in an effort to be “at the forefront of what will eventually be a growing trend in Asia”, according to Garth Bregman, APAC head of investment services at the bank.

Other players are following suit, including DBS, which expects to add a similar solution to its DPM offering in the near future as part of its multi-stage process to add ESG solutions to its overall product platform; and Deutsche Bank, which has earmarked 2019 as the year to roll out an ESG DPM solution in Asia.

ESG aside, private banks are adopting various new techniques to improve stock-picking and alpha generation. At EFG, for example, the private bank has launched its ‘US Future Leaders’ mandate, which focuses on "undiscovered" mid-cap names and, in addition to traditional bottom-up metrics, applies a security selection process which includes the implementation of a framework built by a panel of experts from various fields including neuroscience, behavioural psychology, and more. The bank is seeking to launch its ‘European Future Leaders’ mandate in 2019.

Goldman Sachs Private Wealth Management has also added an equity mandate that leverages big data and machine learning capabilities from its quantitative investment strategies (QIS) team and conducts 36

"Standard solutions will remain as the flagship but responding to requests from clients for new solutions to cater to their concerns will be critical in differentiating the DPM capabilities across private banks in APAC."

2017: A record year for Asian DPM growth 2017 was undoubtedly a record year for private banks across all facets due to a spectacular rally and strengthened ‘animal spirits’ following a Trump election win which promised various pro-growth policies including tax cuts and fiscal spending. But what was particularly impressive was the record growth of DPM assets which increased 52.7% year-on-year, supported by both remarkable returns and continued asset inflows. Penetration rates grew to 9.6%, up 1.6 percentage points year-on-year, in spite of strong overall net new assets for private banks in the region.

On a segmental basis, there were no surprises, with pure plays leading the pack in terms of DPM penetration rates (14.4%) followed by universal banks (9.5%), and Asian banks (4.1%). What was interesting was the rate of DPM asset growth for pure play private banks and the conditions which the segment faced.

Firstly, overall AUM growth at pure plays in Asia significantly outpaced its peers due in no small part to major acquisitions with the segment registering a year-on-year increase of more than 50.4%, compared to the overall industry’s 30.3%. Secondly, pure plays had to simultaneously face the baggage of integration-related challenges, applying further pressures to achieving such spectacular DPM asset growth.

The LGT-ABN AMRO (Asia and the Middle East) deal closed in May 2017, which led its Asia AUM to more than double; EFG completed the acquisition of BSI Hong Kong in 1Q17, amid a troubling 1MDB scandal; and UBP completed the Coutts acquisition in mid-2016 before experiencing its first full trading year in integrated form in 2017.

Interestingly, Asian banks outpaced universal banks in year-on-year DPM asset growth (52.3% versus 44.7%), due to the nascency of efforts to grow discretionary businesses from a low base.

Although growth in 2017 will not be a good reference for the future trajectory of DPM adoption, Asian Private Banker's DPM data, which dates back to 2012, claims that penetration rates have already almost doubled from 4.9% to current levels. Asia’s private banking industry is rapidly maturing to mirror its western counterparts with high net worth clients increasingly adopting approaches that include greater openness to delegation, a greater focus on risk and diversification, and greater willingness to stretch investment time horizons long enough to realise the benefits of active management.

DPM asset-weighted penetration 10%

INDUSTRY

9.6%

2016-17 pp increase

8.0% 8%

1.6%

7.5% 7.0%

6%

2012-2017 CAGR

5.5%

14.3%

4.9%

4% 2012

2013

2014

2015

2016

Average penetration rate by bank type 2016

2017

2016-17 DPM asset growth vs total AUM growth

2017

DPM asset growth

3.7%

Total AUM growth

53.3%

Asian

Asian 4.1%

29.8% 8.3%

44.7%

Universal

Universal 9.5%

27.2% 11.6%

86.9%

Pure Play

Pure Play 14.4%

50.4%

8.0%

52.7%

Total

Total 9.6%

30.3%

Breakdown of 2017 DPM asset-weighted penetration Asian Min Avg Max 0.7% 4.1% 7.2%

Universal Min 2.0%

Avg Max 9.5% 13.7%

Pure Play Min 5.0%

Avg 14.4%

Max 60.4%

Total Min 0.7%

Q1 5.0%

Q2 11.7%

Med Avg 8.4% 9.6%

Max 60.4%

37

DPM

Retro fee ban could prove double-edged sword for DPM

T

he global regulatory landscape may be shifting to better align interests and increase transparency, but industry sources have fair concerns about the immediate impact this will have on discretionary portfolio management (DPM) in Asia, citing clients’ potential to act against their own interests.

Fee scrutiny could lead to harmful fund switching New rules require wealth managers in Hong Kong to disclose all “explicit remuneration arrangement[s]” by discretionary managers by November 2018 — a development that brings the local regulatory environment in line with global trends.

However, some believe the well-intentioned changes may not mesh with Asian investors’ penchant for self-directed investing and fee sensitivity.

“Greater fee transparency and the abolishment of trailer fees is coming to Asia and has already been implemented throughout Europe,” noted Grizelda Lee, Indosuez Wealth Management’s head of DPM.

38

“But this may or may not be a double-edged sword. Although it could reduce the conflict of interest between distributors and manufacturers, a greater focus on fee scrutiny could lead clients to select inferior funds merely because of lower fees.”

At Indosuez, clients already have full transparency to all holdings, including funds, and 95% of fund holdings can be liquidated within three days.

“To be honest, the regulator’s new requirements to raise the standard of discretionary portfolio management businesses are not surprising,” Lee added.

“The requirements include guidelines around liquidity risk, concentration risk, leverage risk and more. Risk management is one of our core strengths at Indosuez Wealth Management and hence what we have in place is extensive.”

DPM

Another industry practitioner echoed Lee’s sentiments, adding that Asian HNWIs’ short investment horizons combined with granular disclosures on individual fund holdings could lead to requests to switch, especially during periods of underperformance.

“Clients in Asia are well known for buying yesterday’s winners and selling today’s losers,” the source said under the condition of anonymity, illustrating Asian HNWIs’ affinity for self-directed market timing.

“Disclosure could lead to greater client scrutiny on fees along with the existing focus on short-term performance which could lead to unsound requests for switching to cheaper managers, especially those that have recently underperformed or those that manage a smaller allocation.”

Still better in the long-term Even so, the industry broadly agrees that enhanced transparency and an eventual ban on retrocession fees are positive steps forward.

In particular, the industry would benefit from improved reporting practices and reduced operational costs at private banks. Numerous private banks are already adopting a full retrocession-free approach in their DPM businesses in Asia in anticipation of future regulatory changes and in order to simplify processes.

“It might be more onerous from the bank’s perspective to have to provide a disclosure upfront to the client and constantly update the changes versus going towards being retrocession-free,” Tan Wei Mei, Credit Suisse Private Banking’s APAC head of portfolio solutions, recently told Asian Private Banker.

“I think the trend is to move towards being 100% retrocession-free.”

“We have been taking a very conservative and stringent approach, and we have been very fair and transparent to our clients. As such, there is no need for us to change any of our practices with this update on requirements for disclosure, as we are already 100% retrocession-free and do not receive any trading profits,” she continued.

In addition, long-term DPM performance could improve if discretionary managers are prompted to turn over a fund due to legacy issues relating to trailer fees.

Still, the industry does not expect to see a trailer fee ban in Asia any time soon. A recent survey conducted by Asian Private Banker found that over a third (37%) of industry leaders in Hong Kong and Singapore do not foresee an outright ban — at least for the time being.

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DPM

HSBC Private Banking’s Asia DPM inflows grew five-fold in 2017

H

SBC Private Banking’s discretionary portfolio management (DPM) inflows grew five-fold in 2017 and the bank has already registered 80% of the same amount in 2018, following a revamp of its platform.

Five-fold increase of 2017 DPM inflows in Asia According to the bank, inflows in 2017 and 2018 year-to-date have primarily been invested into a multi-asset mandate (60% of total inflows) and an in-house short duration bond mandate (40%).

Demand for the former is part of a multi-year trend to invest in diversified portfolios and the latter is due to rising rates and its effect on duration risk.

“The dynamic changes in the current market environment require clients to have a disciplined investment approach. The discussion should always start with clients’ risk/return expectations with which an appropriate ‘game plan’ is derived,” said Michael Christo, HSBC PB’s managing director, discretionary Asia, discretionary wealth management and services.

“Within this portfolio construction, clients should have a core investment and this can be in the form of different strategies: multiasset or fixed income strategies. Our sources of expertise stem from our own HSBC Asset Management Team and SEI (third-party manager of managers exclusive to HSBC Private Banking) providing institutional capabilities to HSBC private clients.”

He added that HSBC PB has experienced “tremendous growth” in the DPM space over the last two years thanks to the strength of the private bank and its unique offering.

DPM platform revamp pays off The bank’s DPM growth in Asia is due in part to a global revamp of the platform with the aim of leveraging the capabilities of the group and achieving sustainable scalability. HSBC Private Banking’s active reorganisation of this business involved shifting the portfolio management function to other partners, including HSBC Global Asset Management and SEI, and consolidating client assets within fewer and more scalable mandates.

“HSBC has four lines of business and as the private bank our strength is knowing and understanding our clients,” said Abdel Ben Tkhayet, managing director, co-head of investment services and product solutions, Asia, explaining the private bank’s decision to move the portfolio management function to other entities.

“HSBC Global Asset Management does have scale, expertise, and all the technological requirements to do a better job than us trying to be portfolio managers. And we have a 15-year partnership with SEI to provide us 40

with manager-of-manager capabilities for multi-asset strategies as well as building blocks for portfolio construction,” he continued.

“By leveraging our group expertise, capabilities, and the power of our brand in the region, we are uniquely positioned to provide the best discretionary and alternatives solutions for our clients and ultimately the best private banking services.”

The private bank said its efforts to consolidate client assets in fewer mandates were successful, with “almost 100%” of legacy clients reinvesting into strategies from the new platform.

“The reality is, in global private banking, we all recognise that our business needs to be scalable in order to be sustainable,” Tkhayet said.

“Having too many different discretionary portfolio management programmes is just not going to work, both from client and efficiency perspectives. So we proceeded to revamp our DPM platform with the purpose to simplify and rationalise our offering.”

Global markets are experiencing increasing risk from a myriad of factors including rising interest rates and intensifying trade tensions.

Higher volatility and lower return expectations are expected to eat into transactional income in Asia and returns for client-directed portfolios.

Accordingly, regional private banks are intensifying their focus on delegating to active managers — whether to funds or discretionary mandates — to offset headwinds.

“Clients in Asia are well known to be relatively short-termist and active in trading, but in the current market environment, it is very difficult to time the market and long-term active management is critical for reducing volatility,” said Jackie Mau, managing director and co-head of investment services and product solutions, Asia.

“At HSBC, we’ve been able to demonstrate our capabilities in DPM solutions and clients have proven to be more open to professionally run investment services, delegating more of its core investments while focusing on satellite trades. Building core positions through professionally managed DPM solutions bodes well both for risk management of client portfolios and for HSBC Private Banking to achieve more sustainable business. This is a win-win situation.”

DPM

UBS raises US$100m in Asia for new ‘fund selection’ discretionary mandate UBS Global Wealth Management (GWM) has raised about US$100 million in Asia for a newly launched discretionary mandate focused on showcasing the bank’s fund selection capabilities and its preferred roster of leading asset managers.

strategy, and a broader discretionary manager overseeing the overall portfolio. Could this be replicated on the advisory side? Yes, but it is likely that clients would struggle to have the same discipline to manage the different allocations to the various fund managers strategically.”

The new mandate, titled ‘UBS Managed Advanced Fund Selection’, launched at the end of May with a minimum ticket size of US$100,000 and a concentrated portfolio made up of 16 funds. With the exception of a small cash allocation to UBS’s money market funds and a multimanager hedge fund module, all the underlying holdings are populated with third-party funds of both large and small brand names.

Although the mandate is built based on the same asset allocation strategy that drives its standard offering, sub-allocations are implemented at a less granular level and the minimum threshold is lower.

According to Mischa Eckart, managing director and APAC head of client investment specialists at UBS GWM, the timing of the mandate launch coincided with the World Cup, prompting the bank to use football analogies to better illustrate the benefits of the solution, likening different elements of the sport to individual strategies, portfolio construction, and active management of underlying funds.

“Just like an effective discretionary mandate, a successful football team contains three major components: strong individual players, the construction of a team with complementary players, and the broader management of the team,” Eckart explained.

“This is the same with our ‘UBS Managed Advanced Fund Selection’.

You need strong individual fund managers, an effective asset allocation

As of 2Q18, UBS GWM’s invested assets (including both assets under advisory and discretionary contracts) in Asia were up 28% year-on-year and Eckart attributes the asset growth to two particular mandates — its ‘Systematic Allocation Portfolio’ and its ‘100% Sustainable Investing’ (SI) mandate — as well as its standard multi-asset solutions.

“Amid the volatility of 2018, clients appreciate discretionary portfolios as a way to participate in markets and to enjoy the smoothing effect of diversification, essentially enabling them to stay in more tighter control of their wealth,” Eckart added.

“It’s no secret that the average investor struggles to adhere to a disciplined execution of their investment strategy. But this is exactly the key for consistent investment success. Helping clients to execute a comprehensive investment strategy is the main driver of our efforts to further build our contracted business.”

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DPM

EFG in two-pronged recurring revenue push

M

Mozamil Afzal global CIO EFG

ost private banks in Asia have historically waited for discretionary mandate businesses to reach a certain scale before launching an advisory mandate offering. However, EFG is making a simultaneous push for both, and is confident clients and bankers will react positively.

US$1 billion which immediately led markets to cut US$14 billion in market cap away from competitors,” Afzal said, illustrating an example of the market’s focus on strong management.

Growing DPM assets and capitalising on differentiated security selection

Simultaneous flat fee advisory mandate push

“Everyone is expanding their discretionary assets, especially in Asia, and we are experiencing faster growth from a low base,” Mozamil Afzal, global CIO for EFG, told Asian Private Banker.

“This is critical not only for private banking businesses to generate recurring income but also particularly because generating returns is becoming increasingly difficult in the current market cycle.”

High beta markets previously allowed Asian investors to make strong returns through concentrated holdings, but the current lower growth and rising rates environment makes for a riskier backdrop.

“On the upside, many investors can make concentrated bets in two or three stocks and outperform a diversified portfolio, but it’s the downside where intellectual rigour and risk management come into play to create a robust portfolio that can stand the test of time,” Afzal explained.

“The benefits of such solutions were especially realised in a year like 2018,” he continued.

In addition to standard multi-asset or single-asset class mandates, EFG has a number of unique solutions that focus on long-term investing in sustainable companies based on a security selection framework. The frame in question relies on metrics beyond traditional bottom-up research — namely, the bank’s US and Asia ‘Future Leaders’ strategies.

“Amazon continues to grow rapidly but produces just a fraction of Walmart’s profits over the last 10 years. Investors trust [Jeff] Bezos to do the right thing and markets reacted to his acquisition.”

Despite not having reached critical mass in its discretionary portfolio management business in Asia, EFG is also pushing ahead with its advisory mandates offering — a more uncertain play given the region’s lack of maturity relative to Switzerland.

“We are in the process of rolling out an investment advisory tool which essentially has models for client relationship officers (CROs) to use on a centralised basis to have a more fruitful dialogue with clients,” Afzal said, describing the upcoming flat fee offering.

“The tool will have various features, including valuations and risk/return analytics which will generate investment advice based on client preferences and objectives. In the old days, private bankers relied on spreadsheets and their own independent inputs but this will allow EFG to interface with clients through a much more structured conversation. We have started piloting this offering and will seek to make a broad rollout soon.”

Traditionally known for its trading capabilities and effectively generating transactional revenues, EFG is in the midst of transforming its business by placing a greater emphasis on recurring income, amongst other goals including strengthening its risk and compliance framework.

But beyond Asian clients’ well-known reticence to delegate, industry leaders point to banker adoption as a major obstacle, in large part due to a desire to retain control of the relationship and, effectively, business activities.

“Our Future Leaders approach is a differentiated way of selecting securities with a focus on management quality,” Afzal said.

Afzal believes this is no longer tenable — not only because of capital market risks but also because bankers must free up time often consumed by low margin trading in core holdings to focus on more impactful investments and client acquisition.

“When you look at the life expectancy of listed companies, it is quite low and could trend even lower given growing disruption in the macro environment, including technological, environmental, and social changes.”

“Annuity business provides the backbone for growth in our CROs. If you are managing the portfolio and contacting clients regularly for updates five to six times a day, you have no time to prospect,” Afzal said.

According to data from management consultancy firm Innosight, the life expectancy of S&P 500 companies has consistently trended lower, at least since the early 1980s when it was well above 30 years.

“By using discretionary managers, you can effectively subcontract the core portfolio to be managed in line with client objectives and house view and focus on growing the book. This is what will ultimately drive CRO profitability and long-term earnings.”

As of February 2018, the average life expectancy was below 25 years and is expected to fall well below 15 years by 2025 and beyond.

“Take Amazon, for example, which recently acquired Pill Pack for around 42

Following the hire of former DBS discretionary portfolio management (DPM) head, Rebekah Chuan, to lead EFG’s efforts in boosting its discretionary business, growth has been robust, albeit from a low base. In August 2017, Chuan said DPM assets growth that year had already reached 40%.

DPM

Regional DPM expansion in the offing for CIMB CIMB Private Banking is planning to expand its discretionary portfolio management (DPM) offering beyond Malaysia amid a growth drive that has also seen the lender establish a unified private banking and investment banking unit.

Favian Tan, regional head of product development for group private banking at CIMB, told Asian Private Banker that DPM services will be rolled out in Singapore, Thailand, and Indonesia over the next six months.

CIMB Private Banking already offers DPM in its home market, Malaysia, and has seen some traction, though Tan said the penetration rate remains low.

“I expect we will face a few more challenges in the Singapore market due to the level of competition,” he continued, referring to the league of established foreign players in the jurisdiction that are ramping up their focus on delegation across the board.

Cultivating the product suite The bank’s DPM plans for key ASEAN markets are part of a wider push to develop and differentiate its product platform going forward.

Meanwhile, on the alternatives side, CIMB Private Banking is exploring the possibility of introducing clients to private equity and hedge funds.

“Private equity will come more in the form of pre-IPO deals,” Tan said.

“We have strong partnerships with IPO providers and some of these deals we can package in a private equity vehicle to offer to clients.”

“For hedge funds, we are looking at strategies to replace some traditional asset classes such as fixed income, which is experiencing challenges right now,” he added.

Towards the end of 2017, CIMB appointed Syed Razif Al-Idid as the head of its private banking business in Singapore, following a recruitment drive in the city-state earlier in the year. The private bank earlier reported that it had around US$11 billion in assets under management.

In September, CIMB announced it had united its private and wholesale banking divisions into a single unit. While the bank did not disclose further details, the structural change is likely to increase the bank’s ability to handle the corporate needs of private clients, many of which are business owners.

Tan said the private bank intends to leverage the group’s “strong treasury DNA” to broaden its treasury product range to include equity derivative products that include loans on a single stock basis.

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EVENTS

Asian Fixed Income Forum The inaugural Asian Fixed Income Forums were held in September, keynoted

by Hiroto Uehara, Bank of Japan’s head of international coordination division, international department. 125 fixed income specialists from private banks, family offices, and independent wealth managers gathered across Hong Kong and Singapore to discuss the outlook for regional and global debt markets — focussing on the topic of ETF implementation in fixed income discretionary strategies.

Special thanks to all attendees, speakers, and partners for their continued support. For full details of the event, please visit: http://apb.events/afi2018

EVENTS

A case for strategic allocation to Asian LC bonds

H

igher US rates, trade tensions, and widening spreads have generated concern amongst investors about a sell-off in emerging market (EM) debt, but Asian bonds have proven to outperform overall EM debt when markets are challenging, and smart beta ETF wrappers are gaining momentum in this fixed income space.

In partnership with State Street Global Advisors (SSGA), Asian Private Banker recently hosted bespoke events in Hong Kong and Singapore centred on the outlook of fixed income in Asia. In addition to investment and trading professionals, more than 10 senior leaders in the discretionary mandate and fund selection domain gathered on a panel to discuss the inclusion of Asian fixed income ETF exposure in the portfolios of Asia’s wealthy.

Due to the yield-driven and capital-preservation nature of fixed income, bonds have historically played a dominant role in Asian HNWIs’ portfolios. Additionally, with a strong home bias, Asian debts have accounted for a significant portion of fixed income allocation.

“Buoyed by favourable demographics, strengthening domestic demand, and increased global competitiveness, Asian economies are exhibiting better growth trends than developed economies,” said Kheng-Siang Ng, Asia Pacific head of fixed income at SSGA. Ng added that in contrast to EM bonds in other regions — such as Latin America and Africa — EM Asian bonds have a lower correlation with riskier assets and are a good diversifier within global asset allocation, setting the asset class apart from its EM peers.

In addition, deteriorating fiscal positions in developed markets drive investors to seek alternative exposure to more stable Asian sovereigns, making the asset class even more attractive from a technical perspective.

Local currency vs hard currency On positioning between Asian local currency and hard currency bonds, some private banking veterans expressed concern over foreign exchange and liquidity risks, with one DPM head from a Swiss bank saying “the biggest uncertainty in the local currency space is currency”.

However, Ng pointed out that, historically, currencies have been a significant contributor to Asian local currency bond returns, as represented by the iBoxx ABF Pan Asia Index, with rolling 1-year currency returns having contributed 1.65% to the total Asian local currency bond return.

Dwyfor Evans, managing director, head of Asia-Pacific macro strategy, State Street Global Markets, said economic data indicates the global cyclical story is still strong and “real money is far less encumbered by positioning risks in EM”.

ETFs vs active funds Although Asian trading-minded investors tend to prefer picking their own bonds, SSGA said semi-active smart beta ETFs with an open and transparent product structure provide quicker and easier access to Asian local currency bonds.

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EVENTS

An example is the ABF Pan Asia Bond Index Fund (PAIF) managed by SSGA and dual-listed on the Hong Kong and Tokyo stock exchange.

The ETF tracks the Markit iBoxx ABF Pan Asia Index, which employs an intelligent indexing approach and allocates exposure according to three factors: market capitalisation, sovereign debt ratings, and investability indicators.

Rather than allocating exposure solely based on market capitalisation (which will result in concentration in a few countries), this modified indexing approach allows for a more diversified and better-balanced portfolio, according to Ng. In relation to fixed income ETF trading, Viktor Östebo, head of institutional trading at Flow Traders Asia, said investors should not use exchange/ADV to judge an ETF’s liquidity.

“Exchange liquidity is not representative of the real liquidity of an ETF,” said Östebo, highlighting that multi-layered liquidity — which includes market liquidity, AUM/shares outstanding, and second market liquidity — enables ETFs to trade stable even in stressed markets, with each ETF at least as liquid as its underliers.

The Asian Bond Fund is a strategic initiative of the Executives’ Meeting of East Asia-Pacific and Central Banks (EMEAP) to promote the development of bond markets in the region, Hiroto Uehara, head of international coordination division, international department at Bank of Japan, pointed out during the opening speech. The latest initiative was the launch of PAIF's securities lending programme, with an aim to deepen liquidity in the secondary markets of Asian local currency bonds.

“Proactive efforts [from EMEAP] are becoming increasingly important to further advance money market development [in the region] as demand for short-term transactions may increase in the possible reversal of the financial cycle,” Uehara said.

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INDUSTRY

Lombard Odier: Strategic partnerships to relieve pressures of local banks

A

s it marks the tenth anniversary of the establishment of its Singapore office, Lombard Odier has signalled its ambitions for growth in emerging Indonesia with the strategic partnership it entered into with Bank Mandiri in April this year.

According to Vincent Magnenat, limited partner and CEO Asia Pacific at Lombard Odier, onshore-offshore strategic partnerships often transform into “strategic friendships” based on the tenet of knowledge transfer that combines the strengths of two organisations that challenge each other to bring more value to their clients.

Vincent Magnenat limited partner and CEO Asia Pacific Lombard Odier

Having seen its interest rate rise to nearly 6% and the rupiah falling almost to its lowest level in 20 years in 2018, Indonesia occupies a unique investment landscape, with sophisticated onshore clients who nonetheless still find it difficult to gain access to the global market, according to Magnenat.

“There are very sophisticated Indonesian clients who have been banking for decades with Singapore. When we go onshore, we see that their expectations for quality of service and access to global markets are really on par with the standards of that in Singapore or Hong Kong,” Magnenat told Asian Private Banker, stressing the importance of having a value proposition that addresses the specific needs of discerning Indonesian clients.

Citing a study that said Asia’s top 20 private banks managed less than 20% of the assets of high net worth and ultra high net worth individuals, Magnenat alluded to the magnitude of the opportunity in the form of untapped onshore wealth, which was thrown into sharp relief via Indonesia’s tax amnesty that concluded in 2017.

Our aim is very clear — we want our partners to be number one in each of the countries we have signed a strategic partnership in

“I think the priority for them is really a diversification — a diversification of currency, a diversification of asset classes, and gaining access to the global market,” Magnenat added.

“Our value proposition is to focus on core investments that are global, multi-asset, and liquid; our risk-based approach gives clients true diversification while at the same time manages the risk of the market.”

Teach a man to fish Lombard Odier provides training on advisory and family services to local relationship managers by leveraging its talent from its offshore bases in Singapore and Hong Kong, while Bank Mandiri holds the client loyalty, local market knowledge, and cultural understanding that the major onshore bank has built over the decades to help it adapt to the local environment.

In selecting a local partner, Lombard Odier seeks an alignment in value, with partners believing in the holistic approach of bringing value to clients.

The partnership with Bank Mandiri is built upon a master-feeder fund arrangement and enables the local lender to offer a global discretionary portfolio management service, the first of its kind in Indonesia.

“The tax amnesty has probably brought a lot of pressure on the local banks to develop their offerings,” Magnenat said. “With our strategic partnership with Bank Mandiri, we can really bring global investments into the local arena, and clients can get access to global markets locally.

That’s very positive for the Indonesian market onshore.”

“Our aim is very clear — we want our partners to be number one in each of the countries we have signed a strategic partnership in,” Magnenat said in reference to the series of tie-ups Lombard Odier has entered into in Southeast Asia, including its first with Kasikornbank in Thailand a little more than three years ago, and with UnionBank in the Philippines.

As such, the need that the Swiss pure play has identified for its Indonesian clients is diversification, or to help their clients identify what to keep onshore and what to move offshore, especially at the juncture where first or second generation families are looking to structure and pass their wealth on to the next generation.

“Indonesia is a huge market, so global players are likely to enter in one way or the other — opening offices, going into joint ventures, or like us in strategic partnerships,” Magnenat concluded in an outlook for the Indonesian private banking landscape. “I think that’s a trend that we will see, especially with regulations becoming increasingly transparent.”

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INDUSTRY

DBS takes root to bank Indonesia’s rising affluence

D

BS Private Bank, Asia’s sixth largest private bank by assets under management in 2017 (ex-China onshore), has strategically positioned Indonesia as one of its key markets, where their overriding priority is to grow by actively broadening and deepening their footprint, according to Joseph Poon, managing director and head of Southeast Asia at DBS Private Bank.

In July this year, the lender launched an onshore branch for its Treasures Private Client proposition in Indonesia, after traversing the path of inorganic growth in its acquisition and post-merger integration of ANZ’s wealth management and retail banking business in Indonesia and four other markets.

“The recent integration of ANZ’s Indonesian business to our already established onshore retail and corporate network there further entrenches DBS as a leading financial services provider to Indonesian businesses, individuals, and families,” said Poon, who asserted that the bank’s Asian roots and legacy of working alongside Asian businesses and families give it “unparalleled insights and know-how” to provide culturally aligned bespoke advice and solutions for their clients across business and personal investment needs.

“This gives us access to a broader onshore client base for our existing onshore offering,” he continued. “At the same time, ANZ’s suite of products and services can be offered to our existing onshore clients.”

The acquisition of ANZ’s onshore business has added some 570,000 new customers and S$1.6 billion in overall assets under management to the DBS franchise in Indonesia.

With national elections looming in 2019 and given the recent increase in volatility in the Indonesian rupiah, Poon has seen risk appetite falling among Indonesian clients who have become more cautious in taking on new directional and idiosyncratic risks against the backdrop of heightened risks in the global financial markets.

“Many have shifted into longer term, balanced, and portfolio-driven investments that are aligned with our chief investment officer’s views,

Many have shifted into longer term, balanced, and portfolio-driven investments that are aligned with our chief investment officer’s views, and to benefit from long-term structural trends

48

Joseph Poon, managing director and head of Southeast Asia, DBS Private Bank and to benefit from long-term structural trends,” Poon said, drawing general correlations between the financial well-being of Indonesia clients and Indonesia’s domestic economic cycle, political environment, and movements in the Indonesian rupiah.

“Trust, relationship, and easy access to the entire bank are foundational anchors of our strong relationships with our Indonesian clients,” he added.

Driven in part by the rising affluence of Indonesia’s growing middle class and the corresponding increase in their needs for offshore and onshore wealth management services, Poon has observed both domestic and foreign banks becoming increasingly active in the country’s evolving landscape over the past year.

Further, under the country’s tax amnesty, the repatriation of funds back onshore is also deemed to have contributed to an increased demand for onshore wealth management services.

“The recent tax amnesty triggered and mobilised clients in commencing the planning and structuring of [and ultimately] transferring their investments, assets, and business[es] to the next generation,” said Poon, who sees this in a positive light given DBS’s presence in Indonesia. “This has, in turn, triggered an extension of their investments’ time horizon.”

DBS also advocates social impact investments in the region, having launched the Woman’s Livelihood Bond in 2017, the “world’s first listed bond with a dual focus on financial and social returns”, with the objective of “empowering the lives of over 385,000 women in Southeast Asia”.

Meanwhile, DBS Foundation works with social enterprises and entrepreneurs across Indonesia, Singapore, India, China, Taiwan, and Hong Kong in various programmes, including venture challenges, learning forums, intensive incubation, project grant support, financing, and skilled volunteer mentoring.

TECHNOLOGY

APIs expose FIs to greater cybersecurity threats: MAS’s CSAP

T

he Monetary Authority of Singapore’s Cyber Security Advisory Panel (MAS’s CSAP) has cautioned the financial industry about possible cybersecurity threats stemming from the use of application programming interfaces (APIs) and the public cloud.

MAS established the CSAP in September 2017, gathering international specialists to share perspectives on how evolving technologies and cyber threats impact the financial service industry, as well as give insights on best practices in cybersecurity strategies.

In the regulator’s media release, the advisory panel highlighted the growing possibility of data leak threats, given that the popularity of APIs as a common data transfer channel is increasing amongst financial institutions (FIs), partnering tech vendors, and other merchants.

“FIs are actively making their APIs available to third parties such as service providers and business partners to enrich the quality and customisation of their financial services,” MAS said.

“As APIs expose FIs to higher risks of cyber threats, CSAP members proposed measures which FIs may adopt when embarking on their open API journey.”

APIs provide a common format and channel for data transfer among organisations, thereby increasing the risk of unauthorised parties gaining access to and misusing data sets provided by FIs.

To prevent such threats, CSAP has suggested that FIs conduct risk assessments of third-party API users and monitor API-related activities for suspicious indicators.

The panel also found that FIs are increasingly relying on the cost-saving, scalability, and time-to-market benefits of public cloud services. And while it encourages small- and medium-sized FIs to leverage such service so long as a high level of cybersecurity is provided by reputable cloud service providers, there are concerns around a ‘concentration risk’ — a growing number of FIs relying on a limited pool of cloud service providers.

“In particular, FIs should implement measures to secure data stored on the cloud and their network connections to the cloud service provider.

Members also said that cloud service providers should provide greater transparency to their customers on how they implement security measures to protect their systems and information,” MAS said.

Almost a year after a cybersecurity expert told Asian Private Banker that Singapore is particularly vulnerable to cyber attacks compared to other jurisdictions in Asia given its highly digitalised and large economy, SingHealth was hacked in July, exposing the personal information of 1.5 million individuals.

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TECHNOLOGY

Sudhir Nemali, APAC COO, Deutsche Bank Wealth Management

Asia at the epicentre of Deutsche Bank WM’s tech ambitions

A

sia will receive the lion’s share of Deutsche Bank Wealth Management’s €65 million investment in new digital technologies, in a move that will see the region become the innovation engine of the private bank.

Sudhir Nemali, Deutsche Bank Wealth Management’s APAC COO, has told Asian Private Banker that a significant chunk of the discretionary spend will go to the region and that the bank will open its first wealth management-focused innovation lab in Singapore later this year.

The cash injection comes as the private bank pushes ahead with its ‘Protect, Transform, and Grow’ strategy, which involves a multi-stage digital revamp, and follows an announcement last year that the bank would “substantially increase” investments in digital capabilities over an 18-month period and hire around 100 new client-facing employees in high-growth markets, including the Asia Pacific.

Since then, the private bank has largely met its hiring targets for the region and rolled out solutions for front-to-end sales and prospecting, and an onboarding tool amid a regional drive to iron out the account opening process.

The bank’s decision to allocate the bulk of the investment to Asia comes on the condition that solutions developed in the region are globally adaptable.

It also points to the importance attached to the Asia wealth management business by the bank, which is undergoing a group-wide reorganisation.

“What Lok [Yim, emerging markets head, Deutsche Bank WM] has managed to do in terms of stabilising and growing the business has 50

given senior management a high degree of confidence in our Asia business and its future prospects,” Nemali said.

Group CEO, Christian Sewing, recently highlighted Asia, alongside Germany, Europe, the Middle East, and the US as markets where the bank expects to increase wealth management revenues.

Nemali said the private bank is now exploring AI-driven technologies and solutions for various digital initiatives and will revamp and upgrade its system, although his “number one priority” remains the client onboarding process — a priority shared by Lok Yim, who previously told Asian Private Banker that account opening is his “one big obsession”.

“For the second phase [of our account opening solution], we are further enhancing our onboarding tool,” said Nemali. “We are looking at integrating AI capabilities in client screening and streamlining and automating the information-gathering process for clients and prospects.

Initial proof of concept results are quite promising, and we believe it works very well insofar as it effectively reduces false positive hits on client screening substantially.”

Nemali said the next big step would be to bring all the pieces together in an effective manner by creating a “cross-sectional database” with integrated dashboards and seamless access.

Meanwhile, the APAC Innovation Lab, based in Singapore, will allow the private bank and Deutsche Bank as a whole to tap into the vibrant innovation ecosystems present across the region, supporting growth plans through partnerships with technology startups.

TECHNOLOGY

HNWIs’ preference for instant messaging is “a pain point unique to Asia”: FinChat

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Bill Eng CEO and co-founder FinChat

rivate banking clients in Asia have a strong preference for instant messaging platforms compared to their Western counterparts, spurring private banks in Asia to incur compliance and regulatory costs to cater to clients’ needs and improve efficiency, according to fintech firm FinChat.

“The compliant instant messaging service is driven by the phenomenon here in Asia,” Bill Eng, CEO and co-founder of FinChat, told Asian Private Banker.

“Unlike their USA counterparts, who are happy with e-mails and SMS, Asian users love to use instant messaging services.”

He added that while HNWIs’ preference for popular social media platforms — such as WhatsApp, WeChat, and LINE — is a pain point unique to Asia, it opens up an opportunity to cater to their needs.

Unsurprisingly, utilising instant messaging platforms for private

banking purposes raises concerns and costs around compliance, making banks hesitant to embark on offering such services. However, given Asian HNWIs’ reluctance towards adopting alternative platforms and the promise of improved relationship manager efficiency, private banks have opened their arms to fintech firms who can help them meet client and compliance demands simultaneously.

In February, Eng told Asian Private Banker the Singapore-based fintech firm — which assists companies in monitoring compliance over popular messaging platforms — had received inquiries from private banks that are “keen to avoid high reputation risk costs as well as to boost the productivity of their relationship managers”.

Last year in June, FinChat inked a deal with UBS Wealth Management to develop a secure communication platform, and on 11 September, DBS launched Wealth Chat — an instant messaging service for its HNW clients developed in partnership with the startup.

According to Asian Private Banker’s AppMap, as of April 2018, 13 banks in Asia offered messaging functions on their mobile and tablet application platforms. However, most clients still prefer to use WhatsApp and WeChat.

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INDUSTRY

All quiet on the Eastern front as private banking consolidation slows, but for how long?

M

erger and acquisition activity in Asia’s private banking industry has ground to a halt after a deluge of deals over the past few years shaped and reshaped the landscape.

From 2012 to 2016, Asia saw no fewer than 20 transactions or market exits. The most recent major deals occurred in early 2017 when Indosuez Wealth Management swooped on CIC and OCBC bought from NAB. Meanwhile, a flurry of transactions in other geographies this year has only underscored Asia’s calm.

Julius Baer took a 95% stake in Brazilian wealth manager Reliance Group. UBP in May entered into an agreement to acquire Banque Carnegie Luxembourg, and in July agreed to buy UK-based ACPI Investments. In the same month, Société Générale said it will sell its Belgian private banking business to ABN AMRO and Swiss bank Bordier & Cie, which maintains a presence in Singapore, took a majority stake in Uruguay-based Helvetia Advisors.

Privately, a number of private banks have told Asian Private Banker that they still intend to acquire in the region should the right opportunity arise, but say that the cupboard is bare after the last major consolidation wave weeded out banks that had struggled to achieve operating efficiency against suboptimal scale.

That’s not quite true, according to Yves Roesti, partner at management consultancy Synpulse, who told Asian Private Banker viable targets remain in Hong Kong and Singapore, although many have “idiosyncratic client books and only a few have universal pluggability”.

Consolidation and the digital factor However, Roesti believes market consolidation going forward will be driven by banks’ failure to address digital exigencies as well as issues of scale and efficiency.

“The future will show consolidation due to lack of investment into client experience, inferior offering, and an absence of digital client engagement,” Roesti said.

His concerns echo those recently voiced by the Asia chief executive of a major international private bank, who told Asian Private Banker on background that within the next decade, he expects bigtech to have 52

reshaped the region’s financial services industry (including private banking) in ways unforeseen, and to the detriment of incumbent wealth managers, which have largely failed to adapt to service commoditisation and clients’ changing preferences.

Indeed, digital disruption has forced the industry’s hand by making it necessary for banks devote significant capital to overhauling legacy systems, improving risk and regulatory monitoring, and opening up new channels for client engagement, often without clear ROI, for fear of falling further behind the curve.

A recent Citi report, The Bank of the Future, neatly captures the conundrum facing a flat-footed private banking industry.

“Incumbent banks are still in the early innings of a digital overhaul and are likely focusing on select IT components where ROI is most compelling,” the report states. “In contrast, the Neobanks with their agile platforms and speed to market are simplifying finance by creating more customer-centric experiences and providing an experience challenge.”

The vast sums involved suggest that digital transformation remains the prerogative of major players that can mutualise investments across geographies or leverage developments in their retail arms.

Smaller players would say that their value proposition hinges on maintaining a robust, personalised RM-client service model to capture client wallet- and mind-share. Others point out that the way forward for cost-conscious smaller banks may be to outsource business processes, typically to larger institutions, on the rationale that they do not have the budget to drive their own transformation.

However, the rent-a-platform model has yet to take hold in Asia, amid concerns about independence and data security.

Meanwhile, recent digital developments in account aggregation point to consolidation playing out in an altogether different manner. While clients are likely to continue to multi-bank to spread counterparty risk, those banks that have the means to systematically advise across clients’ total financial and non-financial holdings stand a better chance of cementing their status as the trusted advisor.

Still, Roesti points out that it cannot be concluded that all smaller institutions are prone to consolidation in the traditional sense.

INDUSTRY

“It warrants a closer look, as some smaller players are there with great growth numbers and a further expansion strategy,” he said.

Lombard Odier is a case in point. The bank has not let its scale in the region impinge upon its conviction that the future of Asian private banking lies onshore. Its hub and spokes network of master-feeder fund arrangements with domestic banks in onshore markets plays to its asset management strengths and Swiss cache while doing away with the need to establish costly brick and mortar setups. Expect others to follow suit.

A buyer’s market?

As cost pressures mount and competition intensifies, logic says we more or less remain in a buyer’s market, notwithstanding prevailing sentiment that viable acquisition targets remain few and far between.

Transactions prices have fallen sharply since OCBC’s landmark purchase of ING Asia Private Bank back in 2009. That deal, which cost OCBC just shy of US$1.5 billion, amounted to the bank paying a heady 5.8% on AUM when adjusted for estimated surplus capital.

Analysts said the price was on the high side and a good deal for the seller, provoking a frank response from OCBC’s CFO, who said the bank was “not embarrassed in any way or surprised” by the price paid, which was driven up by keen competition.

Seven years later, during the thick of Asian private banking’s consolidation wave, a rebranded Bank of Singapore paid around US$320 million for Barclays’ wealth and investment management business in Hong Kong and Singapore in 2016 at a price-to-AUM ratio of 1.7%.

Rival DBS also took Société Générale’s private banking franchise in Singapore and Hong Kong in 2014 for around 1.7% of the client book, and, more recently, Indosuez Wealth Management’s acquisition of CIC netted the bank just over US$6.1 billion in AUM including leverage.

Indosuez did not disclose the price paid, but at 1.3-1.7% on AUM, one could surmise the bank forked out in the range of US$80 million to US$100 million, although Asian Private Banker understands the actual price was substantially less.

But while the current pricing benchmark is unlikely to deter would-be acquirers, it could prove a sticking point for sellers.

This is especially true after robust performances in 2017 may have relieved some pressure on those staring at an exit. AUM and revenues increased across the board — in many cases to record levels — and private banks saw genuine momentum in their managed solutions businesses. That’s positive for an industry where execution-only has traditionally dominated and banks have struggled to raise recurring revenues for insulation.

At the very least, 2017 served to underscore Asia’s fundamentals as a wealth management epicentre, although that hype has surely dissipated after markets bit back around May this year.

“The remaining candidates are waiting things out, given the fact that transactions prices are low and APAC is a strategic market from a global private banking offering perspective,” pointed out Roesti.

“This creates a dilemma for many institutions: sell now?”

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'09 '10 25 June 2010 BNP Paribas integrates Fortis Private Banking Asia

6 March 2012 L&T Finance scoops up EFG's India (US$350 million AUM) wealth business

28 Oct 2009 Deutsche Bank splits and integrates Sal Oppenheim

'11 '12

23 July 2012 Julius Baer and Bank of China form strategic relationship, Bank of China (Suisse) integrated into Julius Baer

06 Jan 2014 EFG buys Falcon in Hong Kong (US$900 million AUM)

22 Feb 2016 EFG acquires BSI for US$1.3 billion

14 Oct 2009 OCBC acquires ING's PB business in Asia for US$1.5 billion, establishes Bank of Singapore

07 Apr 2016 Bank of Singapore buys Barclays Wealth and Investment Management (US$18.3 billion AUM) in Hong Kong and Singapore for US$320 million

13 August 2012 Julius Baer snaps up Merrill Lynch's international wealth management business, adds US$74 billion to AUM

17 Mar 2014 DBS buys Société Générale Private Banking's Hong Kong and Singapore (US$12.6 billion AUM) business for US$220 million

'13 '14 24 Dec 2014 SMBC buys Citi's Japanese retail banking business for US$333 million, merges it with private banking subsidiary – SMBC Trust Bank

11 Oct 2016 MAS revokes Falcon Singapore's banking licence, Falcon loses all APAC presence 17 Oct 2016 DZ Privatbank exits Singapore, forms partnership with OCBC to refer clients to Bank of Singapore 31 Oct 2016 DBS buys ANZ's wealth and retail businesses in Singapore, Greater China and Indonesia

54

'15 '16

06 Dec 2016 LGT purchases ABN AMRO Private Banking in Asia (US$40 billion AUM) and the Middle East 08 Dec 2016 Edmond de Rothschild closes Hong Kong branch

19 Oct 2017 Hong Kong's Mason Group buys Liechtenstein's Raiffeisen Privatbank for US$60 million

THE

ASIAN PRIVATE BANKING CONSOLIDATION TIMELINE 16 November 2011 21 December 2011 Credit Suisse folds in Credit Suisse buys Clariden Leu business HSBC's (US$2.7 billion AUM) private banking business in Japan

24 Jul 2013 SMBC acquires Société Générale's onshore Japan private banking unit

24 Jun 2013 UBS shutters its onshore India wealth management business

12 October 2011 Julius Baer acquires Macquarie's (US$1 billion AUM) wealth portfolio in Asia

20 May 2013 Standard Chartered buys Morgan Stanley's (US$800 million AUM) onshore Indian wealth business

18 April 2013 Investment banks RHB and OSK merge to expand private wealth product shelf in Malaysia

14 Sep 2015 UBS Wealth Management's Australia head leaves to start Crestone, strikes deal for a US$15 billion asset transfer

'17

24 Sep 2015 Management buyout of RBS Private Banking India, Sanctum Wealth Management is created

'18 27 Jul 2018 Rothschild & Co closes its Singapore wealth management office, gives clients the option to transfer assets to Zurich or Hong Kong branches

'19

21 March 2013 Gonet winds down Asian operations

08 Jul 2015 Fosun purchases Germany's Hauck & Aufhäuser for US$233 million

28 January 2013 Bank J. Safra and Bank Sarasin combine to create Bank J. Safra Sarasin

25 Mar 2015 RBS sells Coutts to UBP for US$350-450 million

15 Jul 2015 Korean Exchange Bank and Hana Bank merge to create KEB Hana Bank

04 Sep 2017 Beijing's Legend Holdings buys 90% stake (US$1.8 billion) in Banque Internationale à Luxembourg (BIL)

16 Jun 2017 Indosuez acquires CIC Banque Privée's Hong Kong and Singapore franchise

11 May 2017 OCBC snaps up NAB Private Wealth in Hong Kong and Singapore, OCBC Wing Hang takes Hong Kong assets while OCBC Bank takes Singapore assets

27 Sep 2018 Nomura acquires 40% of Julius Baer's Japan WM business

By end of 2019 NAB aims to offload MLC by the end of 2019, decides to focus on JBWere

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27 November 2018 | Hong Kong 29 November 2018 | Singapore

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