By Abby Schultz
The day after the Swiss central bank removed the floor under the
Swiss franc and sent the currency soaring against the Euro, UBS
Wealth Management put out a note to its private bank clients
detailing how the move would hurt Switzerland's growth and the
stocks of Swiss companies dependent on revenues in other
currencies.
"The next morning when I was here (in Asia) I was being asked
for tactical trades and what people could buy around this," Simon
Smiles, UBS's chief investment officer for ultra-high net worth
investors, recalls with a laugh. And there were trades to
recommend, like using currency options to make very short-term bets
on the relationship between the Euro and the franc.
"It had the right kind of risk profile for clients wanting to be
tactical and benefit from this, the return-to-risk was
significant," says Smiles. The CIO was speaking in a meeting room
at the bank's offices at the International Finance Centre in Hong
Kong in-between back-to-back meetings during a visit to Asia from
his home office in Switzerland.
Smiles offered up the episode to illustrate how many
super-wealthy investors in Asia approach investing: more like
gamblers than long-term investors. And it's not an isolated
incident. "I can't remember the last time a Swiss client asked me
what a stock is going to do in the next week," says Smiles. "That
often happens in meetings here."
But, surprisingly, Smiles says the most well-to-do have many
investing traits in common no matter where they live.
They have a collective bias toward investing in what's familiar
- stocks and bonds from the region where you live -although
specific types of investments may differ. Investors in Hong Kong
have high allocations to Chinese and Hong Kong stocks, while
Spanish investors buy government bonds and Swiss investors will buy
a handful of Swiss equities along with bonds.
The ultra-wealthy also almost universally keep a large amount of
their investments in cash. In Asia, the figure is 25%. One reason
is that entrepreneurs, who make up a big percentage of the upper
echelon of the rich, have a lot of money tied up in their
businesses and they want to have the cash on hand as an offset. And
a lot of clients don't view the capital markets as providing many
good alternatives. If you missed out on the rallies that sent
stocks soaring after the financial crisis, "behaviorally, it's hard
to get invested after such great returns," Smiles says. Rates on
government bonds, meanwhile, are low, and so cash doesn't seem like
such as bad option.
Most super-wealthy also like to invest in property, although,
again, their preferences vary depending on where they live. Asian
investors will gain exposure to property through stocks and bonds
sold by property companies as well as buying it directly, while
investors elsewhere are more likely to invest directly.
But Asia does stand apart in a couple ways. There's the gambling
nature of many customers, where you look for what you can buy in
the next day or so to make a quick return, and the fact fewer of
Asia's most affluent buy the idea of a diversified basket of
investments. A typical ultra-high-net-worth portfolio in Asia might
be 70% stocks and 30% property, Smiles says. A corollary to that is
few of the super-wealthy delegate responsibility for their
investments to an outside manager like UBS. They prefer to do it
themselves.
UBS won't reveal specifics of how many of their ultra-wealthy
clients give UBS discretion for managing their assets, in Asia or
elsewhere, but Smiles says the "vast, vast" majority of
discretionary assets the private bank manages are not in Asia,
despite the high proportion of ultra-high-net-worth assets from the
region. Industry-wide, only about 5% of private bank clients in
Asia have these so-called discretionary accounts compared with 30%
in Europe, according to 2013 figures from the Boston Consulting
Group. At UBS, you need to invest US$50 million to receive
ultra-high-net-worth services.
On the margins, investors are coming around, through lots of
education and explaining about why a diversified portfolio of
stocks, bonds, hedge funds and the like, makes more sense. Sean
Cochran, a UBS managing director in Hong Kong who advises clients
on discretionary portfolios, told current and prospective UBS
private bank clients at a meeting this week that portfolios they
create on their own historically underperform UBS's diversified
portfolios.
In the two-year period from October 2012 to September 2014, for
instance, only 2% of UBS's customer-directed investments
outperformed monthly composite data of classic UBS portfolios,
while 7% had comparable performance and 18% underperformed. A huge
73% created portfolios that were outside of UBS's risk range, with
levels of volatility that exceeded 10%, although many of these did
outperform UBS's portfolios as well.
If you follow UBS's advice, you'll invest more in the U.S.
growth story. That's a strong message throughout the bank's
investor materials for both the long-term as well as this year. For
now that means buying more U.S. stocks and high-yield bonds, as
well as stocks in companies and economies across the globe that
will benefit from U.S. strength.
UBS's private bank also likes stocks in the Eurozone and is less
fond of most emerging markets, including Asia, which it expects
will suffer from the U.S. dollar's growing strength as the U.S.
Federal Reserve tightens monetary policy. That message will be a
hard sell in Asia.
Smiles met with a customer with a family office in Hong Kong
earlier this week, who wouldn't consider investing in Europe, for
instance, given his expectation that the euro is going to weaken
and the U.S. dollar will strengthen. A year ago, Smiles found most
of his customers in the region thought Europe was on the verge of
an upswing and since that didn't play out, they don't want to
consider it now, even as UBS believes Eurozone stocks will benefit
from a weaker currency, lower oil prices and record-low government
bond yields.
"We do think over a six-month basis that the European economy
will start to recover finally, it will start to grow again and that
should be supportive of European equities," Smiles says.
While the bank in general prefers developed markets over
emerging markets, Asia is seen as a "silver lining," but only in
specific markets - namely Taiwan and India. UBS likes Taiwan for
the exposure of its technology companies to the U.S. consumer and
India for its potential to benefit from lower oil and food prices
as well as reforms being enacted by pro-business Prime Minister
Narendra Modi.
The private bank is neutral on China within its global asset
allocation recommendations as it expects only 6.8% GDP growth next
year, and a continued drag to investment growth from the property
sector. But these big-picture views are only part of the story in
terms of what UBS recommends to its ultra-wealthy clients, many of
which are looking for unconventional trade ideas that aren't
correlated with the direction of markets.
For instance, while the bank's macro view is that Chinese
renminbi will depreciate over the next year, some clients might
want to take the opposite stance, and execute their idea through a
series of option trades on the offshore renminbi. As Smiles says,
"We've found clients who are interested in taking a contrarian view
and having the outsized payment if they're right."
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