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EXCLUSIVE INTERVIEW: UBS Wealth Management On What Asia HNW Investors Want

Tom King

WealthBriefingAsia

4 November 2014

This publication recently interviewed Patrick Grossholz, who is head of investment management at UBS Wealth Management for the Asia-Pacific region. The article seeks to explore how investors in the region want their portfolios to be run, highlighting differences – and similarities – with the views held by investors in other regions.

What have you noticed most about the behaviour of Asian investors compared to other regions?
Like investors everywhere, Asian investors have a strong home bias. The difference is that the 'equity culture' is particularly pronounced in Asia, and investing is equated with personal trading of the local equity markets.

Not surprisingly, at the high net worth level, there is a lower penetration of discretionary solutions than in Europe, where such offerings are a part of the core holdings of many investors.

Asian investors are however becoming more interested in managed solutions such as discretionary or advisory mandates, and there is a perceptible change in the way they are structuring their portfolios. More and more Asian investors are recognising the value of diversification and increasingly looking for opportunities beyond the region.  

In Asia, home bias carries added risk because stock concentration is very high in our local Asian markets. The top 10 stocks in the MSCI World Index make up about 10 per cent of the index, in terms of market capitalisation. In Hong Kong, the top 10 stocks make up 60 per cent of MSCI Hong Kong, and in Singapore, nearly 70 per cent of MSCI Singapore. The volatility in these ostensibly developed equity markets is therefore very high and Asian investors are now receptive to the notion of a "core holding" in their portfolios. A core which is more global, more diversified and less volatile.

For the entrepreneurs who make up the majority of newly created wealth across Asia, why does discretionary management make sense and can you elaborate to justify your case?
Entrepreneurs have a strong desire for control. To many, control typically means timing the market. The unpredictability of markets since the global financial crisis has however driven home the point that market timing is extremely difficult and a more reliable route to wealth preservation is to stay invested.  

Take the last eight years. Since the lows of the global financial crisis in 2008/9, both the S&P 500 and MSCI Asia ex Japan have risen by about 200 per cent. The rally has however been dubbed one of the most miserable of all bull markets ever because many investors simply did not participate in it or only to a modest extent. Why? Because they did not believe in it.

This is a key reason why discretionary management appeals to entrepreneurs - it takes emotion out of investing. Many individual investors are driven by what the legendary Benjamin Graham characterised as "hope, fear and greed".

By contrast, professional managers are trained to think about financial markets in terms of both return and risk. Entrepreneurs understand risk very well in their own business but they may have a different view or approach to it when it comes to financial markets.

Understanding risk in markets means understanding diversification, which, when professionally executed, means lower potential risk or volatility. The surprising performance of government bonds this year has caught many individual investors out. Well-diversified portfolios have however had lower risk-adjusted volatility compared to portfolios with concentrated holdings of single securities or an asset class.

Managing a well-diversified portfolio is time-consuming and many entrepreneurs recognise there is real value in delegation. They however demand a wealth manager with a first-rate global platform, with breadth and depth in both research/execution as well as after sales.  

For example, at UBS, our investment mandates are based on the UBS House View. This is led by the Chief Investment Office and draws on the expertise of more than 900 economists, research analysts and strategists from around the globe.

Real estate is the favoured asset class of the Asian investor; it is a simple, easy-to-understand and tangible asset. How do you compete with that mindset to win more share of your clients assets?
Real estate is favored by the Asian investor as it is familiar. However familiarity does not always translate into returns. The first risk is that real estate is susceptible to bubbles. In this region, the big realization of this was the Asian financial crisis in 1997, when real estate prices plunged and did not recover for many years.

The new uncertainty these days is government or central bank policies. Many people expected the current period of near zero interest rates to result in the property market shooting up but Asian policy makers have demonstrated that they are determined to prevent any bubble forming and it is now common to see policy being tightened overnight.

Real estate will always have its appeal which, a bit like art, you cannot always measure through discounted cash flow analysis, but Asian investors are also looking for other asset classes. When we hold client events, we see clear interest in asset classes such as US high yield and Asian credit, and this is something we can offer in a very risk controlled manner through a discretionary portfolio mandate.

With uncertainty about central bank decisions, Middle Eastern friction, fears over the spread of Ebola and the plunging oil price, are discretionary mandates a good way for HNW individuals to stay invested and how do you placate the clients to stay the course?
The world will always have headlines that are frightening and the financial world has never been more challenging than it is today. There are risks everywhere but there are also abundant opportunities. The answer is to build portfolios that are robust enough to weather crises. And the best discretionary strategies are constructed with this in mind. When we discuss discretionary solutions with clients, it is always about the risk and return, not just about return. In other words - we don't talk just about blue skies, we also talk about storms.

So when uncertainty rises and markets grow choppy, our discretionary clients are prepared for them. They know about our UBS House View and our CIO investment process, and they know how important the risk management process is to us. They know they are getting the full knowledge and experience of the world's largest wealth manager and have confidence we can navigate the environment to support the long term investment goals of our clients.   

Across Asia an unprecedented transfer of wealth is taking place from the generation who relentlessly built it to descendants who may or may not wish to carry on. How does your experience and investment acumen address this challenge?
Discretionary solutions are increasingly being used as tools to transfer wealth to the next generation, especially where the younger members of the family decide not to take over the business. The focus is long term and is on wealth preservation, so what these clients seek are actively managed long run strategies which balance capital gains with income.  

UBS has a more than 150-year tradition of serving the wealthiest families, we have a very strong franchise in Asia and have the largest team by far of any wealth management firm in the region. This is the kind of experience clients want. We have a long history in managing clients' wealth and discretionary portfolio management, and we have been very successful in helping our clients on the smooth passing of wealth to the future generation.

Since 2003, we've hosted a UBS Next Generation Program every year in the Asia-Pacific region. This is an education event tailored for young people between 16 and 25 years. They gain access to some of the best minds in UBS and also the invaluable opportunity to form their own networks. Our client promise is not just for our clients today but for the generations to come.