From wealth creation to wealth preservation

The vast majority of high net worth (HNW) Asian families made their money from businesses benefiting from emerging markets clicking into the global economy over the past 15-20 years. Generally that means that father was focused on creating that wealth, and today’s generation is tasked with preserving it. That, of course, is where alternative investments come in. “The second generation is highly-educated and exposed to asset management and allocation,” says Rajesh Malkani, regional head of Standard Chartered Private Bank in South East Asia. “They are also willing to take a more long-term view – and a more realistic one. Today 7-10 per cent growth is considered good – gone are the days when 15-20 per cent was considered ‘normal’.” Diversification For some, diversification can simply mean no longer having the entire pot tied-up with the family business. But these are still entrepreneurial families, so private equity has proven popular (the same holds for real estate, where so many of these families have made their fortunes). The second generation, with its longer-term outlook and its bigger pool of money, can also afford to take on illiquid investments. The scale of the opportunity is evident in the number of Asian private equity funds launched by the big US and European players, but also, increasingly, local asset management firms. The younger generation also seems more willing to give greater discretion to its wealth managers – which also opens up more potential for alternatives. Their parents, says Mr Malkani, often assumed that because they ran successful businesses they could also run successful investment portfolios – and some of them “learnt the hard way”. “HNW professionals have a stronger tendency towards seeking to understand the advisory products range, while those who inherited their wealth often enquire about discretionary mandates so that the responsibility for wealth preservation can be entrusted to the bank,” says Christian Senn, head of investment solutions, Southeast Asia and Australasia, for Credit Suisse’s Private Banking division. There are other regional and cultural aspects to this hands-on or hands-off issue. According to Karen Tan, head of alternative investment and fund solutions with Deutsche Bank Private Wealth Management in Asia, clients from the Indian subcontinent are happy to take a back seat and South Asians tend to be “strategic thinkers who are more concerned about asset allocation decisions”, whereas those based in Hong Kong or Singapore prefer portfolios of stocks rather than funds. They are out for market risk and focused on liquidity – which means that long-term private equity or risk-management products like hedge funds do not appeal so much. “I’d be a bit reluctant to make any sweeping statement about any country or culture,” says Mr Malkani. “It’s more a function of where the wealth is (if it’s outside the home country they will give more discretion) or the sophistication and accessibility of the investors’ home market (Hong Kong and Singapore are both mature markets).” Those who do want to diversify away from equities (including private equity) have gone for commodities and hedge funds. Precious metals figure prominently as a hedge against the related issues of inflation and US dollar weakness (both significant exposures for Asian HNWs). Energy markets have also proven attractive. Hedge fund allocations are mainly to multistrategy funds of funds biased towards long-short equity. They also tend to be US or European names investing globally rather than locals. As Mr Malkani observes, private banking ought to be about meeting the client’s objectives with the best in class, rather than offering something in-house or local. But the fact that brand and reputation are the issues rather than a desire to diversify out of Asia suggests that this situation could develop. “Recently we have seen a new breed of Asia-centric managers who are focused on extracting alpha from the inefficiencies in the domestic markets, that require both local presence and experience,” says Mr Senn. “But the key factors for consideration are track record and size of assets under management [and] Asian-based alternative investment managers are an emergent cohort compared to their Western peers.” “Branding counts for a lot for Asian clients,” agrees Ms Tan. “But Asian clients are actually more willing to invest in Asia – it’s just that the industry for alternative investments is still very much a developed-market phenomenon.”

Tan: Regional and cultural aspects