Alternatives central to Citi’s integrated approach

Mark Mason, newly-appointed CEO of Citi Private Bank, is pre-occupied with the range of products available to his customers, who hold $290bn (€213bn) with the bank. No stranger to adjusting business strategies to maximise profitability, he is currently tinkering with regional offers in Asia and Latin America, available to what he likes to call the “mega wealth” segment.

While pleased with 9 per cent growth in client money during 2013, he wishes to further enhance the menu. “In Emea, managed investments have always been part of our product mix,” he says, during a visit to his bank’s European HQ in London’s Canary Wharf. “But in Asia, capital markets have dominated the revenue streams. Now it is our job to concentrate more on managed assets for Asian clients.”

Currently, the US accounts for half of revenues, Europe and Asia for 18 per cent each, with the balance in Latin America. Because of this Americas-biased revenue picture, unlike the job’s previous incumbent, Mr Mason has decided to base himself in New York rather than London.

“The mix of our products in Latin America is proportionately distributed between capital markets, managed investments, banking and lending,” says the keen golfer, who joined the Citi empire in 2001. “We have the right mix there – we just need it to grow.”

He was hired from Lucent Technologies in January 2001, to boost the efficiency of cross-selling disciplines in which Citi had made its mark in the financial sphere. He then co-founded the alternatives business in 2002 – a new departure for the bank.

Since those days, the bank has become much more integrated, he believes. “As a cross-selling organisation, Citi is a little different now. Back then, there were a lot of business silos.”

Today, bankers think of Citi as one firm which can offer its product platform to a variety of clients, claims Mr Mason. “If you are a family office, we can provide you with capital market execution,” while clients with less institutional-style private banking needs can also be catered for.

Although not personally involved in the decision to put private banking in the institutional clients’ group, rather than alongside retail banking, he believes it was vital to the direction the bank was taking. “This was a very important decision,” he stresses. “Private banking could easily have ended up in the consumer part of the organisation. But our focus is on clients with $25m (€18.5bn) or more of assets. This is a lot more of a narrow focus than some banks and this segment behaves a lot more like institutions than the consumer client base.”

But Mr Mason is the last person to present a picture where everything is rosy in the garden. Fire-fighting is a speciality of his and as well as building up the alternatives business, he has had to wind some of it down.

“It is important to be able to dis-assemble things when they go wrong,” he says, recalling his previous role as the bank’s boss of assets to be offloaded.

He was in Citi Holdings management since 2009 (first as CFO, COO and as CEO since January 2012), then accounting for more than $700bn worth of assets, 37 per cent of Citigroup’s assets, preparing them for sale. Today, that figure has been reduced to a more manageable 6 per cent or $114bn, although he is still obsessed with reducing them further.

Every bank has a metaphorical ‘Holdings’-style bucket of assets to offload, even if they are reluctant to admit it publicly, he says.

“Aren’t there markets not growing quickly enough for you? Have you looked at all the products you have and prioritised them? Are all the clients you have efficiently handled? These are all ‘Holdings’-type activities,” he suggests. 

Among the operating businesses and assets he sold were auto lending, insurance, commercial real estate and consumer finance.

Part of the hedge funds platform, focusing on emerging managers, was offloaded to Skybridge, together with the team, back in 2010. But crucially, the due diligence unit, responsible for choosing hedge funds for Citi’s private clients, was spared and re-integrated into the organisation.

While US equities were up 30 per cent last year,  he is keen to stress the huge importance of hedge funds to his private client base.

“In the future there is likely to be a much greater disparity in stock performance, and as volatility increases we should expect greater performance from hedge funds,” he says.

Strategic and tactical allocations to hedge funds both remain at 16 per cent. The bank’s investment strategists are also conscious of an expected liquidity trade-off.

“We have had a recent bias to liquid asset classes,” suggests Mr Mason. “But now according to our 10-year returns forecast, there is an opportunity presenting itself in private equity.”

While the appetite for alternatives among private clients is clearly increasing, investments can sometimes emerge in a different format. “Appetite for private equity can manifest itself in a number of ways, including direct investments or co-investment clubs, which do their own due diligence and invest alongside a fund.”

For these clients at the top of the financial tree, the greatest investment appetite is for real estate, he says, particularly in London, New York and Miami.

Indeed, much of the discussion around investments for private clients is currently about European and US rather than Asian markets. “We are talking about themes in developed markets, particularly growth and momentum,” says Mr Mason. “Also insurance is cheap. If you are going into equities, it could be wise to buy some insurance around that.”

One of the major themes his relationship managers are discussing with wealthy clients is that of harnessing global change, relating especially to the European financial services sector. He refers to the financial services assets he sold when heading up the Citi Holdings operation and expects other banks to also bail out of this sector. “We will see buyers on the other side, that will seize these opportunities,” he says. “And we will create products to take advantage of this trend.”

Mr Mason believes this adaptation and creation of products in tandem with developing strategic economic viewpoints is one of the major changes occurring in private banking, where previously, products were built and passed on to customers just because they were easy to sell and it made economic sense.

“One of the big changes I have seen is that we are much more focused on creating solutions and products tuned to our views and strategic outlook,” he says. “That marks a significant move towards progress in the right direction.”

Banks such as Citi have to move away from the old investment banking story of product pushing and lead a much more intense dialogue with their clients, he believes. “All of this has to start by addressing the client. Then you can have a dialogue about our view, before you start talking about products and solutions,” ventures Mr Mason.

Part of this transformation also entails reducing numbers of partners such as external fund managers, so that all Citi advisers become “very comfortable with anything we put on our platform” to sell on to private clients, he says. Other products, not necessarily matching Citi’s economic world view are still available on the shelf. But there is a renewed emphasis on quality control and due diligence, regarding all the products on show.

“We need to be confident that these [external] managers are of the quality which our clients rightfully deserve,” he says, while witnessing relentless pressure from managers keen to get shelf-space in the Citi distribution machine.

“Many managers come to us for discussion about access to our distribution channel. But we are more selective, as opposed to ‘you can put anything you like on our shelf’. That enables us to get more productivity for the fund managers that partner with us.”

This transformation is far from complete. Mr Mason has one eye focused on “intensive” regulatory changes. “We are expecting a lot of consolidation and our competitors exiting certain markets, which will continue for some time.” When these opportunities arrive, Mr Mason wants to be sure he has the right product tools to exploit them.