FSA: How does the size of Citibank’s AUM impact on how you select funds?
Roger Bacon: The breadth of investment products in retail is much less than in private banking. Private equity, some real estate and some hedge funds, for example, are not offered to retail clients. What does it mean? It means you do need to understand the unique selling points and how you think this is a relevant proposition for individual clients. So we can be much more selective about products because we know the audience they are intended for very well.
Our mutual funds would need to be much bigger than the equivalent private equity or hedge fund, which are specialized. In practice, we might only look at mutual funds with $250-$500 million in AUM.
We can then make specific demands in terms of length of track record. Also important are a stable management team; a differentiated investment proposition; sustainable alpha generation. So we can be much more selective with mutual than in other asset classes.
With mutual funds, brands tend to be much more important. That’s also different from the specialized private equity or hedge fund manager. The majority of flows will go into mostly household names.
That’s an important part of our fund selection criteria. When you’re deploying dozens of billions of dollars, these funds need to be of a certain size and from a firm with a certain pedigree for us to fulfil our fiduciary obligations to clients. We want to be able to tell clients they are safe with a particular fund manager.
We work with 400 fund managers globally and are in the process of slightly cutting that number down. It’s not efficient to have relationships with 400 fund managers. We can say that a significant percentage of AUM is concentrated in the top 20-30 managers.
FSA: Do you see strong growth for discretionary mandates in Asia?
RB: Up until 2010, discretionary mandates were a small part of our business. Since then we’ve built up a nine person team in Hong Kong.
In 2008, clients became cautious and pulled back discretionary allocations. Clients wanted to steer the decisions rather than outsourcing to portfolio managers. But the appetite is starting to come back and we’re seeing clients reallocate a little more to discretionary. We expect that to continue and see it become a very important part of our business — both direct equity and fixed income and fund of funds.
In the US and Europe, allocation to discretionary investment is much larger than in Asia. Trading activity is still particularly important in Hong Kong and that won’t stop in a hurry.
FSA: How do you construct a portfolio?
RB: We deal directly with high net worth individuals or family offices. It’s not only me, we have gatekeepers, relationship managers, supported by product specialists and investment counsellors, trust, credit, and lending specialists financing specialists, all on different teams. I represent the investment team side of it.
First we establish the client’s starting point. That means understanding the landscape of what the client already has. Then you can also start to have a more detailed conversation about what their trying to achieve in terms of returns and risk. That’s the philosophy behind it.
Our starting point is our view of the world, which comes from our chief investment officer. From that we have model portfolios for different levels of risk. There are typically five levels of risk. We don’t stick rigidly to those levels, but using them gives us a framework for starting a conversation. That usually leads to an implementation plan.
From that plan of implementation we form a risk profile that shows here’s where you’re at and here’s where need to move toward.
In the second part of Fund Selector Asia's interview with Roger Bacon, head of Citibank's managed investments in Asia, he discusses his current views on asset classes and geographies.
FSA: What product trends are you seeing in Asia?
RB: There is a huge amount of complexity of product development in the mutual fund space at the moment and we are pushing back on product innovations that apply complicated strategies. Some fund managers are trying to complicate strategies through structural-type overlays. We want to keep mutual funds simple. Clients don't like over-engineered solutions.
If you have identified a world class portfolio manager, that is the most important thing to make available to clients. The bells and whistles of product development around it are of less importance.
FSA: What are your current views on investment trends in key asset classes and geographies?
RB: Fixed income performed quite well prior to the US Federal Reserve signalled that it would gradually end [quantitative easing] in 2013. During the "taper tantrum" we helped clients reduce their fixed income allocation. We were of the view that the when the US federal reserve flagged that interest rates were going up, we would be more defensive on fixed income allocations.
More recently, client allocations to fixed income have been channelled into high yield fixed income products. That's been building over the past 12 months.
From a geographic standpoint, the investment focus is much more on high yield in Asia, especially Greater China and Europe. Last year there was more of a focus on high yield in the US.
On the equity side, we've been increasingly optimistic for the last 18 months. Now US equities are a little high and clients are starting to pull back a little and that money that's liberated is rotated into Europe and Asia.
There's a dramatic increase in European equities, where allocations have been at a low level, and specifically to China equities. There's currently a lot more interest in China. A lot of it is underpinned by very poor performance over a long time and low valuations. Central authorities have also engineered a soft slowdown in growth that's better than people were anticipating.
Fund managers have been overweight North over South Asia. Up until recently, that hadn't been a good call. Markets in Indonesia, Thailand and India have soared, so we're seeing clients taking a step back and allocating a little to South Asia.
On Japan, the interest in equities really slowed significantly. The clients who got in relatively early were happy to take their money and move away. We're not seeing clients increasing allocations to Japan. There's a view that the honeymoon period is over and it will take a little more time for the market to evolve in a positive way. This is a shift over the past few months.
In India we've seen very strong performance. My sense is that most clients have missed a lot of that. That said, we're not seeing people chase that market.
We've done well with sector theme investing in equities. For example, shale gas. We know specialist managers in the US. Also technologies that are disruptive such as e-cigarettes or rapid prototyping.
FSA: What about ETFs?
RB: Private clients do not ask about ETFs. Why track an index if I can outperform it? They have massive demand in the US but private clients in Asia don't ask for them.
FSA: What funds have you recently invested in?
RB: We're invested in Allianz Europe Equity Growth as well as Blackrock European Equity Income. We've been proposing these to clients in Asia who want to increase exposure to European equities.
On the fixed income side, we've recently started allocating to the UBS European High Yield Bond Fund. Otherwise there have been no major changes on fund side.
We have an approved list of funds and clients are utilizing those funds based on our views of world. In Asia, we have not changed our approved list in the last 12 months. The stability of the approved fund list is very important. On the global approved list, we have at most 10% turnover per year.
If we pick top quartile funds, there should be no reason to keep changing that for another fund. Of course, if we've misread the situation or it turns out something is wrong with fund manager, then we need to act. Otherwise, the only reason we would sell funds is when our asset allocation views change
Fund turnover should be your enemy if you're picking longterm funds for clients.
