The collapse of Lehman Brothers left a legacy of fear over illiquidity and contagion, lower costs and heightened risk, according to four wealth and asset managers quizzed by PA sister title, Fund Selector Asia.
Watching liquidity
Investors and private wealth managers alike have become more cautious with illiquid investments since the global financial crisis, according to Markus Mueller, global head of Deutsche Bank Wealth Management’s chief investment office.
“The global financial crisis brought us a redefinition of risk management and underlined the importance of diversification and also liquidity,” he told Fund Selector Asia.
Mueller explains that investors who had allocations to illiquid investments wanted to exit the positions during the crisis, but it was problematic to do so.
“So to keep a dedicated liquid position in the portfolio is very important, especially if the client does not have a high risk profile.”
Investors since then have become more sophisticated with regards to how to allocate their assets in illiquid investments, he says.
At the same time, wealth managers have implemented more stringent risk-profiling approaches in recent years, driven by the tightening of regulations across both liquid and illiquid investments after the crisis, Mueller says.
“The regulation of illiquid investments is generally far more rigorous than was the case 10 years ago.”
New regulations surrounding transparency have also prompted wealth managers to offer more detailed advice to clients.
Mueller joined Deutsche Bank in 2008 as an executive assistant to the group chief economist.
He says Deutsche Wealth does not invest in illiquid investments for its usual discretionary portfolios, but did not say whether this was the case before the crisis.
If a client today wants illiquid investments, the bank ensures that it corresponds to the investor’s risk profile, he adds.
Thinking about contagion
After 2008, Norman Villamin, chief investment officer for the private banking division at Geneva-based Union Bancaire Privee, says he learned to think beyond the primary effects of significant events on financial markets.
He recalls the collapse of Lehman Brothers and the domestic situation in the US. At the time, he held the position of head of investment analysis and advice at Citi Private Bank.
Initially, there was confidence that panic in the financial world could be contained. “I remember, even guys like Ben Bernanke at the US Federal Reserve believing the sub-prime [mortgage problem] was ‘very small, no big deal, we can handle it’.
“Tactically it is correct. They can handle sub-prime. But the issue is that it was not about the first round of effects,” he says. “The [subsequent] stages of impact, although they occurred in places far away from the US, were the most meaningful.”
He says it was similar for the currency crisis in Asia 20 years ago.
“When the Asian crisis began, Thailand floated the baht and then immediately after you had contagion to Indonesia, Korea, the Philippines and then Russia.
“It is not the first round of effects necessarily that we care about but we must also think about what are the second, third and fourth rounds that kick in,” he says.
Today, when he evaluates investment risks, he tries to identify where the current hot-spots are and studies the potential contagion on investment decisions.
In today’s context, Villamin takes as an example China’s reflationary efforts and the weakening renminbi while oil prices remain high.
“I am not so concerned about China, which is certainly safe over the next 12-18 months. But some big oil-consuming countries with weak local currencies that do not have foreign reserves as big as China, could come under high pressure,” he says.
The fee issue
In terms of fund performance, “the last 10 years have been fantastic”, says Hong Kong-based Vivek Mohindra, co-founder of Kristal.AI, an artificial intelligence-based asset management platform.
“Funds have made huge amounts of money because the market has been on a nearly decade-long bull run.”
On the other hand, strong cost pressure has emerged. Stricter regulations since the financial crisis have increased compliance costs while investors began a huge shift of capital from actively-managed funds into passive products.
As a result, asset management firms have had to rethink the way they operate to remain competitive.
“The biggest change in fund management since the financial crisis has been that the industry as a whole is heading toward low-cost strategies,” says Mohindra. “The average levels of fees have been steadily declining by a few basis points every year.”
Fees have decreased steadily in financial transaction services including forex trading, broking, and remittances, so it was only a matter of time before the trend caught up with fund management, he says.
Industry heavyweights Vanguard, Blackrock and Fidelity have recognised the trend and moved toward lower fee products. For example, in early August, Fidelity introduced two zero-fee market indexed mutual funds. “The pie has shrunk, the fund management industry has been disrupted.”
Risk, then opportunity
Ralph Bassett, head of US small and mid-cap equities for Aberdeen Standard Investments, has been at Aberdeen since 2006. The financial crisis erupted early in his career and he says it taught him “how to juxtapose opportunity and risk”.
During the crisis, every bank was expecting to do a capital raising. His main job at the time was looking at banks and modelling how capital raises will impact his firm’s holdings.
He had to think about portfolio positioning – which banks either to allocate to or pull capital from. It involved figuring out where losses and provisions for the banks will peak and what that meant for solvency.
“What that taught me is to think hard about these things before they happen on every holding we put into the portfolio,” Bassett says. “Young people now come on our team and they think about the opportunity and I think about the risk.
“The opportunity is more apparent, but the risk you have to think about more. It’s important those [risk] questions are being asked.”
Low interest rates and low volatility during the years following the Lehman collapse, however, have not impacted the way he approaches a potential investment, he says.
“We would like more volatility because generally it is a friend to active managers. We don’t want companies that are exceedingly volatile, but we like it in the broader market because it gives us an opportunity to buy.”
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