Identifying and Delivering the Right Investment Solutions for Asia’s HNWIs

Where do Asia’s HNWIs put their money today, and how should they be allocating their portfolios to position themselves for the right balance of risk and reward? A panel of independent wealth management experts pondered these issues at the Hubbis Independent Wealth Management Forum in Hong Kong.

The Key Takeaways

The allure of gold

An expert noted how physical gold is a hedge against uncertainty in the mainstream financial markets, a store of value and a producer of return. In fact, he noted how in the past decade since the global financial crisis, gold has achieved a return of 6% a year. Moreover, it is liquid and beyond the world’s financial system.

We will drink to that!

Fine wine is another asset class that Asia’s wealthy investors not only like to enjoy but also increasingly to invest in. Even in difficult economic and market conditions, wine performs well and offers a consistent rate of return in most economic conditions, said a guest. Moreover, there is a world of diverse opportunity, not only in old-world vintages but also from vineyards from Latin America to the Pacific.

Digital assets becoming less cryptic

Cryptocurrencies such as Bitcoin and others have had a rough ride in the past two years or so, but over the past five years have performed remarkably well. The entire digital assets space is gradually becoming less mysterious, the regulators are focusing more attention, as are institutional investors. Keen proponents recommend that digital currencies should represent some 5% of any smart portfolio, alongside gold.

The appeals of Asian beta

There is far greater diversity available now in the Asian ETF arena, and ETF investment is rising as investors seek out better access to beta strategies. Costs are still high, though, so the industry must drive fees down towards US norms, although that will take time.

Migrating within EM debt

One guest pointed to the universe of EM fixed income, maintaining that it represents value as a whole and that enhanced returns can be found by sticking to the better names but moving down the capital structure.

Plenty of alternatives

The panel appeared to agree that Asia’s wealthy should diversify further into non-listed assets, including private equity, private debt, specific areas of real estate, infrastructure, agriculture, all of which are relatively long duration that also act as relatively good inflation hedges.  REITs, for example, tend to perform like the underlying property assets themselves, if help for five, 10 years or more.

China’s debt – a vast opportunity

China offshore and onshore bond funds are both in the sights for many advisers. As the onshore debt market opens up, global investors can see through the door to the world’s second-biggest credit market, at USD30 trillion in size, of which USD12 trillion are bonds. Top-flight research and analysis are required, but the opportunities are simply immense.

And Chinese equities still beckon

China’s equity market is still priced at a massive discount to the rest of the world. With GDP growth of 5% to 6%, and the average PE of 12, while the US is a 2% to 3% GDP growth economy with an average PE of 20, something is evidently out of kilter, so for those bulls of China, there is great growth ahead.

The Discussion

Gold was the starting point for the discussion, as a hedge against uncertainty and volatility. “People should buy physical gold for diversification purposes, as an insurance policy and gold has proven itself over a long time to provide good returns in the medium to long term, so on average in the last 10 years gold has achieved 6% a year,” said an expert. “That is good for a risk-free asset.”

“Moreover,” he continued, “it is very liquid. HNW investors should have somewhere between 3% and 10% of their investible wealth in gold, and we believe that physical gold is best, as there is no counterparty risk, you operate outside the global financial system, and you have direct ownership in the assets. There is a whole professional infrastructure for owning, storing, insuring, lending against and moving gold here in Asia, and worldwide today. We urge clients to work with the professionals in this field.”

Making a hobby into an investment

Fine wines are another asset class that the HNWI segment like to invest in, as well as to enjoy. “We look at wine as an asset class and help private investors to build collections in fine wine that are geared towards capital appreciation and very much tailored to each individual,” said one guest. “Even in difficult economic and market conditions, wine performs well and offers a consistent rate of return in most economic conditions.”

He added that smart investing in wine allows people to combine investing and imbibing in these fine wines, potentially therefore allowing the enjoyment at a profit. Moreover, there is today a wealth of choice amongst old and new world vineyards across the globe. Discovering new producers or identifying those that are gaining the best reputations is a lot of fun.

Cryptic clues to the future

The panel moved their focus to cryptocurrency trading. An expert noted that while these went through a major boom in activity and interest in recent years, they are now somewhat out of the public consciousness over the past 12 or more months.

“But,” he noted, “we see a lot of institutions getting more involved in the space, offering custody and trading services, and there are new exchanges, for example offering Bitcoin futures. There is a lot more interest now from pension funds and endowments. There is much more effort at building out the ecosystem and infrastructure to create a more investible asset class.”

He added that there is considerable excitement to communicate why cryptocurrencies are an asset class that people should allocate some money to. “We believe there is a strong rationale to allocate perhaps 5% of your portfolio to digital assets,” he stated. “In fact, Bitcoin has been a remarkable performer in recent years, with the highest Sharpe Ratio if you compare it to say the S&P index, or commodities, or gold. Yes, it is volatile, but there is also a strong investment thesis.”

He added that the market is approaching digital currencies with a more of a regulatory mindset. “As a result,” he noted, “we see the likes of Facebook looking to launch its own cryptocurrency, you have the Chinese central bank considering a digitised version of Renminbi. The industry is evidently both diversifying and professionalising.”

Another guest remarked on the similarities between gold and cryptos, noting that both are decentralised global currencies, and also highlighted how both are beyond the financial system. “However, there are still concerns over cybersecurity, so while it is an asset to consider for diversification, there are still significant risks in digital assets.”

Seeking Asia beta

Turning to ETFs, a guest highlighted the diversity of ETFs now available in Hong Kong, from China-focused ETFs, to money market ETFs and leveraged and inverse strategies.

“We believe there is a massive under-investment by the asset management industry in Asian beta that is built properly,” opined another panellist. “Right now, the average ETF in Hong Kong is three times as expensive as the average ETF in the US, but of course it doesn’t cost three times more to run. The average ETF in Hong Kong costs 90 basis points, which is probably more expensive than some institutional active strategies. Which is why we offer proper Asian beta exposures at a proper beta price.”

Head down the capital structure

To achieve higher returns, another guest pointed to the value to be found in moving the focus down the capital structure in fixed income while staying in higher quality names, thereby achieving higher yields but from credits that are the strongest in the markets, albeit perhaps at subordinated paper levels.

“Investors in Asia,” he said, “also tend to be very Asia-centric, but we can offer our investors an exposure to the world of emerging market debt and achieve a very good balance of upside return and downside risk mitigation.”

Another expert noted that his firm had been building out its alternative assets platform, anchored in certain theses, for example in specific areas of real estate, infrastructure, agriculture and private credit, all four of which are income producing assets with relatively long duration and that also act as relatively good inflation hedges.

Looking to the long-term

“In today's world,” he commented, “we need to worry about getting income in the negative rates environment. We are big believers in long-duration, income-generating assets in those four asset classes. We are, for example, the second biggest player in real estate in Canada, we are one of the largest players in the vast Asia credit market, and we have our infrastructure fund that focuses on mid-market infrastructure assets around the world. We like long-duration, cash-generating assets, and actually we don't like to go down the capital structure, we take the top of the capital structure, but we then offer as much as 70% loan to value, resulting in double-digit returns nett to our investors.”

A fellow guest agreed, noting that research his firm had conducted showed that investing in real assets does not need to entail a locked-up structure. “If you invest in the listed instruments, so for example REITs,” he explained, “and if you hold for a short period of time then, yes, it does behave like equity but if you tend to hold it for a longer period, say, five or maybe 10 years then it starts to behave much more like the underlying physical asset. This means you can pick up an asset with income from uncorrelated asset classes.”

China, China, and China

A panel member then highlighted China offshore and onshore bond funds. A fellow guest agreed, remarking that his firm is bullish long-term on China and broader Asia. “China onshore bonds, for example, is a valid place to invest, but it does take real commitment because frankly the credit markets there continue to evolve rapidly. It is the world’s second-biggest credit market at USD30 trillion, of which USD12 trillion are bonds, and therefore one needs to really employ good old-fashioned credit skills onshore in China. Interestingly, local laws and enforcement are far better enforcement than conventional Western wisdom might assume. You can really build a good portfolio there, and we have been doing so for the past five years. There are road bumps, including on the regulatory front, but directionally it’s really continuing to give opportunities.”

The panel then quickly offered their views on other ideas for diversified portfolio construction, including the Philippines, which an expert said had been somewhat overlooked, and which is enjoying rapid growth. Another expert pointed to the Australian and UK property markets, the latter, especially if Boris Johnson can achieve his goals and based on the ongoing weakness of the pound.

A guest highlighted the new economy in China, noting that the top 50 such stocks excluding Alibaba, Baidu, and Tencent, have seen earnings up 22% year to date.  “The China equity market is still priced at a massive discount to the rest of the world,” he noted, “so the GDP growth is 5% to 6% GDP growth economy, and the average PE is 12, while the US is a 2% to 3% GDP growth economy with an average PE of 20. One of those has to be wrong.”