In an Uncertain World Stay Cautious and Alert says Head of Investment Advisory at St James’s Place Wealth Management Hong Kong
Martin W. Hennecke of St. James's Place
Apr 8, 2022
Martin W. Hennecke is Head of Asia Investment Advisory and Communications at St James’s Place Wealth Management in Hong Kong. He is a frequent speaker at investment forums in the region and well-known in the financial world for his regular appearances on TV and radio programmes, including CNBC, Bloomberg and others. He has held his current role since 2015, before which he was Chief Economist for the firm, also then based in Hong Kong, where he first arrived to work shortly after the 9/11 attacks of 2001. Hubbis met up with him recently to learn more of his advice to SJP private clients on how they should structure their portfolios in the face of increasing uncertainties around the world. He errs greatly on the side of diversification and conservatism and advises clients to scrutinise ideas carefully and take only manageable risks.
The St. James’s Place Wealth Management (SJP) journey in Asia dates back many years, and the firm has always emphasised its mission to help clients with wealth preservation and to take a conservative approach to their portfolios, linked closely to their personal situations and risk tolerances.
The business model inclines much more towards recurring income than upfront commissions, which the firm believes provides a greater alignment for client-facing professionals to maintain strong and meaningful long-term relationships with their clients. The idea is that this model also sees the SJP clients retaining more control and economic power over their investments.
The firm’s historical focus has been on wealthy expatriates working in the region, but for some years now the firm has expanded into the local wealth management client market and has also been elevating its sights more towards the higher net worth private banking client space.
A long heritage
SJP is the largest wealth management company in the UK, with over GBP154 billion of client assets under management (AUM). The company was established in 1991 by Sir Mark Weinberg, Mike Wilson CBE and Lord Rothschild under the name of the J. Rothschild Assurance Group and started trading in 1992.
The firm’s DNA is to focus on long-term needs, relationships and understanding, providing consistency and reliability. They call their RMs and advisors ‘Partners’ and they aim to build the business centred around the Partner-to-client relationship.
DNA to match
This type of DNA suits Hennecke well, hence his more than nine-year tenure at the firm in Hong Kong. Aside from his rather prominent role communicating views on geopolitics, events and markets in various media, on the investment advisory side, Hennecke helps the firm’s advisors with their more standard client portfolios, and also helps them in formulating bespoke portfolio solutions involving more complicated assets and allocation.
He cautions that in a world of greater uncertainty than for many years since the global financial crisis, bespoke solutions can however often be driven by clients becoming over-focused on particular ideas that they might have picked up in the media without properly considering the reality around due diligence and also valuations.
Take the holistic view
He indicates that clients need to be careful to plan properly and make decisions based on a more holistic view of the whole portfolio. He advises them to consider their own personal situation and aspirations, and SJP aims to help them refine those and ensure that they are not taking on too much risk, and to be ultra-objective in their choices.
“A doctor analyses what might be wrong with a patient before advising any treatment,” he says. “Similarly, we need to understand the client’s situation, and sometimes perhaps advise them against their natural inclination, based on our analysis.”
“For example, a client who wants to take on new bets but holds a lot of debt and/or has near term financial obligations, might be best served to deleverage first, in the face of rising interest rates, geo-political and market correction risks. On the other hand, someone sitting fully in cash due to market worries, should consider the risk of purchasing power loss at a time of highly negative interest rates as well, and might be best advised to invest at least some holdings, if only for the purpose of longer term inflationary protection.”
Diversification and the conservative approach
In the face of the many and indeed increasing uncertainties across the globe, Hennecke strongly advises diversification. “This might be one of the most boring pieces of advice, and it is easier always for advisors to talk about this or that new fund or product, but diversification is the most important element of portfolio formation,” he observes. “And a significant part of my job is moving some of the high-conviction oriented clients to more of a middle ground.”
As to the typical clients that SJP in Hong Kong works with, Hennecke reports that the vast majority are in diversified managed portfolios. “We are neither highly aggressive or highly concentrated; we are broadly diversified across funds, themes, sectors, geographies, managers, and so forth,” he explains. “This is the core of our approach, and on top of that, you have different risk profiles of clients, for example, their current or future home bias, preferred currencies, time frames, and other factors. The portfolios may comprise third-party and/or SJP’s own-brand funds, the management of which is actually sub-contracted to external managers.”
Inflation – a rising threat
As to the current environment, Hennecke reports that clients’ most immediate concern centres on inflation. He says people increasingly realise this represents a major risk to their wealth. Hennecke advises against seeking to address inflation by leveraging up on fixed interest holdings to ‘enhance the yield’, as has been promoted by some industry players. There are significant dangers in taking that approach, he warns, adding that credit and price correction risks are notably higher than during preceding years, as we are now in an era of inflation and rising rates. “It is vital to avoid concentration risks while chasing returns,” he says.
Beware leverage
He expands on his concerns over excess leverage, noting that some might assume that leverage is useful because as inflation rises the debt gets eroded, which is correct in theory, however he warns there is a genuine concern that central banks might just be pushed into a corner as inflation jumps and significantly change their rhetoric if not positions, leading to much more volatility.
Another important element of dealing with inflation is to manage exposure to asset classes that don't have intrinsic inflation protection. “Cash, bank deposits, fixed interest, all are exposed to erosion of value, so one should balance these well with exposure to more inflation-proof assets such as equities, property, commodities and/or inflation-linked bonds.
Inflation-proof ballast
And he indicates that clients should weight up their allocations to equities that can pass price rises to customers without hitting their margins. “Last year at his annual meeting, Buffett said they were raising prices because their suppliers were raising prices, but the key here is that you tailor portfolios to be invested in companies that can wear inflation and maintain their margins.”
He also advises investors to be wary of trying to time their entries. “They need to be well-positioned and well-diversified, have a clear focus on their risk tolerance, take a medium to long term time horizon on funds they will not need in the nearer term, and make wise decisions,” he comments.
He rounds off his comments on inflation by warning that we might be heading to a perfect storm. “There are many elements to this that have been building for some years, and are not simply related to the pandemic and Russia,” he observes. “For example, Greenspan long ago warned that Western government deficits will fuel inflation. China has a peaking population and a major clean energy drive, both of which will tend to drive them to export inflation not deflation. In short, there is much to be concerned about.”
Be objective
Hennecke also remarks that investors tend to be biased towards the near-term past, which can often affect their thinking.
“In my 20-plus years doing this, I so often see that people see a product or sector or theme that has done well recently, and extrapolate this to future performance, expecting this to continue,” he observes. “Some returns might continue, but be careful of being overly focused on those, select ideas also that haven't done particularly well and balance the portfolios appropriately.”
For example, he says right now people should not overlook the Hong Kong and China markets, which have underperformed and where valuations are relatively at the lower end of global markets. “And China is actually easing policy, whereas the Western countries cannot, so be mindful, stay diversified, don’t overlook opportunities and markets that might be out of favour.”
Surprising findings
He cites an interesting study by researchers at the London Business School, who he reports published a research paper in terms of the correlation of stock market returns and the underlying GDPs of the host countries, and they found there was a slight inverse correlation.
“The headline finding was that countries with the lowest growth in GDP per capita typically saw the best stock market returns over more than 100 years of data. So, sometimes things look bleak, but that is when prices are often deeply discounted and might offer some excellent opportunities. But again, this approach needs to be part of a diversified portfolio.”
The need for measured advice
He concludes with the observation that the complexity around the need for advice has increased significantly. “The need for good quality of advice to cover different types of risks and scenarios that might unfold is essential. We provide a holistic approach to investment management to our clients – it is all about holistic perspectives and advice rather than product selling,” he reports. “And the advice must be client-specific, taking into account a proper understanding of their personal needs and expectations, their position in life, their families, and then tailoring ideas and suggestions to suit. It is not easy; it takes discipline and, as I said, a holistic perspective on investments and the portfolios.”
Getting Personal
With a career in banking and wealth management spanning over 20 years in Germany and Hong Kong, Hennecke has for some years been a go-to speaker on TV and radio in Asia. He is also a strong advocate for ethical and professional advice, and is conservative in his approach to portfolio curation and financial planning.
A German by birth, he began his working life in banking, learning the trade as an apprentice on a special two-year programme after school. He then went on to earn a 1st class (Hons) degree in International Business from Oxford Brookes University. After that, he arrived in Hong Kong shortly after 9/11 in 2001, and in the subsequent years also earned his MBA (with distinction) from the HKUST Business School.
“It has been an exciting 20-plus years since coming here,” he reports. “I have gained great insights and become a regular in the media and at events, all of which I greatly enjoy. I try to cut through the jargon and tell people clearly what the risks are and also try to avoid the more ‘fancy’ type ideas that might be in vogue but perhaps now past their sell-by date or where sectors or stocks or assets are over-valued. It is all about context and the longer-term view.”
He met his wife, who is from Mainland China, while on a language course in Beijing not long after he arrived in Hong Kong, and they now have two daughters, aged 2 and 6.
“I went to Beijing to study Chinese, and she was learning German there and preparing to study biochemistry in Germany,” he recalls, wistfully. “We hit it off, and although she still went off for five years to Germany, we stayed together, later married and then she returned to Hong Kong armed with her PhD.”
He explains that he is passionate about global geopolitics and also global markets. “After I left Oxford Brookes and before coming to Hong Kong, I spent seven months volunteering in Mozambique, and that really crystallised my interest in global politics, geopolitics and global markets, so I maintain my reading and interest around all that, in my spare time as well,” he reports.
He says that naturally as the children are still young, that also takes a lot of his time. “After work and family and my reading, there is not so much time left over,” he says.
Head of Asia Investment Advisory at St. James's Place
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