HNWIs Stepping Back

From SCMP

Back to basics
Asia's wealthy, shaken by global financial market woes, are returning to private bankers for investment advice
Louis Beckerling
Updated on Jun 10, 2008
The shake-out of global financial markets in the wake of the United States subprime credit crisis has sent the region's mega-wealthy investors running for cover - and back into the fold of the investment advisers attached to the family offices of private banks in Asia.
For the ultra high-net-worth investors in the region who make use of family office services, the roller-coaster ride taken by markets as the credit crisis unfolded became more scary than the market meltdown that followed the collapse of regional currencies in 1997, say industry insiders.

As a result the region's super-wealthy are now paying belated attention to the advice of their private bankers and cutting back on high-risk investments - chief among them the often highly leveraged "share-accumulator" style structured products that proved popular during the equity bull run in the region and bet on big share price gains of a selected portfolio of stocks.

"The riskier equity products had become a massive focus for many ultra high-net-worth customers of private banks, and the emergence of a bear market in Asian equities has been a wake-up call to investors and the family offices that serve them to ensure greater diversification of their investment portfolios," says Nicolas Reille, managing director and head of sales and marketing Asia ex-Japan for Societe Generale.

Rather than borrowing heavily to boost returns, investors intent on preserving family wealth for successive generations are now also sitting on growing cash piles rather than investing, say bankers, and returning to the investment basic of diversifying their portfolios to limit the erosion of the family wealth.

David Cripps of HSBC's Family Wealth Advisory Group acknowledges this trend to risk aversion. "In 1997-98 we saw a big correction in growth stocks after a lot of companies got overpriced," he says. "Now people are genuinely concerned about such things as the long-term outlook for the US dollar, inflation, and talk of oil prices reaching US$200 per barrel."

Finding investments in this environment that offer secure short-term gains is now more challenging than ever, he says.

HSBC's Todd James, head of the Family Office Investment Advisory Group in Hong Kong covering structured products, says the outcome of the shake-out is that the super-rich are now becoming risk managers rather than aggressive investors.

Michael Troth, managing director and head of Global Wealth Structuring for Citi Global Wealth Management, Asia-Pacific, says with the focus of the region's wealthy families back on the preservation of that wealth, greater attention is being paid to managing risk in increasingly globalised investment portfolios and ensuring a smooth intergenerational transfer of that wealth. "For example, if I am a non-US person and wish to have a portfolio of US equities and if I were to hold those equities in my name and I passed away, I only have an exemption limit of US$60,000 after which I would start to pay US estate tax. The top rate is 45 per cent," he says.

"So for a lot of our clients we manage this by setting up a private investment company that would acquire the US equities, in which case there would be zero estate duty tax exposure for the individual." He adds that particular care is taken to ensure that such structures are compliant and not regarded as attempts to evade tax.

Citi's mega-wealth unit caters for the ultra high-net-worth families that typically have a net worth of more than US$250million, and with the increasing internationalisation of families and their investments, more attention is being paid to establishing the most tax-efficient but compliant investment structures and smooth succession planning, Mr Troth says.

Lionel Kwok, head of investment solutions, North Asia, for Credit Suisse, also notes the increasing attention being paid by the region's wealthy families to the preservation of their wealth.

"In the past few months most investors, especially North Asian who tend to be a lot more directional-trading oriented, have changed their risk appetite and are now less aggressive in taking on leveraged risk," Mr Kwok says.

While markets performed strongly last year, investors put a lot of energy and money into structured equity derivatives, Mr Kwok says, but portfolios are now less geared and more diversified. "Larger clients are now tending to look at a better allocation process and adhering to a better portfolio advisory process suggested by their bankers and a better allocation of risk."

Capital-protected structured investment products as opposed to riskier equity-linked products are now returning to favour, he says.

"We encourage our clients to look at core holdings for medium-term investment. In the short-term the present market volatility will prevail and it will be very difficult to outsmart the market in three to six months.

"So we propose a proper portfolio advisory process that will maintain a certain percentage of a portfolio in a well-diversified core holding, with some `satellite' structured products or hedge fund holdings that may be more related to market direction," he says.

Before the subprime crisis and the collapse of several big financial institutions that followed, Asia's wealthy families paid little attention to counter-party risk when making investment decisions to preserve that wealth, he says.

"One thing we want to highlight is that we have a risk dimension in the market that we have not seen before. We now have the fear factor and liquidity risk, but most important is the realisation that there is counter-party risk as well. A lot of investors had not looked at this before, but they are now looking at who the issuer of the securities is before they invest. And, given recent developments in financial markets, they want to see higher returns if the credit is perceived to be a higher risk, which means yield is becoming more important," Mr Kwok says.

Samantha Bradley, managing director of the newly opened Hong Kong office of Withers Bergman, a unit of global law firm Withers Worldwide, says wealthy families in Asia are paying increasing attention to issues of wealth transfer and turning to Family Offices for advice.

"Our research shows that there is a lot of thought being given by wealthy families in the region to issues of succession, and another topical issue is the increasing internationalisation of investment," Ms Bradley says.

"This is particularly so with the emerging class of wealthy families in China who are looking further afield to make strategic investments across world markets," she says.

Asia's wealthy families have also become more selective about their philanthropic grants and bequests. Whereas family philanthropy used to take the form of a simple gift to charity, or possibly the establishment of a grant-making foundation, donors are now taking a more hands on approach to target their gift-giving.

Commenting on this trend, Withers Bergman says that philanthropists now expect to enhance the value of their charitable investments through maximum tax-efficiency to ensure that the most money is available for the work they wish to support at the least cost. And through using that money to meet their goals in the most efficient manner.