Mutual funds are traditionally popular with retail investors, but Asia’s private banks are now using more of these investment products to service their high net worth (HNW) clients. Private banks are also offering more exchange traded funds (ETFs), customized products and other liquid alternatives to strengthen their presence in the sector.

BlackRock Asset Management is a major player in the manufacture and distribution of mutual funds and mutual fund solutions targeting private banks and their HNW clients.

In a move highlighting the importance it gives to this sector, BlackRock in August appointed Tan-Yuan Kueh, former UBS chief executive officer for wealth management in China, as head of private bank business and strategic client development, Asia ex-Japan.

Damien Mooney, head of retail business, Asia-Pacific at BlackRock, to whom Kueh reports, explains that the four pillars of its private banking business coincide with the long-term trends which BlackRock sees in the business.

“We see that the continued usage and adoption of mutual funds as part of the solutions for private banking clients is increasing,” Mooney tells The Asset in an interview. “Many private banks offer multi-asset products but mutual funds are being seen as a good part of that core offering. We’ve seen that in our own business. I think many private banks themselves have expressed on how they see these as being an important part of their offering as businesses have changed.”

The use of mutual funds as part of private banking solutions is deemed as beneficial for private bank clients from the fiduciary perspective, especially with the increased focus on regulatory scrutiny following the financial crisis.

Also, since mutual funds can be actively managed, they are able to meet particular needs of clients in a more efficient manner than having to select individual securities for the same purpose.

Another reason why mutual funds are becoming more widely used as part of private banking solutions is that they can generate more annuitized revenue streams.

“It’s clearly beneficial for both their clients and the private banks,” says Mooney. “Certainly, from a fiduciary standpoint, funds are a really great solution for portfolios, and because they can be actively managed, they’re meeting a particular need. For the private banks, they can be a source of annuitized revenue. So there are a lot of benefits on having clients and private banks use mutual funds for meeting their needs as well as for efficiency.”

Mooney: Asian private banks, HNWIs now keen on ETFs

Common platform

Consumer banks that cater to retail investors are still the dominant distributors of mutual funds in local and regional markets, but the action is gradually moving to the wealth management space, where private banks are offering the products to their HNW clients.

Since most of the banks that dominate distribution have both a retail banking arm as well as a private banking unit, there is often an overlap in the types of mutual fund products that are sold to retail consumers and wealth management clients.
This means that some of the distributor banks may have certain mutual funds or mutual fund solutions available to their private bank clients but not to their mainstream retail clients.

However, Mooney shares there are a lot of common products for both clients, particularly when there is a similar platform for due diligence, infrastructure and assessment of funds.

“This is why sometimes you will see similar trends in the mutual fund space between what the private banks are holding and that of the broader consumer segment. But actually, we see a lot of common ground particularly where the private bank has a consumer arm.”

The themes that have been very prevalent in the business are well known. There has been a dramatic increase in the income theme, which is played out through high-yield products to multi-asset income products. “That’s been one common theme between private banks and consumer banks,” Mooney points out.

Another trend pushing the use of mutual funds in the private banking space is the greater availability of research and interest in equities.

In the last two years, the interest in equities has been focused on European and global equities. But since the beginning of this year, there has also been renewed interest in Asia and emerging market equities.

Mooney suggests that the focus on particular themes or sectors of equities is driven primarily by the investment views of individual private banks and the specific requirements of their clients.

“What is shaping and focusing these themes is how they are actually pointing or driving their views within their firm. Some of the private banks have become much more institutionalized with very strong CIO (chief investment officer) view. If they have a particular view on certain asset classes, that will determine to a much greater extent than before where their relationship managers and private bankers are advising clients to put their money in,” Mooney observes.

For example, a global or regional private bank with a neutral view on Asian equities will reflect this view on the products it makes available to their clients.

“There’s more adherence to the house and CIO view now,” Mooney notes. “It’s a generalization but we’re seeing that more and more. As an asset manager, when we’re talking to private banks, our starting point for the conversation is where do they see the markets from their perspective, what is their view on their own model portfolio allocations, and then how can we work with them in particular areas.”

Apart from the greater use of mutual funds, another discernible development is the desire by private banks to increase their discretionary services and the share of discretionary portfolio solutions.

Asian investors seek control

In this aspect, the development and growth of discretionary portfolio management has been slower among private banks in Asia than the US and Europe because of the keen preference of Asian HNWs to have greater control over their investments.

“The concept of delegating discretion to a manager is something that is relatively new to them or something that they are not comfortable with,” Mooney explains.

“But we’re seeing more private banks trying to figure out how they can grow this part of their business where they can create quality solutions for clients. So the percentage of private bank assets in the discretionary portfolio is starting to change. We’re having more conversations with clients around discretionary portfolios or separately-managed accounts.”

A related trend is that there is now increasing interest among Asian private banks and HNWs in the use of ETFs, particularly within the discretionary portfolios. The reason is that ETFs are key building blocks for generating performance from discretionary portfolios.

As a key player in the regional ETF market with its iShares brand, BlackRock is confident it can provide products in this space.

“We’ve done a lot within BlackRock over the last couple of years. We’re clearly the market leader. It’s fair to say the primary driver of growth for usage of ETFs in Asia has been led by institutions, though within the retail advisory business of BlackRock, we’ve increasing focus on ETFs as part of those solutions for clients,” Mooney says.

BlackRock has formed an integrated relationship manager specialist team to work with private banks specifically on ETFs.

“We have the product capability but we also need to focus on helping our clients figure out what ETFs mean to them and how they fit into their solutions. It’s one of education, hand-holding and providing capital markets expertise which we provide to specific clients,” he adds.

Discretionary portfolios – and to a lesser extent structured products – are the primary driver for ETFs within private banks. ETFs are used to build or access particular investment themes, sometimes on active advisory that will allow their clients to benefit from such themes quickly and to capture the beta to market exposure.

“The private banks are doing a lot of structured products issuance and development in the market,” he says. “They can be built on stock baskets or single stocks. We feel very strongly and we’ve proven to many of our clients that ETFs as underlying is an efficient and cost-effective way of creating exposure and structures for them.”

The use of liquid alternative products by private banks is a move that is playing out on a per-client basis. This means that some private banks have the right infrastructure in-house to be able to advise on alternative solutions while others don’t.
Unlike traditional alternative products, which have lock-ups and gates and are usually less liquid, liquid alternative assets are in a form that can be easily accessed by investors. The interest in such assets is driven by the need for HNWs to have alternative assets in their portfolio.

“Clients need that exposure in their portfolio but the banks are not investing the infrastructure to support that because it’s a more complex area of investing and they have to make sure they’ve got the right product expertise in-house, the right ability to assess the risk and how to build those portfolios. And equally, for an asset manager like BlackRock, we need to have a dedicated specialist team that supports those products as well,” Mooney says.