Transcription
Welcome to BT podcasts. In this episode, find out how hedge funds and private assets can enhance the stability of your portfolio in these uncertain times. This podcast is produced in collaboration with OB Private Bank.
In an era of global rebalancing and disruption, investors are keenly evaluating their asset allocation strategies. As such, there seems to be a growing significance of private assets and hedge funds. These instruments are increasingly viewed as crucial for diversifying portfolios and enhancing stability in volatile markets.
Welcome to BT podcast by the business times. I'm Howie Lim and we have expert help today from Wong Mit, managing director and head of managed products and alternative investments at OOB private bank. Menit, thanks for your time.
>> Thank you for having me. So given current global rebalancing and disruption, what are the primary shifts you're observing in client asset allocation strategies?
>> The top of- mind concerns for clients today would be diversification not just from the US market but also from the US dollar is a double US diversification that clients are thinking of. On top of that, there are also concerns about public market valuations as well. The AI techdriven companies form a disproportionate amount of the market cap in an index like the S&P 500. So a lot of the value in broad-based indices concentrated in just a few tech companies. We also have this continued insatiable demand for yield and income for many of our clients and to that end the private credit strategies which have been proliferating are very attractive to many of our clients right now.
Beyond the headlines, what specific market inefficiencies or opportunities are you seeing that require a re-evaluation I suppose of traditional portfolios? So, diversifying away from US assets. What else is going on?
>> Yes, the big game changer in this segment would be with the private markets semi-liquid sometimes also referred to as the evergreen structures. So, private markets would be assets which are not listed on the public markets. They can include private equity, private credit, private real estate, and private infrastructure. Most private markets were the domain of institutions and very large single family offices for a long time. In order to access them, you would have to uh >> be very rich. >> That helps and the entry level was quite sizable. But with the proliferation of the evergreen structures, minimum ticket sizes have come down considerably. So even if you weren't in the centillion range, you could actually construct a fairly diversified portfolio, giving you access to top tier managers in the private markets. So I would say that's the main change that's taken place in terms of portfolio construction and diversification.
>> Sounding like you will be private bank than your fund offerings anyway specifically will be designed to navigate the volatility and uncertainty in today's global economy with private funds, hedge funds, private assets, etc.
Yes. So in terms of navigating the volatility, it's funny, we host many conferences and the theme is always centered around navigating through volatility and that volatility only seems to get more complex and more intense over time. And because that is a reality, we have elevated asset allocation to be the central focus of all investment conversations. And for clients who are actively doing that, we also remind them again to take a close look at the portfolios. Diversification is often referred to as the only free lunch in investing and we say diversify, diversify, diversify. We repeat it three times quite intentionally because we mean diversification by markets, diversification by asset class and diversification by currency. We feel that diversification is the only way to help us not just mitigate the risk that we see in the macro environment but also capture opportunities as well.
>> Private assets and diversification those things putting together. Yeah. So how do private assets really offer that superior diversification and portfolio stability compared to say publicly traded instruments especially in this environment right Minkit?
>> Yes the first thing to keep in mind is that private assets are not listed on any public exchange and therefore are much less vulnerable to the swings in the market because it's less exposed to the raw public sentiment. And I want to be careful in saying that because it's not completely uncorrelated. it is less correlated. Good way of thinking about it is the home that we live in, we live in it. We may not check the price on it daily, but we probably have a sense that maybe the valuations in the property that we own does fluctuate over the course of the year. The only way that that valuation is actually tested is when you actually put it out for a transaction and when there's a meeting of the buyer and the seller, which could take months, that's when we know what the real price of the public asset is.
So, >> but point is it doesn't ding-dong ding really, right? Yeah. In many ways, it actually saves us from our own worst emotions of greed and fear. It's very different than if you had a mobile phone that you could whip out anytime and take a look at how it goes up and goes down minute to minute, hour to hour. So, that's something which is key to bear in mind. Another key consideration when looking at private assets is that there's also a larger component of a manager skill and value creation. So, when I buy a stock, I'm pretty much at the mercy of the stock price going up and down. And I've hoped that I've done the right amount of homework ahead of time in making that decision to buy and to own that stock. It's quite different from private assets where if you invest in it, you are choosing a manager. So in some ways you're taking a bet on the skill of the manager and that manager will buy and own it asset and very often they would also do something called value creation. They will make operational changes to the underlying company and that gives them an opportunity to actually manage themselves out of a bad situation or if they're in a good situation to make it much better. So we have a number of managers on our platform who have a very strong track record of managing assets through good times and bad times. So that also helps.
>> Hold that thought. Minkit still to come. What if you're new to private assets? Also, what emerging trends are there in alternative investment classes. More with Wong Minkit from OB Private Bank in a moment.
>> And now back to BT podcast in collaboration with OB Private Bank.
>> Welcome back Minkit. Earlier we talked about private assets and how they're the investment duour if you will, but there are some things we should be looking out for. One we've often heard is the illquidity of private assets. Also, it's quite opaque, not very transparent. What are some other key misconceptions or challenges that should be addressed, especially if you're new to it?
>> Yes, in the alternative investment space, uh, let me start with the hedge funds. One misconception is that they're expected to generate higher than market returns consistently. That is not true of all hedge fund strategies. For some of them in the minority, it is true, but by and large they should be expected to be a shock absorber and to dampen volatility in the portfolio. Now on the private market side for those who are unaware that we now have options outside the traditional private market structure which was the 10 + 1 plus 1 the the 10 to 12 year lockup structure with capital calls and was administratively very burdensome. We now have it in the evergreen structure. So that's the first thing to be aware of in the private asset space that the second thing to be aware of is that it's often talked about as an uncorrelated asset class. The term is used quite loosely. By definition, an uncorrelated return means zero correlation. In most cases, that's not true. Many alternative strategies, be it hedge funds or private assets, actually have some correlation. That there are exceptional strategies like um catastrophe bonds which genuinely uncorrelated, but uh most other strategies have some correlation. So, the way to think of it is that it's less correlated. So, if we have a period of prolonged market weakness or poor economy, private assets could also be affected.
>> Yeah, I mean, Kit, you're right. it's sounding more and more complex. So, I'm hoping that your team does look into the specifics and the due diligence and all that when selecting private asset and hedge fund managers because can't expect us to do it. We know nothing.
>> Yeah. So, the skill set that we refer to in the space would be manager selection. Many platforms operate differently. Some of them just want to have a very comprehensive platform and that's really quite helpful for more sophisticated self-directed clients who feel that they know enough and they know specifically what they want. However, at UB private bank, we take a different view that the investment experience has to be first and foremost and we prioritize that over having the most comprehensive offering. So, we spend a lot of time on due diligence of the manager. There is both the investment due diligence hat and the operational due diligence hat.
>> What does that entail really beyond say track record?
>> Yes. Yes. So let me start by the top down what we select in manager. When we select a manager we are thinking of them as anyone would of a business partner. You want that business partner to have integrity to to be transparent to deal with you fairly. And it's very important for us to have access to senior management. And so we can have an experience and an understanding of the manager at different echelons of management. And once you have that and there's a few interactions you would very quickly know if the organization is a well-run organization or not. Then on the investment due diligence side, the way that we would look at it would be and I always press my team on this conviction. If it was your own money or if it was the money of your family, would you be willing to write a check? And as Buffett says, dividing of a check is what separates commitment from conversation. Do we have conviction in the manager and we take a look at the track record. Now we also joke within the team that no private equity manager has come to our firm to pitch to us without somehow being able to show that they are a top quartile manager. When we take a look at the track record, what's key to us is the transparency. And here in the alternatives world, you will see the biggest dispersion in terms of the behavior of managers. Some are extremely transparent all the way down to putting every monthly return on their website that you don't need any special access or industry knowledge to access. So that is very transparent all the way down to those who may >> there's nothing on the website. >> Nothing on the website. There's actually no website to begin with and many of them on top of that require a non-disclosure agreement. So you have to enter some kind of a legal contract before they show you a portion. Um so whoever >> even I feel that's shady as a lay person. Come on. Right. So, if you're looking to get access to an alternative manager, make sure that the platform or the adviser that you're relying on has a robust process and these things actually matter to them as opposed to just wanting to bring you a hot name or an interesting idea. Then digging deeper into an investment due diligence conversation, a good enough track record is not enough because you need to know the attribution. Was that good performance a result of luck? you just happened to, you know, swing for the fences as they say in baseball, you know, to gamble and something and then you got lucky or or >> spray and pre. >> Yeah, spray and prey, right? Or was it really due to actual skill? So, we try to isolate and to make sure that it's not luck, it's skill. And we also would like that to be to the best of our knowledge something which is repeatable and not just a flash in the pan. On the investment due diligence side and on the operational due diligence side, it it really is more of evaluating them again as as an organization. I mentioned that at the start what I mentioned was more qualitative but there's also basic numbers is the manager of the size where they can keep the lights on if they go through a tough time. A very senior head of an asset management firm told me many years ago he said uh Minkit I can't promise you many things in the investment world but the only thing I can guarantee you is that at some point we will have a bad year. >> You have one bad year but we also know that sometimes there can be multiple bad years and is an organization able to withstand that as a fiduciary.
So looking ahead, what about emerging trends that you're seeing or alternative investment classes maybe that you anticipate will play a more significant role in portfolio construction? So we've squared away private assets. Are there other things?
>> I think there will be a continued move towards dollar diversification. Not that investors are abandoning ship in that sense, but if you already have a portfolio and most portfolios will be very heavy on both the US market and the dollar, you'll be looking to diversify from that. So the next dollar clients will be wanting to to look at options outside of that. I also think the other major trend is there will be this mainstreaming democratization easier access of the alternatives as well. It's going to be less in the domain of the high net worth individual and much more accessible by size and by the platforms it's going to be offered. But all of this is subject to regulation. So we can only move as fast as the regulations change.
>> Yeah. But it's good news like recently MAS had started a conversation that they want to have about allowing retail investors more access to the private markets, right?
>> Yes. I think it's a very timely one and in other markets like the US, you've seen that they've actually made some movements there already.
>> How does then for you guys over at OB Private Bank that mean for your work really? How are you tailoring your advice on these maybe well to some sophisticated investment tools?
>> Yes. to help client risk appetites, help their long-term financial goals as well.
>> Yes, the private markets and the alternatives are woven into the standard asset allocation conversation. We can accommodate clients who want to have exposure to alternatives and not want to have any exposure to alternatives. We obviously have our view the client's risk profile, liquidity needs and investment objectives are at the forefront of any advice and to the extent that the alternatives are able to help the client achieve those needs whether on the investment objectives or the risk profiling it will be part of the conversation if appropriate for the client. Yeah. So in that sense it's not looked separately. It is very much integrated as you would have in a conversation that was only traditional stocks and bonds.
>> Manit thank you so much for your insights.
>> Thank you for having me. Wong Menit, managing director and head of managed products and alternative investments at OB Private Bank. This has been BT podcast by the Business Times. I'm Howie Lim.
>> This episode of BT podcast was produced in collaboration with OB Private Bank.
>> Find more BT podcasts at business times.com.sg/mpodcasts or wherever you get your podcasts. This podcast is meant to provide general information only. PH Media accepts no liability for loss arising from any reliance on the podcast or use of third parties products and services. Please consult professional adviserss for independent advice.
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