Go for a balanced portfolio, says CIMB Private Banking.

Investors should hold a balanced portfolio consisting of equities, bonds, alternative investments, gold and cash this year, says Datuk Kong Sooi Lin, CEO of CIMB Investment Bank Bhd and group head of CIMB Private Banking.

“We advocate not taking large bets this year on any particular asset class, event or geography, so, generally, we are recommending [a portfolio of] 45% equities, 40% bonds, and 15% alternatives and cash. There is a case this year for buying some protection in the form of gold.”

In equities, we tend to favour growth stocks and shy away from yield and defensive stocks. Our view is that while the bond markets have priced in rate hikes, high-yield equities may underperform this year,” Kong points out.She believes this year will be better than last year. Equity returns thus far have been good and bond returns are expected to perform well since the bond funds have already priced in two to three rate hikes.

It will be a good year for equities owing to optimism over growth in the US and improved output and export data in many economies at the start of the year. Moreover, rising inflation gives companies better pricing power and China’s stabilising economy is important for Asian currencies and equity markets.

In the bonds segment, she advises adding floating rate notes (FRNs). She also recommends hybrid investments such as preferred shares to obtain higher yields and to mitigate the impact of a potential hike in interest rates.

“Investors tend to prefer medium-tenor bonds (five to seven years), which are less impacted by rising interest rates compared with longer-tenor bonds. They also give higher yields compared with short-tenor bonds,” Kong notes.

“We also adopt a ‘buy and hold till maturity’ strategy [for our clients] to lock in future returns by buying at reasonably good yields to earn fixed coupons and to ride out volatile market cycles.”

She believes that most bond markets have priced in two to three rate hikes, thus they are unlikely to overreact on the downside in the near term when the rate hikes eventually take place.

“Investors should not avoid bonds altogether, as a stable and recurring cash flow investment will cushion future market downturns and providediversification benefits to the overall stability of their portfolio,” she adds.

For alternative assets, Kong recommends a 15% tactical asset allocation. This is because returns from this asset class are less correlated than those of typical traditional asset classes and thus provide diversification benefits, which works well in volatile market conditions. “Some of the alternative assets that our clients invest in are hedge funds, commodity-based ETFs (exchange-traded funds), gold, private equity and structured products.”

Kong adds that certain investors who are prone to loss aversion behaviour would be interested in tailor-made principal-protected structured investments. These products, such as Brand Vantage Floating Rate Negotiable Instrument of Deposits (FRNID), Resettable Participation FRNID and Fund Connect FRNID, offer reasonable returns that are contingent upon certain high-probability trigger events occurring.

Over the past two years, CIMB Private Banking has included global offerings, adding more exposure to developed markets such as the US, the UK, Australia and Europe. “These include listed equities, mutual funds as well as bonds."

Addressing demand for convenience and transparency

Last year, global research published by EY stated that there are three gaps between clients and wealth managers — in the form of digital channels, transparency and the role of the wealth advisor. How does CIMB Private Banking address the emergence financial technology (fintech) platforms that may be competing for the same pool of clients?

While there is no doubt that there are external factors impacting the wealth management space, Kong says the bank does not believe the high net worth individuals (HNWI) and ultra-high net worth individuals (UHNWI) will be moving away from the traditional face-to-face approach just yet.

“Client experience is a key differentiator in the wealth management industry and there are many factors to take into consideration. Fintech platforms may offer automated investment at a low management cost but they are just not able to replicate the personal experience a private banker brings to the table,” she notes. “A recent study done by CEB Wealth Management Leadership Council found that the main reason why clients do not want robo-advisors was that they valued advice directly from their private bankers.

“Furthermore, the fintech platforms’ market share still lies primarily with the mass and mass affluent segment.”

She believes it is still early days for robo-advisory in markets like Malaysia although the Securities Commission Malaysia has recently come up with guidelines for parties to apply for a licence to operate such platforms.

“While clients are demanding more convenience through increased touch points, CIMB Private Banking is always looking for ways to enhance our client experience. Our key focus is equipping our people with the right skills and knowledge to provide clients with a holistic financial advisory experience.”

Kong says clients are increasingly demanding transparency as they are becoming more knowledgeable, sophisticated and astute. Digitisation has also played a role, providing clients greater access to information.

“We believe in providing clients with avenues to provide feedback, through portfolio reviews and periodic client surveys. Clients are given the opportunity to rate our services and assess the private bankers. We have seen an increase in client satisfaction survey responses in recent years,” she adds.

While the HNWI population in Malaysia contracted 3.6% in 2015 from the previous year, CIMB Private Banking’s assets under management (AUM) has been growing at a compound annual growth rate (CAGR) of 9%. Its revenue has logged a CAGR of 25% over the past three years. Its AUM stood at US$10.4 billion as at the end of last year. Kong says the target for this year is a growth of RM4 billion.

She notes that the firm did not manage to surpass its AUM budget of RM32.5 billion last year for two reasons. “First, clients were risk-averse and not keen to invest further. It was a challenge to get them to deploy new funds into investments. Second, they also took advantage of the weakening ringgit to pick up distressed assets and identifying businesses elsewhere.”

When it comes to growing its AUM and clientele, Kong says CIMB Private Banking is now leaning towards improving client service and delivering real added value.

“Our growth strategies include cultivating deeper relationships with key client segments and introducing investment consultants to further advise this segment, ensuring that overall personal and business needs are well taken care,” Kong explains.

“We are also building an advisory-led model, developing comprehensive and continuous understanding of and taking into account clients’ best interests. We deliver action-oriented advice to help clients achieve their goals, steering them to make better financial decisions, focusing more on their long-term goals.”

Furthermore, Kong says, the firm is also evolving from providing standard retail banking credit products to offering a diverse range of exclusive credit products as well as customised solutions. The integrated credit solutions are able to cover clients’ business needs by tapping CIMB Group’s universal banking platform.

As millennials are a core segment, Kong says CIMB Private Banking has set out plans to attract these clients. They include organising workshops with specific agendas, focusing on building “financial intelligence and capabilities” to help millennial clients transition into their parents’ shoes.

“The idea is to utilise CIMB’s universal banking platform to make their exposure more interesting and relevant. It is important to involve millennial clients at an early stage as we see more clients involving their children in their businesses and financial planning,” she notes.

“Our conscious effort to assign appropriate private bankers to [clients in] this segment also has had a huge impact. We have been able to see a deepening of client relationships and a rise in opportunities to discuss inter-generation wealth transfer and legacy planning.”

Challenges and growth strategies

Datuk Kong Sooi Lin, CEO of CIMB Investment Bank Bhd and group head of CIMB Private Banking, says some of the key challenges in the local private banking scene are compliance practices and the accompanying costs, stiff competition and shortage of good talent.

“The global wealth management industry is now at the forefront of regulatory change. Cross-border standards, customer protection and transparency are anticipated to impact the front-end client experience and increase costs,” she notes.

“The shortage of talent is one of the biggest barriers to future growth. Top-quality people are becoming more valuable, more difficult to source and more expensive to train. Links between performance and pay are becoming critical. New strategies, incentives and support are needed to attract and retain qualified professionals.”

To address the tightening of regulations and new guidelines for banks, Kong says CIMB Private Banking has tightened governance surrounding its sales process, focusing on matching product and risk appetite. Internally, the firm has implemented stricter self-governance requirements and put in place processes to keep up with the increasing regulatory requirements.

“Private bankers are better equipped — through more comprehensive and thorough training — to ensure that they can customise the appropriate solutions to meet the financial needs of clients,” she adds.

Kong says the bank’s staff retention and development strategy has worked very well to resolve the shortage of talent. “Through the setting up of our Wealth Academy — a holistic and institutionalised training programme — we are able to ensure our private bankers are well equipped with the necessary skills to service our increasingly sophisticated clients. There is also emphasis on organic development and growth as CIMB Private Banking trains and develops its own pool of private bankers in a well-established management trainee programme.”

Moreover, it takes on fresh recruits and taps the group’s well- established The Complete Banker programme to feed the pipeline of private bankers. Kong says this is coupled with continuous development whereby its staff are offered long-term incentives, recognition and clear career progression opportunities.

Source: theedgemarkets.com

Nick Kalikajaros 2017