Citi Private Bank eyes below-radar alternatives

Faced with the growing challenge of differentiating their fund platforms, private banks should be focusing on niche alternatives exposure and particularly private-market co-investment and club deals, says Roger Bacon, Asia-Pacific head of managed investments at Citi Private Bank. 

When it comes to mutual funds, a private bank seeks to differentiate itself either through pricing or fund selection, he noted at the AsianInvestor Fund Selector Forum in Singapore last week. 

Wealth managers may tout lower charges or better due diligence, said Bacon, “but everybody is claiming that they have the best due diligence, so clients are skeptical if you tell them that".

Moreover, John Cappetta, Singapore head of fund advisory at Julius Baer, argued at the same event that due diligence of mutual funds by bank distributors was “overrated”, as reported. It is more important for alternative products, he noted.

Meanwhile, discretionary portfolio management (DPM) has become increasingly commoditised at private banks with in-house asset management arms, said Bacon, pointing out that Citi no longer had its own funds business. 

But alternative investments is an area where a private bank can offer strong differentiation, he noted. Within the alternative space, hedge funds have changed the least as a product offering since 2008, while private equity and real estate have evolved significantly, he said.

Private banks continue to offer hedge funds as single strategies or funds of funds run by internal or external managers. Differentiation here still comes down to the assessment of manager quality and the level of access provided to them, Bacon noted. 

It’s a different story for private-market assets, he said. Prior to 2008, 100% of wealthy private clients seeking illiquid strategies were going into blind-pool funds, where assets are not identified prior to fundraising. Now as many as 70% of private equity and property investors are doing club deals or single asset co-investments.

That’s how private banks can differentiate themselves: by providing access to deals and assets previously only available to institutional investors, noted Bacon.

He added that Citi was seeking niche products that had fallen below the radar. “We are looking at the dislocation last year and this year and where the potential opportunities are in the area of the investment spectrum that we haven’t focused on."

One example is emerging-market short-duration bonds, which Citi has been focusing on in the last two months. Bacon said there would also be opportunities in liquid macro alternatives, as the bank has not offered many such products so far. It will also look at more sophisticated offerings in fixed income, he noted.

Products with a slimmer chance of getting on its platform include unconstrained funds, liquid alternatives and multi-asset/income funds, as these have already been touted by asset managers.

Meanwhile, asked his view on the question of retrocession fees, Bacon said it was only a matter of time before Hong Kong and Singapore regulators banned them.

But he noted: “It is important for asset managers not to be bogged down and worry on how fees get charged. We will tell you what we need – if you can just focus on the alpha sourcing, the wrapping around it is our concern.”