Citi's Tay challenges Edhec's private wealth report

Private banks have taken fierce criticism in the past couple of years for alleged mis-selling of investment products. The latest negative comments come from French research organisation Edhec-Risk, but Jennifer Tay, Asia-Pacific head of investment advisory at Citi Private Bank, says some of the organisation's views are off the mark.

The central finding of a late-September Edhec report* is that portfolio-optimisation techniques used by institutional investors can be transposed to private wealth management. That's because, it argues, these techniques have been engineered to incorporate an investor's specific context, objectives and horizon into the portfolio-construction process.

The Nice-based organisation says an asset-liability management (ALM) approach is beneficial because it has a direct impact on the selection of asset classes. "In particular, it leads to a focus on the liability-hedging and goal-specific properties of various asset classes, a focus that would, by definition, be absent from an asset-only perspective," adds the report.

On this view, Singapore-based Tay is inclined to agree, up to a point. Most asset-allocation frameworks that private banks use with their clients focus on the asset side of the client's balance sheet, with the focus on liabilities being mainly in the area of currency and interest rate hedging, she says. But she adds that, for the purpose of selecting asset classes, "we maintain a consciousness of the liability profile of the client, and avoid illiquids if the client has an amortising or repayment to make in the near term".

Meanwhile, Tay disagrees with certain other conclusions in the report.

Edhec argues that the ALM approach "leads to defining risk and return in relative rather than absolute terms, with the liability portfolio used as a benchmark or numeraire. This is a critical improvement on asset-only asset-allocation models, which fail to recognise that changes to asset values must be analysed in comparison to changes in liability values."

"In other words," says the study, "private investors are not seeking terminal wealth per se so much as they are seeking terminal wealth whose purchasing power enables them to achieve such goals as preparing for retirement or buying property."

Tay says the ALM approach cannot be applied across the board, as "some clients are liabilities-agnostic and would want to avoid having liabilities at all", which would mean the benchmark would be non-existent. "We'd rather apply relevant relative benchmarks or cash-deposit rates as a comparison measure," she adds. "This is how many private bank clients look at returns on their portfolios in any case."

She also takes issue with Edhec's view that private bank products "tend to boil down to a rather basic classification in terms of risk profile".

This assertion is not accurate from Citi's viewpoint, says Tay. "There is a conscious effort to align clients' portfolios to their risk profiles," she adds. It may take time to adjust the allocations due to less liquid existing investments, says Tay, but the bank is aware of the client's portfolio aims according to their the risk/return profiles and the acceptable level of illiquidity and investment time horizon.

* Asset-Liability Management in Private Wealth Management, published on September 28.