Deutsche WM’s Asian clients slow to warm to alternatives, DPM

Asian clients of Deutsche Bank Wealth Management are showing little interest in discretionary portfolio management (DPM) and alternative assets, says Tuan Huynh, Asia-Pacific chief investment officer and head of DPM.

The percentage take-up of discretionary accounts among Deutsche’s clients in the region is in the low single digits, he told AsianInvestor. A rough calculation therefore suggests that no more than $3 billion of Deutsche WM’s $66 billion in Asia assets under management (according to Asian Private Banker’s 2015 AUM estimate) is managed on a discretionary basis. 

The firm’s DPM assets under management are growing, but only very gradually. Since 2009 the bank has seen them increase by an annual average of 13%, though clearly from a very low base. Amid the particularly difficult and volatile market environment of the past 18 months, added Tuan, DPM take-up has started catching up to where it is in Europe and the US, but it’s not yet a trend.

This is largely because most clients in Asia are still first- or second-generation businesspeople, he noted. They prefer to retain control of their investments, with the expectation that they can be successful in their investment decisions, as they are in their businesses, he said, but that is not always the case.

More risk recommended

Asked about allocations, Tuan said most Deutsche WM clients were fairly conservative, because they don’t want to take additional risks – on top of those in their businesses – by investing in liquid assets. That’s why most of the bank’s discretionary portfolios are either fixed income-based or multi-asset, balanced portfolios, he said.

Deutsche WM’s current model balanced portfolio – the house view for advisory and discretionary allocations – has 50% in equity, 35% in fixed income, 10% in alternatives, 3.5% in commodities and 1.5% in cash.

The firm has recommended that its DPM clients take on more risk this year by shifting some of their fixed income allocation into equities. The risk for fixed income-heavy portfolios is that if bond yields rise too far too fast, investors face the market-to-market risk of a loss of the value of their holdings, said Tuan (pictured left). 

Deutsche forecasts that the US 10-year Treasury yield will climb towards 3% from their current level of around 2.5% as of press time.

Even if a client wants to stick to fixed income, and mostly in investment-grade bonds, the bank recommends that they add more risk by widening their debt investment universe, such as selectively in high yield or EM bonds. They should stay in hard currency though, said Tuan, because the firm expects the dollar to strengthen further.

“We have seen some clients [taking this advice], but we still haven't seen a great rotation out of bonds into the equity space,” he noted.

Likewise, Liechtenstein-based private bank LGT has been advising clients to increase their stock exposure, but they are proving reluctant to do so, said Stephen Corry, the firm's head of investment strategy earlier this month.

In respect of equities, Deutsche WM favours US stocks because of their positive earnings outlook, despite them being richly priced (the Dow Jones exceeded 20,000 for the first time on Wednesday) and likes Japanese stocks because of their relatively low valuations.

Institutional investors are certainly still keen on American stocks, said Tim Orchard, chief investment officer for Asia Pacific ex-Japan at Fidelity International. “Everybody invests in US equities, and there is no change yet.”

Alternatives aversion

Meanwhile, Asian wealthy clients’ take-up in alternatives is “pretty low” in advisory portfolios, Tuan said – something Corry also noted earlier this month.

They are not interested in hedge funds, which have failed to deliver good performance in the past few years, said Tuan. Nor have they allocated much to real estate either, because they already own property directly, he noted. 

However, infrastructure is seeing demand, with some clients favouring direct investment into projects, while smaller clients tend to look for funds.