Asian private banks look to stay ahead of the herd

Capital protection: Asian clients’ eternal theme I One region, many markets: where Asia's wealthy put their money

IF YOU HAVE been taking a daring, ahead-of-the-curve punt by putting money into Vietnam, perhaps through one of the many new country-specific funds that have sprung up in the past few months, here’s an irksome thought. Private banks in Asia had their clients in there a year ago and in some cases are now starting to pull them back out again. "Vietnam was a very big theme for clients in this region last year," says Tuck Meng Yee, head of product development for Asia-Pacific private banking at ABN Amro. That’s the skill of the adviser to the wealthy: being ahead of the herd.

Half the fun of private wealth management is the quirky product around the edges of the mainstream investments. You can take it as read that all private banks treat their clients’ money with suitable conservatism and care, putting the bulk into core strategies that will protect capital as well as help it grow. But increasingly, advisers recommend surrounding this core with a few satellites: riskier investments, perhaps, or ones predicated on long-term thematics, or just a bit out of the ordinary.

So it is that private banks in Asia Pacific today are, variously, putting clients into insurance risk structures, luxury goods funds, water-related investment vehicles, and even getting them to co-invest alongside the bank in biotechs or British windfarms. Some manufacture these things in-house through funds or structured notes, others scour the world for the most suitable existing products. It’s a useful point of differentiation – provided the investments work out.

Citigroup is big on themes. Hans Goetti, managing director and investment strategist for Citigroup Private Bank, starts with the plutonomy theme: that in many developed countries, the ultra-high-net-worth people totally dominate the economy. This part of society has different spending patterns from the rest, and these can be targeted.

One of the ways to do this is through a luxury goods fund. Scilla Huang Sun, head of equity products at Clariden, a Swiss investment bank, is the director of the Clariden Leu Luxury Goods Equity Fund. She launched it six years ago, reasoning that "luxury goods will have higher growth, and have a better business model, than other consumer sectors, driven by the high growth in Asia and other emerging markets."

Huang Sun’s fund captured advisers’ imaginations, and it has €250 million invested in it. Over five years its returns to investors have almost doubled those from the MSCI World Index.

Others speak of a broader lifestyle theme. "Our clients are an expert in that sector: they know the companies well," says Alex Fung, chief executive officer of the Hong Kong branch of Société Générale, who considers lifestyle to include companies in luxury goods, fashion, and some food and beverages.

Goetti points out a second theme, the flip side of the plutonomy idea. "Plutonomy means lots of poor people at the bottom," he says, which leads to rising default rates, particularly for sub-prime borrowers. Citi puts money into strategies and hedge funds geared to this idea, particularly by being short the borrowers by the use of credit default swaps.

If making money from the inability of the impoverished to service their debt seems callous, you can always invest in themes that are doing a bit more for the planet. The ones most frequently talked about are water and alternative fuels – and since things like ethanol and biofuels require lots of water in order to irrigate the feedstock crops, the two themes are related.

Many private wealth advisers talk about water: the premise, put bluntly, is that there isn’t enough and the problem’s getting worse. All over the developing world there are wells that no longer reach the water table. China’s Yellow River frequently fails to reach the sea. Dealing with this problem is a huge challenge, and companies with proficiency in waste water management, desalination and other services are very well positioned.

Much the most popular fund investing in these companies is run by Pictet & Cie, another Swiss bank. A great many multinational private banks have put clients into this fund – so much so that the manager is said to be considering closing it to new funds. ABN Amro also began offering a water-based investment in 2005 – perhaps a bit too soon. "I think we were way ahead of the curve," says Tuck. "It’s taken the market another year to catch up with us."

Ethanol and biofuels were popular investments a year ago but there is already a sense that investments in this theme are getting ahead of themselves. "Alternative fuel, and in particular ethanol production from sugar and corn, has seen massive speculative interest," says Chuck Ng, head of global product sales for North Asia in the private banking division of Credit Suisse. "First we saw sugar claiming multi-year unprecedented peaks then losing ground dramatically. Corn is now seeing similar upturns."

That doesn’t mean alternative fuel structures don’t have merit, just that they are already pricing in an acceptance of ethanol and biofuels that in most markets is still some distance away. "These are early years of alternative fuel and the potential should not be dismissed," says Ng, who notes the increasing attention paid to palm oil (an easy play through Malaysian listed stocks) and rapeseed in the context of alternative fuels. "There is much more to the alternative fuel space and its run has just begun." Tuck puts it like this: "It’s very exciting, but people are still trying to get a feel for what works."