Wealth Management in Asia

By Ellen Sheng

The private banking industry in Asia is in an enviable position. With the region’s fast-growing wealth and high savings rate, the market has plenty of room for growth.

According to the 2010 “Asia Pacific Wealth Report” by Capgemini and Merrill Lynch Private Bank, Asia’s population of high-net-worth individuals increased by nearly 26% in 2009 to 3 million, catching up with Europe. High-net-worth wealth in Asia increased more than 30% to US$9.7 trillion in 2009. On Forbes’ 2011 list of billionaires worldwide, the number of Asian billionaires (in U.S. dollars) doubled in the last year to 115, making Asia home to the second-largest number of billionaires in the world, behind the U.S.

This section takes a look at several issues in Asia’s fast-growing wealth management industry. As Asian policymakers look for tools to fend off inflation, Asian currencies are expected to appreciate. Private banks are seeing increased demand for foreign exchange trading and foreign currency plays. Among those increasingly popular currencies is the Chinese renminbi (RMB).

This report also looks at Islamic finance, a niche segment of wealth management that started in the Middle East and is taking hold in Asia, particularly Malaysia. The market is now one of wealth management’s fastest-growing subsectors.

In other areas, private banks are looking at new ways to advise clients. With charitable giving on the rise, private banks are playing an increasing role in advising clients on how to structure their charitable giving. Additionally, private banks are increasingly helping affluent Asians manage growing portfolios and a wide range of assets.

Asian Currency Plays

lnvestors turn to Asian currencies, seeking shelter from inflationary concerns.

lnflationary concerns are driving policymakers to view currency appreciation as a favorable tool to fight inflation.

The result? Currency exposure, always an important consideration in any investment portfolio, has become more significant—particularly in Asia. With the U.S. trade-weighted dollar near all-time lows, investors in Asia and elsewhere are diversifying into other baskets of currencies. Top picks include the Chinese RMB, the Philippine peso, the Indonesian rupiah, the Malaysian ringgit and the South Korean won.

“Clients ask, ‘Why should I take on risk with a foreign currency when Asian currencies appear to be more stable and offer more long-term appreciation?’” says Hanspeter Brunner, chief executive officer of BSI Bank Asia. “Clients are definitely looking more toward multiple Asian currency products than in the past.”

“It’s a very fast-growing area. I would say foreign-exchange trading now is probably one of the larger asset classes that private clients invest in,” says Arjuna Mahendran, head of investment strategy for Asia at HSBC Private Bank.

Marc Lansonneur, regional head of investment teams and market solutions at Société Générale Private Banking (Asia Pacific), notes that investors in Asia are typically quite comfortable with currency plays, as local Hong Kong and Singaporean newspapers often advertise foreign exchange margin trading or seminars on how to become a foreign exchange trader.

As market watchers anticipate continued strengthening in Asian currencies, private banks are seeing more demand for currency-related plays such as dual currency deposits, short-term emerging market bond funds and equities denominated in Asian currencies.

“Our biggest wins in the last weeks and months have been in currencies,” says Kenneth Ho, head of products for Asia Pacific at Julius Baer, adding, “Asian currencies are at the top of our list by far.”

“We are now at a transition point, and there is a debate in the marketplace: Is the U.S. dollar in a cyclical decline as per historical precedent, or is it more of a structural, gradual, longer-term decline?” says Erik Wytenus, head of foreign exchange and commodities at JPMorgan Private Bank in Asia.

Currency Exposure in Bonds, Equities
For investors on either side of the debate, there are numerous options. Among BSI Bank’s recommendations are simple shorter-term hedging products, which provide a degree of protection. Short-term bond funds, denominated in Asian currencies, have seen increased interest. BSI Bank’s Brunner says many Asian clients are increasingly investing in their own countries and in their domestic currencies through equities and bonds.

At ABN AMRO Private Banking Asia, Asian clients, who generally hold onto local currencies, have been moving toward structured notes and bonds, such as the Singapore dollar or Indonesian rupiah, according to Angel Wu, ABN AMRO’s head of products and solutions. Dim sum bonds, synthetic offshore RMB-denominated bonds and Brazilian real bonds are also in demand, as are dual currency deposits, in which investors can deposit in one currency and receive another, Wu adds.

Investors are “most definitely trying to diversify their currency holdings by investing in emerging market currencies. It’s part of a longer-term trend. Currency markets have broadened their breadth and depth,” says HSBC’s Mahendran.

“Clients ask, ‘Why should I take on risk with a foreign currency when Asian currencies
appear to be more stable and offer more long-term appreciation?’ Clients are
definitely looking more toward multiple Asian currency products than in the past.”

Hanspeter Brunner, Chief Executive Officer, BSI Bank Asia

Manpreet Gill, Asia strategist at Barclays Wealth, says the firm was keen on local Asian currency bonds last year, but this year there is more emphasis on equities.

For investors worried about inflation, there are also commodities such as gold, platinum or palladium. Although gold prices seem to hit new all-time highs every month, private bankers say it still makes sense to include gold as part of a diversified portfolio.

“Western central banks typically have about 60% of their reserves in gold, while emerging market central banks often have closer to 5%. In China, it’s less than 2%. So if some central banks decide to inch up their gold exposure, that’s an underlying support by major participants in the market,” says JPMorgan’s Wytenus.

There certainly are risks, however. Political risk is always a concern. For instance, in April, the Brazilian central bank started imposing a tax on foreign currency trade, hoping to curb huge inflows of foreign currency.

“But that’s the risk in these markets. Central banks are worried that asset bubbles will form and can’t cope with huge inflows,” says HSBC’s Mahendran.

Betting on the Renminbi

Private banks roll out RMB-denominated products.

Policy changes and forecasts for the RMB’s continued appreciation are driving increased popularity. Starting last July, Chinese and Hong Kong policymakers started implementing policies to “internationalize” the RMB, increasing its use in offshore markets. At the same time, market watchers expect steady appreciation of the RMB as Chinese regulators look to curb inflation.

All of these factors have led to an increase in offshore RMB investment products, known as CNH products, which private banks in Hong Kong, and increasingly Singapore, are rolling out to clients. With the RMB expected to appreciate 4% to 6% a year, investors from Europe, the U.S. and Asia are showing increased interest in RMB-denominated investment products.

The market is small for now, but market watchers anticipate rapid growth. In 2010 alone, offshore RMB deposits increased by 380%; offshore deposits of RMB now total about 400 billion Chinese yuan (US$61 billion). JPMorgan Private Bank estimates they will grow another 770% in five years.

“We’re all experiencing history in some ways. China will have a major world currency, along with the U.S. dollar, euro and yen. We are in the beginning phase of China’s internationalization and development into a major reserve currency,” says Kenneth Ho, head of products for Asia Pacific at Julius Baer.

“We’re all experiencing history in some ways. China will have a major world currency,
along with the U.S. dollar, euro and yen. We are in the beginning phase of
China’s internationalization and development into a major reserve currency.”

Kenneth Ho, Head of Products for Asia Pacific, Julius Baer

Meeting Demand

Private banks are rushing to meet demand for RMB-denominated products. ABN AMRO, for instance, is seeking approval to launch an RMB business in Singapore, primarily to offer offshore RMB deposits and bonds. Julius Baer received approval for a qualified foreign institutional investor (QFII) license to buy mainland Chinese A-shares. It also offers RMB conversion services, current and fixed-deposit accounts, RMB unit trusts, equity-linked investments, and bonds in Hong Kong and Singapore. JPMorgan Private Bank recently had its QFII allotment enlarged.

Among the more popular CNH products are so-called “dim sum bonds” or RMB-denominated bonds traded in Hong Kong. Major companies such as McDonald’s Corp., Unilever N.V. and Caterpillar Inc. have issued dim sum bonds in Hong Kong in the past year. Private bankers say even though the yield on dim sum bonds is low—around 1% to 3%—investors like them because they get an additional bump up from the currency exposure. A growing number of firms are rolling out RMB-denominated bond funds.

At US$65 billion, the dim sum bond market is still quite small compared to the volume of offshore RMB, says HSBC’s Arjuna Mahendran. But the market is expected to expand quickly, supported by government policy.

Developed and Emerging Market GDPs, 1950–2050

Renminbi drives China to the top

China was once the world’s largest economy before 1890, and financial experts predict it will again soon reclaim that position—perhaps by 2015—outranking even the U.S. In the midst of a global economic recovery, China’s growth will not be stunted. The chart above shows the country pulling ahead of other worldwide developed and emerging markets, with an estimated GDP over US$70 billion by 2050. The strength of the RMB will be a primary driving factor.

Source: Data from World Bank and “The World in 2050,” PricewaterhouseCoopers 2008; updates from John Hawksworth and Gordon Cookson; authors’ analysis

Creating a Market

The market, while expanding, still has a lot of growing to do. With RMB daily spot liquidity reaching approximately US$500 million to US$1 billion a day, the RMB market is considerably thinner than most other currencies.

Xavier Denis, economist and strategist at Société Générale Private Banking, says that while offshore RMB is “very attractive for non-Asian clients,” there is a lack of issuance. “Many are literally sitting on holdings, and there is very limited trading,” he adds.

“To go further and get into structured products or fixed income, we are waiting for more liquidity. That will come in one or two years,” says Marc Lansonneur, regional head of investment teams and market solutions at Société Générale Private Banking (Asia Pacific).

But that will change as Hong Kong and Chinese authorities work to create a deeper, more liquid market.

In March, the Hong Kong Monetary Authority assisted in allowing Hong Kong banks to open an RMB-denominated account service, helping them reduce counter-party credit risk. With this move, private banks expect clients will want to buy more RMB.

“I wouldn’t say the floodgates will open, but with the added flexibility, ultra-high-net-worth clients will be very keen to procure RMB and will be able to do so more easily,” says Eric Wytenus, head of foreign exchange and commodities at JPMorgan Private Bank in Asia. “I would not be surprised to see many U.S. and other global ultra-high-net-worth clients garner US$5 million’s worth of CNH right off the bat,” he adds.

As with any investment, investors need to be aware of risks. CNH products carry foreign exchange costs as well as transaction fees, and currency appreciation may not always be sufficient to make them worthwhile. Such investments should also be considered in the context of a balanced portfolio.

Islamic Finance Industry Expanding in Asia

Malaysia is carving out its role as a major hub for international Islamic finance.

Islamic finance, which initially developed in the Middle East, is gaining a foothold in Asia, with Malaysia taking a leading role in its development.

The budding industry is expected to reach the US$1 trillion mark by the end of the year, according to Ernst & Young. In Malaysia alone, Islamic banking assets reached US$72.5 billion with an average growth rate of 20% annually, according to the Malaysia International Islamic Finance Centre (MIFC). MIFC began in 2006 as an initiative to promote Malaysia as a major hub for international Islamic finance.

In Asia, interest in Islamic finance is greatest in Malaysia and Indonesia, which have some of the largest Muslim populations outside the Middle East. The Islamic finance industry began in order to meet the needs of Muslim investors who face certain restrictions. For instance, Muslim investors are not permitted to invest in companies that produce alcohol, tobacco or pornography. They also cannot invest in conventional banks or insurers, or in companies with a debt-to-capital ratio of over one-third.

Islamic finance is “considered safer because it offers a more equitable distribution of wealth. There’s a balance in terms of profit that we are building, so it’s a win-win for both parties,” says Azahari Kamil, chief executive officer of Asian Finance Bank.

But interest in Islamic finance goes beyond religious beliefs. “The fact that the oil prices are high also has an impact,” says Fares Mourad, head of Islamic Finance at Bank Sarasin & Co. Ltd., a Swiss private bank that recently introduced Islamic banking. The industry has grown at an estimated 12% to 14% over the last 10 to 15 years, and some expect the industry to sustain this double-digit growth, Mourad adds.

Malaysia is currently home to at least 16 Islamic fund and wealth management companies, as well as the largest Islamic funds market in the world, with 152 approved funds as of July 2010. The country is also home to a growing number of Islamic banks, investment banks and insurance companies, known as takaful. Among those active in the market are Asian Finance Bank, CIMB Islamic Bank, Maybank Islamic, Standard Chartered Saadiq, BNP Paribas Investment Partners and Nomura Asset Management.

“Islamic finance is considered safer because it offers a more equitable distribution of wealth.
There’s a balance in terms of profit that we are building, so it’s a win-win for both parties.”

Azahari Kamil, Chief Executive Officer, Asian Finance Bank

Islamic investors are conservative, but the marketplace is becoming more diverse. Islamic retail investors have traditionally gravitated toward bank deposits and money market funds, but currently they are looking more closely at mutual funds. High-net-worth and institutional investors invest in equity funds as well as private equity. Private equity and real estate investments are making up a significant portion of sharia-compliant wealth.

Islamic banks increasingly are looking at project financing and equity financing. Sukuk, or the Islamic equivalent of bonds, also is starting to see growth after some setbacks in recent years. Total issuance of sukuk is now higher than in 2007, according to Moody’s. Companies have much incentive to use Islamic financing options: Not only are there sometimes tax benefits in certain jurisdictions, but recent issuances have been hugely oversubscribed, showing strong demand. Turkey’s first Islamic bond, a three-year US$100 million sukuk from Kuveyt Turk, was reportedly 45% oversubscribed by investors. The Central Bank of Bahrain said in April that its monthly issue of short-term Islamic leasing bonds had been oversubscribed by 400%.

Companies using Islamic financing over conventional bonds can sell “to conventional and Islamic buyers. The population is much bigger,” says Kamil.

Indeed, Islamic finance is not just for Muslims. During the financial crisis, a growing number of non-Muslim investors became interested in sukuk investments “since they hold these for yields,” Mourad says. “Similar to sustainable investing, investors are attracted to the different type of risk filter that sharia compliance offers.”

Charitable Acts

Private banks help clients with charitable giving.

Charitable giving is on the rise in Asia. The region’s growing wealth and fast-growing population of millionaires means more people are in a position to give—sometimes generously.

Figures for charitable donations are hard to come by because a lot of giving is anonymous, but private bankers say that anecdotally they are noticing an influx of interest and money going toward charitable causes.

“There are a lot of baby boomers; some 10,000 people are turning 60 each day. These are people who have achieved significant wealth and are now thinking about their legacies,” says Cynthia D’Anjou-Brown, senior advisor for philanthropy and governance at HSBC Private Bank. “There’s also been a lot more publicity about organized philanthropy; more charities are asking for support. The number of charities in Hong Kong, China and Singapore is going up and up each year,” she explains.

Thinking about charity is “becoming a lot more common. Perhaps because of the recent abolition of death taxes in Hong Kong, some families feel that they would like to give to charity,” says Patrick Hamlin, an attorney at Withers Worldwide in Hong Kong.

While giving occasionally or regularly to charities doesn’t require much planning, those who would like to get more involved in how their donation is used, or in fundraising, are advised to look into structuring their giving, generally in the form of a charitable trust or company by limited guarantee.

“More recently, there has been an increase in the need for structure around charitable initiatives—institutionalizing them rather than leaving them to occasional or ad hoc support,” says BSI Bank Asia’s Hanspeter Brunner.

Indeed, private banks are noticing this trend and acting on it. Private banks have an important role to play in helping high-net-worth individuals decide how to plan their giving. Some banks have a philanthropy team that helps clients structure their giving, find meaningful causes and sometimes even vet the charities themselves.

“A BSI Bank private banker advising a client on charitable giving considers all vehicles and structures that are available and appropriate to that client. Where necessary, we may bring in third-party experts,” says Brunner.

“There are a lot of baby boomers; some 10,000 people are turning 60 each day. These are
people who have achieved significant wealth and are now thinking about their legacies.”

Cynthia D’Anjou-Brown, Senior Advisor for Philanthropy and Governance, HSBC Private Bank

Finding a Good Cause

Not surprisingly, in Asia, education ranks among the most popular charitable causes. Others include social welfare, medical or health-related causes, and religion.

Some young donors with an entrepreneurial background gravitate toward venture philanthropy. Many like the idea of applying business practices or investment principles to their charitable giving.

With improving infrastructure in Asia, the nature of giving has shifted over the last ten years.

“For a long time, [donors focused on giving] scholarships and building schools and hospitals because basic infrastructure was what was most needed. Now that a lot of that infrastructure is in place, more giving has been directed to programs or soft services,” says HSBC’s D’Anjou-Brown.

Doing Your Homework
Once donors decide on a cause or causes, there is the question of how to structure their giving. Many dedicate a lump sum and use the interest for donations, but others prefer to work on a cash basis or leave a legacy in a will.

There are resources available—such as WiseGiving in Hong Kong, National Council of Social Service in Singapore and Give2Asia—that vet charities. Still, the process of making sure certain charities are trustworthy or are spending appropriately can take more time in Asia because of a lack of transparency. Because of this, some banks, such as HSBC Private Bank, assist in this area.

“We have a very detailed application process for charities in order to make recommendations to the donor,” explains D’Anjou-Brown.

The HSBC application form addresses multiple factors donors should consider when looking into a charity: efficiency, effectiveness and governance of the charity, audited financial statements, incorporation papers and annual reports.

Even those that don’t have a staff dedicated to philanthropy are able to help clients connect with charities.

“We don’t have a philanthropy department, but we can advise clients to look into certain charities that we’ve worked with, such as Child’s Dream in Thailand,” says Andrea Benenati, chief executive officer for Julius Baer in North Asia.

There is some regulatory oversight in Asia: Singapore recently enacted charity legislation, and the Hong Kong government is preparing to introduce a similar charity act.

“I’m sure the proposed changes in registration will greatly improve the charity landscape,” says D’Anjou-Brown.

Appreciating Assets

Art, wine and other collectibles are a growing part of investment portfolios.

If recent Christie’s and Sotheby’s auctions are any indication, the wealthy in Asia are spending record amounts on art, wine and other collectibles. And private banks are playing an increasingly important role in helping clients manage such assets in a portfolio.

“There is definitely a trend for Asian investors to move into assets that, in the past, might not have been part of a typical portfolio,” says BSI Bank Asia’s Brunner. “In particular, once core investments are taken care of, investors are prepared to do something a little bit unusual with what they might consider ‘spare cash.’”

And spending they are. Auctions in Hong Kong regularly set new records. In April, sales at a Sotheby’s art auction of 20th-century and contemporary art were well above presale estimates, with one work by a living Chinese artist selling for US$10 million, a new record for contemporary Chinese art. And it’s not just art. In March, a red Tibetan mastiff puppy sold for 10 million yuan to a Chinese buyer.

Chinese buyers are driving a lot of the boom, and auction houses and banks are seeing new, younger buyers.

“In the past, lots of art collectors were from older families and had been collecting for a very long time,” says Kam Shing Kwang, market manager for Hong Kong at JPMorgan Private Bank. “In recent years we’ve seen an emerging group of people who are very interested in collecting pieces. They are typically much younger, have amassed significant wealth from their businesses and are looking to reinvest,” she adds.

The Art of Investing
With prices rising rapidly, art and wine enthusiasts are increasingly viewing their purchases as a hobby as well as an investment. Private bankers say the primary reason for buying such alternative assets is enjoyment of the art or wine itself; but, with clients spending so much money on such acquisitions, it’s even more fulfilling when the assets appreciate in value.

Bankers say there are good reasons to look at art and wine as solid investments.

They can be “a diversification tool in a way. Wine prices are very unrelated to the stock market,” says Julius Baer’s Andrea Benenati.

Private bankers generally advise that investors put no more than 5% to 10% of their portfolio into alternative assets such as art or wine, but there’s no set formula. JPMorgan Private Bank’s Kwang says she has seen some invest more than 50% of their wealth in an art collection.

“You have to think about how much of your portfolio you can invest [in this space] without expecting income. Wine and art are also less liquid than financial investments, so collectors need to be careful with the percentage they allocate to this space,” Kwang adds.

Taking Stock of Your Collection
Years after an investor has bought a cellar full of fine wines or a Picasso, it can be tricky figuring out the value of that investment.

“There is fluctuating knowledge to what the price threshold should be. If a collectible comes up at auction, the mere process can drive up price,” says BSI Bank Asia’s Brunner.

Jennifer Scally, regional manager of AXA Art Asia, part of AXA General Insurance Hong Kong Limited, says valuations for wine are based on “agreed value,” which reflects fair market value upon effecting the coverage. If there is loss, the claim will be adjusted based on market value, but only up to the agreed value, as declared by the policy. Market value can be determined on sites such as Liv-ex.com or wine-searcher.com, which are commonly accepted as reliable sources by wine collectors and insurance companies.

With prices on the rise, wine and art collections are playing into conversations about estate planning as well, introducing an additional layer of complexity, says JPMorgan’s Kwang. Wine, art and collectibles, albeit valuable, are in a different asset class because they are less liquid. “When passing to the next generation, [some individuals] many want collections to go to [offspring] who actually love art or wine. Some might have children who aren’t too interested in art. So what do you do with that?”

These sorts of questions will come up more often as more wealthy Asians start spreading their wealth into other types of assets.

“Clearly, if wealth managers are going to provide meaningful advice on these unusual kinds of assets, they need to increase their knowledge in these asset classes—as well as provide investors with access to qualified valuation experts and other sources of knowledge on these niche assets,” says BSI Bank Asia’s Brunner.