Malaysian Wealth Management – Curating Winning Client Portfolios amidst Uncertain and Difficult Conditions

What are the investment opportunities and challenges for the year ahead? Should private clients be investing at home or in international assets for the best opportunities ahead? Is it time to be cautious or take on more risk exposure? Should HNWIs and UHNWIs be buying into the public or private markets and what is an ideal allocation? What is the outlook for fixed income? What constitutes good advice today? These and other questions were addressed by a panel of experts at the Hubbis Malaysia Wealth Management Forum in Kuala Lumpur on April 12. This is a brief summary of some of the key insights.

Chair:

Rossen Djounov
Managing Director, Head of Asia
GAM Investments

Panel Members:

Ng Shin Seong
Head, Investment Strategy & Advisory, Wealth Management
Standard Chartered Bank

Shan Saeed
Chief Economist
IQI Global

Wendy Chen
Senior Investment Analyst
GAM Investments

Teh Chi-cheun
Former CEO & Managing Director
BOS Wealth Management Malaysia

Lee Lian Foo
Managing Director, Fund Management
Alta

Alternatives offer interesting diversification for well-articulated portfolios

An expert opened proceedings by remarking that investment in the alternative space provides an interesting and valuable form of portfolio diversification to investors, at the same time as potentially offering higher returns to investors compared to traditional investments. There are also some fascinating innovations taking place in the fundraising space, he reported, in the form of crowdfunding platforms, and tokenisation, offering new avenues for those wanting to raise new funds, and those seeking new opportunities.

He added that the emerging markets arena (especially India, China, Brazil and other major EM economies) is also producing some interesting private market opportunities. However, having said that.

Challenges include complying with regulatory restrictions as private markets are subject to different regulations when compared to the public markets and any changes or any increased scrutiny from the regulatory body could potentially affect the ability of the private market to operate effectively. The second key challenge is intensifying competition in the private space, making it increasingly challenging for fund managers to find interesting investment opportunities. Finally, there are also privacy and cybersecurity risks, making it vital for fund managers to have the appropriate cybersecurity measures in place to minimise the risk and also protect their investments as well as investor information.

Another guest agreed with these views but added that Malaysian clients are not so familiar with private and alternative assets and need more education and support to understand them and the various nuances around valuations, liquidity, the exits, timeframes and so forth.

Within private assets, private credit and secondary markets offer sound opportunities

An expert highlighted the opportunities in private credit, noting that it tends to have a superior yield to public market debt, partly as a trade-off for the relative lack of liquidity, and also from a risk-return profile, private credit is higher in terms of risk when compared to senior debt, but lower when compared to equity or equity-linked product. “In an environment where the interest rate is rising and inflation is surging, private credit may well serve its purpose by offering a product that offers superior yield, low volatility, as well as diversification to an investor's portfolio,” he stated.

There are also solid opportunities in the secondary market, which has been gaining in popularity of late, driven by several factors. The first driver is the number of primary funds out there, fuelling supply into the secondary market. Secondly, companies are choosing to maintain private status for longer, plus more LPs and other shareholders looking for liquidity or exit avenues, fuelling supply in the secondary market.

He said that an estimated USD1.1 trillion of NAV today remains unrealised from the private equity fund vintages of 2016 and older. “As more supply comes into the secondary market, this creates a more favourable and attractive environment for investors who are looking to enter the secondary space or the alternative asset space at attractive valuations,” he told guests.

China is reopening and investors should be watching the opportunities there very studiously

After a few years in the wilderness, China is back on many investors’ radars as it reopens and as government policy is much clearer today in terms of which sectors and industries will benefit from the state-directed expansion.

A guest observed that right now the US is entering a different phase from China, with the intensifying mobilisation of the SMEs and mid-market corporations, while the Chinese government is turning to an investment-led, government-level economy, trying to be more consumption-driven in the domestic economy. “The two countries are on different structural paths, but well balanced between the long-term and short-term benefits,” she observed.

Diversification is key at all levels, not only across the entire portfolio but in each asset class

Another guest highlighted the need for balance allocations across the entire portfolio and also within each of the asset classes. He added that in Malaysia as the local currency had weakened over the years, currency allocation and diversification are also important. He said that in his view in an era of rising inflation, equities hold the best opportunities for maintaining value.

He added that the platform with higher rates back again after many years is more towards the traditional 60-40 allocation model, but also with a reasonable allocation to private and alternative assets. But he reminded delegates that the risk exposures and timelines for holding investments must fit the risk profile and goals of the clients themselves, hence there is no fixed allocation model, as each portfolio should be tailored appropriately.

Another guest explained that their allocation models are more traditional and strategic today, with a seven-year horizon and then they overlay tactical and more agile asset allocation, for example currently towards investment grade bonds. The less traditional allocations head towards alternative income-producing assets like utilities, and toll roads, as these offer solidity and also hedges against inflation. “While we do actually expect recession, whether shallow or perhaps deeper, there is a strong inclination towards income-producing assets that will at least help bridge this very difficult period and also offer good returns in less difficult times.”

He added that in today’s market, they are looking at how to structure their conversations with clients with regard to asset allocation, not only from an assets perspective but also from a timeframe perspective. “We need to understand what money they need today, tomorrow, or in the future, and structure accordingly,” he reported.

Looking ahead, there are significant risks around deflation or stagflation

A guest agreed with the generally cautious outlook expressed by the panel, adding that as much as 60% of the global economy is already in stagflation, and another significant percentage is in recession, while some countries are already facing an actual or pending sovereign debt problem. He predicted that disinflation would follow, which he said is similar to deflation, and will emerge in the coming two or three years and prove very problematic for the central banks to shift.