Super rich diversifying into riskier but higher-yielding investments, study shows

Bracing for a prolonged record-low interest rate regime, the ultrawealthy are warming up to alternative asset classes outside stocks and bonds and diversifying out of their home markets in search of better yields.

This is based on a joint research by Union Bank of the Philippines and Swiss global private bank Lombard Odier, which offer a private banking platform targeting ultrahigh net worth individuals and families, defined as those with assets of at least $30 million.

Vincent Magnenat, chief executive officer and head of Asia Private Banking at Lombard Odier, said in an online briefing on Thursday that the group’s regional research had shown that 78 percent of ultrarich clients believed that low interest rates would remain for a decade.

“This means the traditional way of investing—the so-called balanced portfolio of 60 percent fixed income and 40 percent in equities—will be challenged in terms of expected returns,” he said.

As such, he said the ultrawealthy had started to take on higher risk assets, diversify their investments and include much more real assets like private equity and private debt. This also means entering into less liquid assets in order to obtain better yields over the long-term period.

Private equity refers to interest in an entity that is not publicly listed or traded. The investment horizon is typically longer than five years.

The low interest rate environment has also highlighted the importance of investing globally “in order to pick the opportunity where interest rates are higher than other regions,” Magnenat said. In Asia, opportunities for interest arbitrage are still seen to abound compared to other territories with negative interest rates.

Citing another research, Magnenat noted that about 80 percent of wealth was still kept by the ultrarich onshore.

Since the Asian crisis of 1997, Magnenat observed that high net worth individuals in the region have become more sophisticated. During the ongoing coronavirus pandemic, most of them have reported satisfaction with their investment holdings and have shown less stress compared to the previous crises.

The need for advice from the ultrawealthy has also increased with the world becoming more complex. In this context, 58 percent of respondents said that, going forward, they would most likely choose discretionary mandates, of which 44 percent said they would seek a mix of discretionary and advisory mandates.

Arlene Agustin, senior vice president and head of private banking at UnionBank, said the joint research also showed that digitalization of banks would matter going forward. However, she said 59 percent of respondents would still want face-to-face meetings with their private bankers once the pandemic is over.

“We are very much aware of the impact of this crisis and how [Philippine economic] growth hasn’t been as fast as we want it to be given that we’re still looking for the rollout of the vaccine,” Agustin said.

“Having said that, our ultrahigh net worth individuals, although they remain cautious, they remain invested and they know that after this crisis, nothing has changed. What has changed is their demand and needs for structural, transactional support and that’s where our technology comes in,” she added.

Since teaming up in 2016 for a local private banking platform, UnionBank and Lombard Odier have doubled assets under management under this platform to about P40 billion as of end-2020. This year, the team is expecting business to grow by 25 percent.

More than 150 ultrahigh rich people domiciled in the Philippines, Hong Kong, Indonesia, Japan, Singapore, Taiwan and Thailand participated in the study. The findings are presented in four broad categories—technology, investment, sustainability and family services—themes that have gained the most importance for the ultrawealthy since the COVID-19 crisis began.