CIO 2018 Outlook

I attended the Asian Private Banker – High Conviction: Investment Ideas & Themes 2018 – last night in Singapore.

CIOs from six of the larger private Banks in Singapore presented and it was an excellent event to get a quick snapshot of their views and to also meet with a number of asset managers and other investors.

Below are a few of my takeaways:

Investor flows have been skewed towards Fixed Income:

According to a few of the CIOs, around 80% of investment flows they see from clients in Asia were into the Fixed Income space. More concerning was that investors were massively allocated to a certain fund, using leverage to increase exposure.

Investors flocking into one asset class and indeed one fund is a little worrying, both to myself and the CIOs on the panel. The problem arises when everybody wants to get out at the same time and liquidity becomes an issue, potentially pushing prices way below fair value. The leverage will not help.

It’s an issue that I have highlighted many times but, as per my last post, investors feel pretty smart when the going is good and still believe you can get a free lunch.

There is a general lack of diversification amongst PB clients:

This follows from above and is compounded by the fact that investors have been increasingly moving up the risk curve, to High Yield and the like.

The CIOs highlighted the need for investors to diversify and also spoke to the asset allocation models available at their banks. Many, however, found that, while the bank offered these tools, the relationship managers would still push what was ‘hot’ and what the clients were interested in.

It was notable that, while one of the CIOs spoke of the need to diversify assets away from fixed income, he was recommending clients take more exposure to equity. I can’t help but think this is somewhat poor advice.

Why would one advocate that an investor, who is potentially already levered to Fixed Income, to add more risk to their market exposure. In an asset class, which tends to be highly correlated in times of stress. It would be far more appropriate to advocate that investors take exposure to less correlated parts of the market.

Alternatives, however, such as Private Equity, Venture Capital, Gold, CTAs and Hedge funds got a mention, but almost as an aside.

While it was noted by one of the CIOs that clients don’t want exposure to Beta, which is encouraging, this was followed with the view that good alternatives and hedge funds are hard to find. I couldn’t disagree more. If you have the tools and the network, it’s possible to find some excellent managers.

In terms of the underlying market themes, the views were pretty much in line with consensus.

• Economic growth will continue to improve, the Fed will raise a few times, the ECB will not. The economic environment will be benign.
• Equities in the US are expensive, better opportunities can be found in Asia and Europe. A few of the CIO’s highlighted opportunities in China.
• A short duration bond strategy was favoured. One of the CIOs argued that it was appropriate to be defensively positioned in Bonds (IG) and expected a market reset in the next 12 months.

The general message was keep duration short, diversify more and look for uncorrelated exposure. On all of that, I am in full agreement.

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