Wealth Management for the Ultra High Networth (UHNW) Clients

Wealth Management for the Ultra High Networth (UHNW) Clients 22 nd Private Banker International Wealth Summit Singapore 24 th October 2012

Wealth Management for the Ultra High Networth (UHNW) Clients Agenda 1 Introduction 2 Focus on Wealth Creation: Incorporating the wealth tied up in the company 3 Barbell Approach to Wealth Management 4 Risk Management Solutions 5 Conclusion 1

1 Introduction Compared to global average, more Asian clients derived their wealth from entrepreneurship The majority of Asian clients wealth was derived from entrepreneurship Demographic differences According to the Capgemini/Merrill Lynch Management Financial Advisor Survey 2011, 57% of all Asian clients wealth is derived from business ownership while only about 23% was from inheritance. In addition, on average 68% of the Asian clients are relatively young of between 31-55 years of age. Clients in Asia Pacific are typically first generation wealth who made their money as entrepreneurs. Asia s key clients are still managing their business, which led to potentially less time to manage their investment portfolio. Therefore, asset allocation in terms of the family s overall wealth is dominated by the core business activities. Core business activities vary from country to country but have a strong focus on traditional industries such as shipping in Singapore and Hong Kong or tobacco and wood processing in Indonesia. Only a small portion of UHNWIs in Asia accumulated their wealth only by acting as asset managers or stock market investors. Source: Capgemini Analysis, 2011; Capgemini/Merrill Lynch Global Wealth Management Financial Advisor Survey, 2011 Note: Percentages may not add up to 100% due to rounding Past performance is not indicative of future returns. No assurance can be given that any investment objectives and/or expected returns can be achieved. 2

2 Focus on Wealth Creation: Incorporating the wealth tied up in the company 2.1 How do you monetize value from client s company? Personal Company Collateral Value based on market value, profits, future cash flow etc Financial Institutions Extend Credit Facility via loans, structures etc Investment Portfolio Portfolio Investments invests in financial instruments not correlated with the Company s core business Clients Source: AG. For illustration purposes only. 3

10/19/2012 2010 DB Blue template 2 Focus on Wealth Creation: Incorporating the wealth tied up in the company 2.2 Wealth protection through strategic diversification strategies Key Objective: Counter the long only shareholding and provide asset, currency and market diversification strategies to preserve and grow wealth in volatile market conditions. Key Portfolio Construction Factors: Significant client s wealth is concentrated in their shareholding company Client wishes to remain the major shareholder of their company Client s personal wealth is strongly concentrated towards the success of the company and that of its Senior Management Team Company might pay zero dividends Moving a large portion of the share holdings would require monetisation strategies that do not impact the market place for the shares themselves (e.g. sizeable holding relative to daily liquidity, disclosure requirements, market perception) How do we Transition from a KEY Shareholding Position to a Key Shareholding Plus Well Diversified Portfolio Position? MONETISATION (synthetic or liability based) Source: AG. For illustration purposes only. 4

2 Focus on Wealth Creation: Incorporating the wealth tied up in the company 2.3 Monetization options Monetization can take a number of paths, but with each path there are a number of draw backs, including but not limited to, disclosure requirements and the method of execution. The methods of execution that can be considered are as follows: Sell a parcel on market A public sell down which may be viewed as a negative by shareholders and market commentators Requires market disclosure May depress the share price if the execution is not managed appropriately May take weeks to complete depending on final size Sale via book-build or placement to existing shareholders Sale would most likely require a discount to the prevailing market spot price Creates an immediate tax liability May be viewed as a negative by shareholders and market commentators, requires disclosure May not allow all existing shareholders to participate Margin Loan Low interest rate currently Easy way to realise liquid funds for diversification without selling any shares Use of funds for further diversification will increase available loan to value ratios Interest on the loan can be capitalised to preserve cash flow May require some disclosure to the company and the market Swap or derivative product Source: AG. Enter into a derivative/swap structure with Bank No change in beneficial interest Bank can provide a loan with recourse limited to the pledged shares Any tax liabilities would be at the maturity of the structure May not require disclosure For illustration purposes only. 5

2 Focus on Wealth Creation: Incorporating the wealth tied up in the company 2.4 Swap or Derivative product Variable Notional Swap (VNS) A flexible option to monetize share holdings Rationale Protect against downside price risk of shareholding at a premium to current market price May be cheaper than a traditional collar strategy (Combination of Put and Call) Enables you to lock in a protection level for some of share holdings, proceeds from loan can be utilised to diversify your portfolio into other markets Advantages Clients continue to hold their shareholding (Beneficial Owner) Reduce current market exposure at a premium to current market price Access to a limited-recourse loan facility with no upfront fees or interest payment required Funds from the loan can be used to diversify overall position by accessing other investment options to complement your overall investment strategy Flexible protection option at maturity without the requirement to sell shareholding at settlement for the Swap Disadvantage Complex structure May not be able to unwind structure before maturity Some form of counter-party risk This option is an indicative analysis only. It is investors responsibility to assess the rationale and advantages in light of their personal circumstances. Source: AG. For illustration purposes only. 6

10/19/2012 2010 DB Blue template 3 Barbell Approach to Wealth Management 3.1 Introducing the Barbell Investment Strategy Wealth Preservation And Income Capital Growth Generally Liquid Cash Fixed Income REITs Dividend paying stocks etc Equities Real Estate Hedge Funds Private Equity etc May Consists of Illiquid Assets Source: AG. For illustration purposes only. 7

10/19/2012 2010 DB Blue template 3 Barbell Approach to Wealth Management 3.2 Benefits of barbell portfolios (an example) It has been possible, by blending cash and U.S. stocks, to equal the returns of U. S. Government bonds, with less portfolio risk than directly holding the bonds Risks of Barbell Bonds vs. U.S. Government Bonds with Equal Rates of Return Barbell Bonds (blend of cash and U.S. stocks) U.S. Govt Bonds Std Dev. Of Barbell Bonds Through 1995 from Length of Period Required Return % Cash % Stocks Standard Deviation Standard Deviation as % of Std Dev. Of U.S. Govt Bonds 1926 70 years 5.2% 78% 22% 7.1% 9.2% 77% 1946 50 years 5.3% 93% 7% 4.1% 10.5% 39% 1966 30 years 7.9% 70% 30% 6.7% 12.3% 55% 1971 25 years 9.6% 50% 50% 9.7% 12.5% 78% 1976 20 years 10.4% 58% 42% 7.5% 13.6% 55% 1981 15 years 13.5% 17% 83% 11.8% 13.8% 86% 1986 10 years 11.9% 32% 68% 10.0% 12.2% 82% 1991 5 years 13.1% 28% 72% 11.6% 14.7% 79% Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation 1996 Yearbook 8

10/19/2012 2010 DB Blue template 3 Barbell Approach to Wealth Management 3.3 Benefits of barbell portfolios (an example) It is also possible the other way round, by blending cash and U.S. stocks, to equal the risks of U. S. Government bonds, yet delivering higher returns Rates of Return on Barbell Bonds vs. U.S. Government Bonds with Equal Risk Barbell Bonds (blend of cash and U.S. stocks) U.S. Govt Bonds Total Return Of Barbell Bonds Through 1995 from Length of Period Maximum Std Deviation % Cash % Stocks Average Annual Total Return Average Annual Total Return as % of Total Return of U.S. Govt Bonds 1926 70 years 9.2% 65% 35% 6.0% 5.2% 116% 1946 50 years 10.5% 46% 54% 8.7% 5.3% 164% 1966 30 years 12.3% 30% 70% 9.5% 7.9% 120% 1971 25 years 12.5% 30% 70% 10.7% 9.6% 111% 1976 20 years 13.6% 1% 99% 14.5% 10.4% 140% 1981 15 years 13.8% -2% 102% 14.9% 13.5% 111% 1986 10 years 12.2% 13% 87% 13.6% 11.9% 114% 1991 5 years 14.7% 7% 93% 15.8% 13.1% 120% Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation 1996 Yearbook 9

4 Risk Management Solutions 4.1 Elements of a Professional Return-Risk-Management Full transparency including the client s status quo in showing future portfolio performance * * * * Return-Risk-Management Asset Controlling (Transparency on Status Quo) Asset Management (Transparency on Future Impact of Investment Decisions) Infrastructure/ Asset Balance Sheet Investment Goals/ Investment Guidelines Investment Decisions/ Timing Insurance known Knowns known Unknowns unknown Unknowns Source: AG. Past performance is not indicative of future returns. No assurance can be given that any investment objectives and/or expected returns can be achieved. 10

4 Risk Management Solutions 4.2 In Times of Market Downturns Diversification May Not Show the Desired Effect Annual performance of selected asset classes in comparison 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% 6% 8% -19% 17% Internetblase Bubble 13% 14% 6% 5% 2% -13% -3% 0% -27% -26% 26% 21% 10% 9% 14% 11% -1% -1% 19% 8% 0% 1% 48% 3% Real Immobilienblase Estate Bubble Debt Crisis 15% 11% 4% -1% -16% 4% -28% -37% 10% 13% 26% 14% 0% 4% 15% 9% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 iboxx OA EUR TR Sov. iboxx OA EUR TR Corp. DAX DJ Commodity Index 13% 5% -12% -10% (at 15.06. respectively) Source: AG, Bloomberg Finance L.P. as at Jun 2012 Past performance is not indicative of future returns. No assurance can be given that any investment objectives and/or expected returns can be achieved. 11

4 Risk Management Solutions 4.3 Looking at Market Risk Market risk as difference between market view and future returns 8.500 8.000 DAX 12.500 11.500 10.500 DAX Potential Market Scenarios 7.500 7.000 Forecast of Banks for 2011 9.500 8.500 7.500 Market View 6.500 6.500 6.000 5.500 Index Performance 5.500 4.500 3.500 Index Performance 5.000 Jan. 10 Apr. 10 Jul. 10 Okt. 10 Feb. 11 Mai. 11 Aug. 11 Dez. 11 2.500 Jan. 10 Apr. 10 Jul. 10 Okt. 10 Feb. 11 Mai. 11 Aug. 11 Dez. 11 Extreme market developments appear far more often than expected and show a considerable influence on the mid- and long-term return on assets Understanding market risks implies the willingness to analyse the consequences in case the market does not develop as expected Especially extreme risks are often not sufficiently anticipated; the spread between market expectation and actual chart development may be enormous Source: AG, Bloomberg Finance L.P. as at Jan 2012 Objective: Comprehension of the full scope of possible market scenarios, even beyond the market opinion Approach: Completion of market forecasts ( market opinion ) by analyzing the consequences of numerous alternative market scenarios, using close-to-reality market models Outcome: An adequate description is achieved, additionally considering extreme risks, asymmetric return-risk-profiles (e.g. using derivatives), as well as trading strategies Past performance is not indicative of future returns. No assurance can be given that any investment objectives and/or expected returns can be achieved. 12

4 Risk Management Solutions 4.4 Our Return-Risk-Profile: Log-Probability Distribution of Future Log-Returns The shape of the probability distribution of returns reveals possible tail risk Example: Estimation of the Distribution of Future Returns of the DAX (Time Horizon: 12 Months) Frequency 10.000 What is the probability of future losses? Which returns are the most frequent? 1.000 How probable are tail events? 100 Fat Tail For comparison: Normal Distribution What is the probability to achieve a certain return? 10 1 Losses Gains Future Log-Returns Source: AG, Bloomberg Finance L.P. as at Jan 2012 Past performance is not indicative of future returns. No assurance can be given that any investment objectives and/or expected returns can be achieved. 13

4 Risk Management Solutions 4.5 S&P 500 Index - Histogram of rolling 250 daily prices (from Dec 1990 to Jun 2012) <Double Click> Source: AG, Bloomberg Finance L.P. as at Jun 2012 Past performance is not indicative of future returns. No assurance can be given that any investment objectives and/or expected returns can be achieved. 10/19/2012 22nd Private Banker International Wealth Summit October 2012 2010 DB Blue template 14

4 Risk Management Solutions 4.6 The Shape of the Return Distribution is a Key Feature The shape of the distribution is a stable feature during different market conditions Deutscher Aktienindex (DAX) Frequency Distribution of normalized daily returns 9000 1000 8000 7000 100 6000 5000 4000 10 3000 2000 1000 1 Daily Return -5,0% -4,0% -3,0% -2,0% -1,0% 0,0% 1,0% 2,0% 3,0% 4,0% 5,0% 0 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Market Scenarios 1. Flat Market 2. Bear Market 3. Bull Market Performance (p.a.) Volatility (p.a.) Seitwärtsmarkt 01/1978-12/1982 Bärenmarkt 03/2000-03/2003 Bullenmarkt 03/2005-07/2007 The expected performance and the volatility differ widely between the different market scenarios The shape of the distribution (scaling of the tails) remains more or less constant As a result, the shape of the distribution provides a stable feature for future-oriented simulations Source: AG, Bloomberg Finance L.P. as at Oct 2010 Past performance is not indicative of future returns. No assurance can be given that any investment objectives and/or expected returns can be achieved. 15 10/19/2012 1:20:24 PM 2010 DB Blue template

4 Risk Management Solutions 4.7 Example of adjusting the hedge in February 2011 Modified Return-Risk-Profile of the Investment Strategy with an Optimized Hedge Frequency 10.000 1.000 100 10 Indicative Distribution of Future Returns* (Time horizon: 12 Months) Incl. Hedge Hedging strategy: Strategy: Long Put Underlying: DAX Strike: 5500 Maturity: 16.12.2011 Weight: 0.86% Excl. Hedge Expected Return 10,84% 11,26% Volatility 18,46% 19,57% 99% Risk Budget -22,06% -33,01% Tail Factor 0,44 6,44 Future Log-Returns 1-73% -62% -48% -29% -2% 35% 86% 156% 253% * Based on the capital market assumptions: Expected Returns: Liquidity: 0.93%; Government Bonds: 1.63%; Corporate Bonds: 1.74%; Equity Europe: 12.99%; Equity US: 13,56%, Equity Japan: 6,65% Equity Emerging Markets: 14.70%; Commodities: 10.68%; EUR/USD: 0%; Volatility and correlations according to historical data of the past 5 years Source: AG, Bloomberg Finance L.P. as at 28 Feb 2011 Past performance is not indicative of future returns. No assurance can be given that any investment objectives and/or expected returns can be achieved. 16

4 Risk Management Solutions 4.8 Identification of Cost-efficient Hedgings Optimization of hedging strategies with the underlying indices DAX/EuroStoxx50 Expected Annual Return Efficient Frontier of Hedging Solutions 11,2% 11,0% Expected cost Portfolio without hedging 10,8% Portfolio with hedging 10,6% 10,4% 10,2% 10,0% 9,8% Impact 9,6% 9,4% 0,00 1,00 2,00 3,00 4,00 5,00 6,00 7,00 Tail Factor (p.a.) Elaborate optimization procedure estimate the impact of a very high number of hedging strategies on the probability distribution of future returns Variables: underlying, strike, maturity and weight The Efficient Frontier consists of the cost-efficient hedging strategies as a function of the risk budget Result: transparency regarding the expected cost of hedging (reduction of the expected return) and the impact on the risk budget Optimized Hedging Strategy for a Tail Factor of 1: Strategy: Long Put Underlying: DAX Strike: 5500 Maturity: 16.12.2011 Weight: 0,86% Source: AG, Bloomberg Finance L.P. as at 28 Feb 2011 Past performance is not indicative of future returns. No assurance can be given that any investment objectives and/or expected returns can be achieved. 17

5 Conclusion Asian wealth is oftentimes first generation wealth As a consequence, a huge part of the wealth may be tied up in the company. However, there are solutions to monetize it in order to achieve a higher diversification A "simple" barbell strategy might already help not only to achieve a better diversification but also better returns However, given the changed market environment, risk-return-engineering looks to be a promising approach Focus on market downturns and unreliable risk diversification instead of standard figures Focus on the behaviour of real capital markets instead of mathematical models Focus on cost-efficient customized solutions (mandate) instead of product approach Focus on simple, robust solutions instead of complex, in-transparent structures Source: AG,. Past performance is not indicative of future returns. No assurance can be given that any investment objectives and/or expected returns can be achieved. 18

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