After a harsh year, 2024 seems to be marked with less ambivalence, amid expectations of US interest rate cuts and a soft-landing for the economy. Although cash rates of close to 5% are still attractive, more investors have made allocations to bonds and equities, according to Grizelda Lee, head of discretionary portfolio management at Bank of Singapore (BOS).
“There is perhaps a stronger case to lock in investment grade bond yields of around 6%, or even 8-9% for high yield fixed income and perpetuals. However, conservative investors aren’t moving down the credit curve. Instead, they take risk by switching to longer-duration IG bonds in developed markets,” Lee (pictured) told FSA in an exclusive interview.
Asia’s wealth management’s client behaviour is largely transactional, but the discretionary portfolio management (DPM) segment, which includes dedicated funds, is increasing.
Bank of Singapore is the dedicated private banking subsidiary of OCBC. It has an open-architecture product platform backed by strong research capabilities that provides clients with private banking and bespoke wealth planning solutions.
Headquartered in Singapore, it serves high net worth individuals and wealthy families in its key markets of Asia, Greater China, the Indian subcontinent and other international markets. It is also able to leverage OCBC’s capabilities to extend its clients a broad array of services across the OCBC’s regional and international network.
“Nevertheless, for most universal banks such as Bank of Singapore, DPM still only comprises 5-10% of wealth management assets (pure-play wealth managers might have 15-20%), with advisory or transactional business clearly predominant,” said Lee, who spent 15 years at Indosuez Wealth Management.
Rigorous selection process
To attract investors, Bank of Singapore’s DPM division has a highly disciplined process backed by extensive resources.
First it determines a client’s risk profile, then allocates to model portfolios: defensive (75% bonds, 20% equities), balanced (the bank’s flagship, which invests in a mix of bonds, equities and alternatives), and growth (60-70% equities with a growth tilt) model portfolios.
“Each model portfolio has a neutral position and the divergence from those benchmarks is restricted to a range below and above the prescribed weightings,” said Lee.
“Bank of Singapore’s investment committee formulates a house view after receiving inputs from and through discussions with analysts of different sectors and country experts, investment strategy and macroeconomic team, and portfolio managers. The house view is then translated into model portfolios, which comprise either direct purchase of securities or exposure through third-party funds,” she said.
Yazid Mahadi, head of funds selection and his team conduct due diligence, as well as performance and management analysis to select appropriate funds, which currently amount to around 120. Funds are also chosen to achieve specific solutions, such as for income distribution, or portfolios with duration targets.
Extending bond duration
“One of the biggest risks to markets and our strategies is a failure by the Fed to cut interest rates at the speed and extent that investors are expecting,” said Lee. Bank of Singapore forecasts a reduction of 75 basis points from June, but “the danger is that the Fed’s actions might be hampered by perceived optics before and after the November presidential election”.
In this environment, Lee prefers developed market investment grade bonds and US Treasuries in the 8-15 year maturity bucket for potential capital appreciation, combined with attractive yields.
Lee is neutral on high yield bonds in developed and emerging markets, although she has a preference for emerging markets (in US dollars), which have already out-performed this year, yet some still offer double-digit yields in Latin America as well as Asia. Bank of Singapore has particularly strong research coverage of emerging markets.
“However, bonds are not expected to have the volatility of equities,” and Lee expects to generate strong returns from her equity allocations.
Value in equities
She is neutral for US and Europe, but over-weight Japan because of on-going corporate reforms, potential positive earnings surprises amid a supportive weak currency for exporters.
“To some extent, Japan has also become a replacement for China as an Asia allocation,” Lee said. “There are lots of tailwinds in Japan.”
But, Beijing’s ranking of priorities tends to be first, the exchange rate, next, government bonds, and only third are the local equity markets because they are not as widely held by domestic investors as in the developed markets.
On the other hand, “Chinese technology stocks are especially undervalued, and there are also tremendous opportunities in infrastructure-related sectors, such as renewables and EVs,” said Lee.
Bank of Singapore’s DPM’s conventional mandates can usually allocate 10-15% to alternatives, although the mandates generally restrict them to listed stocks, with some allowing allocations to semi-liquids.
“However, we are working on offering a Yale-endowment inspired type strategy, which comprises a mixture of public and private securities, the latter typically making up about 30% of the portfolio,” said Lee.
ESG themed strategy
Finally, Bank of Singapore has an ESG mandate which offers a high-conviction strategy composed of 30-50 ESG leaders, as well as including a minority of laggard stocks in the category.
“The primary focus is on sustainable investing and governance,” said Lee.
The strategy currently contains only two of the Magnificent Seven US technology stocks, namely Microsoft and Nvidia. “It is a highly diverse portfolio, which encapsulates key themes such as healthcare, water security, data protection and adaption to demographic shifts,” Lee concluded.
