Going into the new year, the bank is overweight developed and emerging market equities.
Along those lines, for Europe exposure, Bacon mentioned the Allianz European Equity Growth fund and for US equities, the Legg Mason Clearbridge Aggressive Growth fund as some of the bank’s live funds that have had good flows.
Turning to a focus on Asian equities, choices include the Aberdeen India fund, the First State India fund, Schroders Asian Growth, Templeton Asian Growth and a suite of Value Partners funds for China equities.
In fixed income, the bank has had traction with the UBS European High Yield Bond fund and the Alliance Bernstein Global High Yield Bond Portfolio.
The bank is also invested in alternative hybrid absolute return funds such as the Old Mutual Global Equity Absolute Return fund.
Technology and ESG themes
One of Citibank’s investment themes for 2015 is disruptive technology.
Some of the funds selected to address that theme are the Henderson Technology fund and the Baron Growth fund. For shale oil exposure, the banks is invested in the Legg Mason Clearbridge Aggressive Growth fund and the Miller Howard American Energy Drill Bit to Burner Tip fund.
New funds the bank is looking at include the RWC Partners US Absolute Alpha fund managed out of London, and two European funds, the Henderson UK Absolute Return fund and the Martin Currie European Absolute Alpha fund.
Another Citibank theme in 2015 is investing with a social angle
Although this theme is gaining interest mainly in the US and Europe, Asian investors are starting to listen to social investing ideas, Bacon said.
He expects the region’s ultra high net worth investors to increasingly support this type of manager over the next five years.
“We’re starting to see more focus on social investing. Historically [Asian investors] have been behind the curve versus the West, but they are getting up to speed and the social angle is an increasingly important area for them.”
The bank has not made any decisions on social investment funds yet, but Bacon mentioned some that “are well-represented in this space”: the Nordea Emerging Market Stars fund, Robeco SAM funds, and related theme funds from Pictet.
Alternative assets
The bank uses hedge funds not only to generate alpha but for downside protection.
Citibank has about 40 hedge funds on its list but only focuses on 10, Bacon said, though he declined to name specific funds.
“We don’t like to see too much turnover in our clients’ holdings of hedge funds. We want them to be a little longer term and patient.
“Hedge funds had a bad year in 2008, but if clients were patient with managers, some came back very quickly.
“The argument that hedge funds are overcharging sounds like a broken record. The reality is that you can’t say hedge funds are too expensive. You must be more granular in looking at the industry. The best performers can justify their fees.
“If you’ve got a manager that’s been compounding 15% over the last 15 years with half the volatility of the equity market, then he should be charging 2-and-20. He’s done a very good job on a risk-adjusted and absolute return basis.”
He said the scepticism toward the asset class, which spread after the Lehman-sparked financial crisis in 2008, is starting to fade.
However, he cautioned that it’s necessary to do the homework on hedge funds and use exacting judgment in selecting them.
“A significant part of the industry has been, frankly, unspectacular.”
Blind pool decline
Other alternative asset classes are in demand, but Bacon noted a shift in investor preferences going into 2015.
“In private equity and to an extent real estate, clients have moved away from blind pool investing and now they ask for individual assets.
“They like that transparency of seeing the asset before they write the check, and that trend will continue. It will become more difficult to sell blind pool funds.”
Read Roger Bacon’s views on investment in 2015 in Part 1 of the interview.
