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Inflation the top concern among APAC HNWIs

Lombard Odier study also finds that Asia Pacific HNWIs are lukewarm on cryptocurrencies.
The main difference between the two funds is in how close they stay to their benchmarks, which for the Axa fund is the euro-hedged Bloomberg Barclays World Inflation-Linked Bond Index and for the Pimco fund is the US dollar-hedged Bloomberg Barclays World Government Inflation-Linked Bond Index. “The Axa fund is managed in a benchmark-aware fashion,” Dobrescu said. “That’s in line with the way they manage their whole fixed income range.” The fund managers have a conservative limit of 1.5 percentage points on allowable tracking error, a 25% allowable deviation in the average duration of the portfolio with respect to the benchmark, and a 10% limit on deviation in country exposure. “That’s something that limits the activeness of their approach,” Dobrescu noted. Even though the fund prospectus allows the fund to invest up to one-third of its assets in nominal bonds, in practice the fund’s managers do not use this ability frequently or to a large extent. “The managers want to keep [the fund] a plain-vanilla, core offering that’s predictable and is going to do more or less what the benchmark does,” she said. The Pimco fund is much more adventurous. The fund’s prospectus also allows up to one-third of the assets outside the benchmark and the management team tends to use this leeway to the full extent. They also go beyond nominal government bonds, adding to their portfolio corporate issues, asset-backed securities, emerging market debt and derivatives. While the Axa fund “may occasionally use some bond futures to tweak the duration, for the Pimco fund [derivatives] are a major drive of the strategy,” Dobrescu said. Pimco uses derivatives in what it calls a “bond-plus technique”, to obtain desired exposures through derivatives, while the cash collateral that’s freed up this way is invested in short-term bonds for extra yield. Dobrescu noted that this approach was used across all Pimco funds. Both funds invest a high portion of their assets in US Treasury Inflation-Protected Securities (TIPS). The US exposure accounts for 51.4% of the Axa fund and 58% of the Pimco fund. The Axa fund has 25.5% of assets in UK bonds and Pimco 31.1%. Securitised bonds, which include mortgage-backed and asset-backed securities, account for 8.3% of the Pimco fund, while Axa does not use them. Axa’s portfolio has a higher proportion of AA-rated bonds, 67%, compared to Pimco’s 34%. Pimco has 51% of assets in AAA-rated bonds, some of which are asset-backed securities. Pimco's use of derivatives results in a high number of holdings in the portfolio, around 430, and a high turnover ratio. The Axa fund held 111 positions in June 2017. The Pimco fund also has the ability to make currency bets through its small currency overlay, Dobrescu noted, and has been using it recently to bet on the US dollar and against Asian currencies. The Axa fund does not take active currency bets.

Rising inflation and the impact on the economy is the biggest concern to Asia Pacific high-net-worth individuals (HNWIs), although surprisingly higher interest rates was cited as a much smaller concern, according to a study from Lombard Odier.

The Swiss pure-play private bank surveyed 450 HNWIs in Australia, Hong Kong, Indonesia, Japan, the Philippines, Singapore, Taiwan and Thailand and found that 77% of respondents saw rising inflation as the biggest risk.

In contrast, higher interest rates were much less of a concern with Australia (68%) and Indonesia (70%) being the only two markets surveyed where HNWIs cited it as the top risk facing the global economy over the next 12 months.

In fact, geopolitical risk beat it out as the second biggest concern among Asia Pacific HNWIs at 65%.

Unsurprisingly, market volatility was the main concern when it comes to investment portfolios with 50% of Asia Pacific HNWIs worried about its negative impact on performance.

HNWIs from Thailand (72%), the Philippines (62%), Taiwan (55%) and Singapore (54%) are the most worried about market volatility having a negative performance on their portfolio performance.

The other issues flagged received comparatively low scores, for example only 21% are worried about a lack of liquidity. The second highest concern was missing out on opportunities at 32%.

As a result of market volatility, HNWIs have started to diversify their portfolios with 44% of respondents diverting their investments from traditional assets such as equities and bonds towards safer assets, 37% to alternatives and 27% to investing in their own companies.

Crypto not in vogue

One surprising outcome of the survey given the increasing regulatory drive to democratise the trading of cryptocurrencies was the extent to which Asia Pacific HNWIs were disengaged with the asset class.

Overall, 83% of respondents have no crypto investments or it accounts for less than 5% of their portfolio. This trend held up even in crypto-friendly jurisdictions like Japan, which recently became the first developed economy to legalise stablecoins, where 83% also had less than 5% of their portfolio invested in the asset class.

Even more surprisingly, the survey found no significant willingness among HNWIs to increase the weight of digital assets in their portfolios with only 20% intending to do so. At the same time, a third of Japanese HNWIs even intend to decrease their holdings in cryptocurrencies.

In contrast, there is a high degree of interest in sustainable investing with 78% of respondents saying they are interested in such investments. The numbers go as high as 93% in Thailand and 88% in Taiwan. Australia has the lowest score with a third not interested in sustainable investing.

Interestingly, two of the top three reasons for Asia Pacific HNWIs making sustainable investments are not related to philanthropy or morality but because of superior returns. This is especially true in Taiwan, where 65% of respondents think it will lead to superior returns. In fact, Singapore is the only market where HNWIs’ main motivation is still values driven with only 18% citing returns as the main factor.

Lombard Odier noted that this shift in mindset overall across the region from a values-driven choice to a prudent management of a portfolio was an important watershed.

Part of the Mark Allen Group.