The fear of protracted inflation has returned in the US and investors need to allocate to assets that provide protection, according to Connie Sin, CFA, head of funds and alternatives, international wealth management at Nomura International (Hong Kong).
“These include stocks and bonds of high-quality issuers, as well as real assets such property and infrastructure. Gold is an inflation hedge and provides protection if the capital markets sell off,” she told FSA in an exclusive interview.
Sin, who previously held senior roles at Standard Chartered and BNP Paribas, believes Nomura differentiates itself from many other private banks by not focussing on product distribution. Instead, it acts more like an institutional type of manager, taking a broader view of a clients’ needs and providing them with access to lesser-known strategies.
“After-sales service is particularly important, both digitally and through regular face-to-face meetings,” said Sin (pictured).
The fund selection process starts with screening, then moves to discussions with analysts and asset class specialists and ends with a final choice of funds for Nomura’s platform.
Selection is composed of both quantitative and qualitative features. The former includes performance, such as returns, volatility, risk-adjusted ratios and drawdown fund size (which is contingent on the size of the class and hence the number of products available).
Sin uses an internal quant team that accesses both inhouse and external data sources to generate fund rankings.
The qualitative element of the process comprises rigorous discussions with the firm’s specialists about a fund’s track record, and meetings with investment teams to understand how the portfolio managers control risk, especially during difficult market conditions.
“For instance, seasoned managers who have manoeuvred successfully through the global financial crisis and the Covid 19 pandemic clearly demonstrate a robust process and a resilient professionalism,” said Sin.
The open architecture platform typically contains about 200 funds and includes funds in asset classes Sin and her colleagues don’t have a relatively strong conviction in – but they prioritise giving clients an option – while there will be up to 10 funds available for the larger asset classes. Monthly and quarterly fund reviews and the incorporation of Nomura’s CIO views determine which funds stay on the platform.
Asset allocation
Sin recommends a diversified portfolio, a variation of the traditional 40% bonds and 60% equities mix, but with a 20-25% allocation to alternatives.
“Markets are very challenging, so managers need to mitigate volatility, drawdowns and other risks,” said Sin.
“Income is a major theme, both from dividends and bond interest, not least because it provides a buffer against volatile price movements. Encouragingly, Asian companies are raising their dividend payout levels in an environment of better corporate governance, exemplified by Japan,” she said.
Sin acknowledged that “it has been tough to persuade some clients to shift out of cash when time deposit rates have been so high, which has meant that flows into money market funds have been among the most popular choices.”
“However, cash is not king, and investors should lock in high bond yields when they can, especially at the mid-point of the curve,” she warned.
Sin likes the flexibility of unconstrained bond strategies and favours active fund managers across asset classes because they can generate alpha returns.
“Global equity dividend strategies are among our core allocations and recommendations, as well as high quality fixed income with medium duration,” she said.
Clients typically have their own cash-trading books, separate from their managed core holdings, so Sin and her team don’t make individual stock recommendations.
However, among equity markets, Nomura has been backing Japan for the past two years, and the call has been vindicated by performance and the torrent of international investor inflows.
“The firm’s extensive coverage of its home country gives it an edge over competitors,’ said Sin, who is also positive about India – a high conviction view — South Korea and Greater China.
As to mainland China itself, Sin believes valuations are generally attractive and is encouraged that local regulators have introduced supportive measures to boost stock prices.
“But we are wary allocating directly to the market, although we already have indirect exposure to China stocks through our pan-Asia funds,” she said.
Alternative choices
Sin also wears an alternatives hat as part of her responsibilities, and she has strong suggestions across that broad space.
Private markets are less volatile than public markets, and valuations are can often be more attractive in both private equity and private credit.
“However, the rigour of their valuation models is paramount, and therefore we use expert boutiques to gain exposure to private markets,” she said.
Sin also likes private infrastructure funds, and among hedge funds, prefers long/short and macro strategies which generate “market agnostic returns”.
However, one fashionable, alternative asset class is not yet on her buy-list: virtual currencies.
“Bitcoin is still at an early stage in Hong Kong, and we’ve not added it or other virtual currencies to our platform yet. Much will depend on how well the local regulator sets the rules and supervises the sector before we would recommend it,” Sin said.
