Mr. Chen Wenji, Executive Director and Head of Product and Investment Solutions Department of CITIC Wealth Management (Hong Kong), talked about the topic of "buy-side advisory" and what is "Creating True Asset Allocation from the Buyer's Perspective".
The true face of asset allocation
First, let's revisit the concept of "truth". While we may not be sure what true asset allocation is, we can get a clear picture of what is not true asset allocation. In conversations with customers, we often find that their so-called asset allocation is actually concentrated on a certain number of ** votes, and the risk is still relatively concentrated. In our wealth management philosophy, the real goal is to manage wealth for the long term and achieve long-term, stable returns, not just high returns and extreme growth in the short term.
Second, it's about "reasonable long-term returns". The purpose of investment is to share in the fruits of economic growth, believing in the long-term growth of capital, labor and technology. So in order to preserve value and prevent the erosion of purchasing power, we must invest. Wealth managers are primarily concerned with reasonable long-term returns and levels of global economic growth and inflation, so we pursue returns between 6-10% with a modest risk premium. This is considered a reasonable level of long-term returns.
Some clients want higher returns, but it is essential to realize that high returns often come with high risks. Therefore, we aim to pursue the highest possible return while preserving our capital, while at the same time understanding that all investments come with a certain amount of risk and must be clear about the level of risk they can tolerate. In fact, in June 2018, Mr. Kwok Shuqing warned that if the rate of return exceeds 6%, you may need to be vigilant; 8% may be at greater risk; and 10% can result in a loss of principal. That's the message we want to convey to our clients that they must be prepared to take the risk when pursuing higher than a certain level of long-term return.
In general, there are four types of risks that customers are willing to take, depending on personal preference. Some customers believe that the market risk is higher and are reluctant to get involved**, but prefer to buy trust and wealth management products to bear financial risks, and the market value fluctuates less. Other customers may feel that the risk is too great, and they are more inclined to buy non-liquid and non-standard products, taking liquidity risks. The risk that each client takes depends on their personal preferences, and we provide advice based on those preferences, but we seek a balance of risk regardless of which option we choose. True asset allocation means true risk diversification. We can deal with the high valuation of certain targets through the diversification of large asset classes, the diversification of hedging strategies, the selection of managers, or the purchase of structured products to ensure true diversification of risks.
As a buyer, our main task is to provide sufficient products, enrich the product platform, and conduct sufficient due diligence and tracking to ensure that the products purchased by customers are in line with their needs.
Mr. Chen Wenji at the speech site.
Seek dividends from economic growth
In terms of asset allocation, first observe the performance of large asset classes. Red represents bond-like assets, blue is **-class assets, green is **, and black is **. The performance of major asset classes varies greatly from year to year, and may fluctuate around %. This year, the U.S. may have performed better, while the U.S. has performed poorly, with a 34% increase in the previous year, and the market has underperformed, with U.S. Treasury bonds also up about 13%. This is mainly due to the fact that although the credit risk of US Treasury bonds is low, the market risk is large, and the interest rate hike last year was more drastic, resulting in a large **.
If you look at it from a broad class of assets, the average annual return is about 63%, which is an analysis of returns over the past 20 years. If you can intelligently choose the best performing assets each year, the annualized return could be as high as 42%, although this is unrealistic. Similarly, if the worst-performing asset is selected each year, the annualized return may be -1%, which is equally difficult to achieve. Therefore, do a good job in real asset allocation, and the reasonable return is between 6-42%, biased towards 6%. Academic research shows that if you are really good at investing, the choice of broad asset classes and asset allocation accounts for about 90% of the explanation for long-term return changes. That's what we've been emphasizing.
As a buyer, we often face three questions. First of all, customers have high expectations for revenue, and we need to manage customer expectations. Second, our clients' local appetite is heavier, but we still emphasize diversification, at least not too much concentration in the underlying portfolio. Thirdly, clients may be familiar with some global strategies, but are unable to invest a large amount of money due to quota limitations. We offer strategies that have good long-term performance, but are not well-known, and our responsibility is to find good managers.
Risk balancing and management
Finally, I would like to highlight investor education. We have to help our clients avoid some of the risks and communicate our philosophy clearly to them. Through the efforts of colleagues and the support of leaders, the client's understanding of asset allocation has gradually increased. We hope that through the practice of investor education, we can answer the doubts of our customers.
The familiar Merrill Lynch investment clock is used to guide when to buy and sell**, bonds and cash. By judging inflation and recession, we can determine the current market period. However, due to the increasingly ephemeral market cycles and the existence of special circumstances, traditional methods have become difficult to apply. Therefore, instead of using Merrill Lynch's investment clock, we judge the market position and the cycle of financial assets by looking at the correlation and risk premium of large asset classes. For example, if the beta of the market performs well, we may increase our allocation to broad asset classes or choose to buy more hedges** for better direction. In mid-2021 to the end of 2021, we judged that the market was in a period of contraction, so we increased our hedging** allocation, successfully avoiding the difficulties of 2022.
At the moment, despite the larger gains, we still see a contractionary period, so we will continue to watch. So, do we not buy any major asset classes at all during the contraction? No, we take into account the risk premium and what the market is worthwhile, although the proportions may vary.
Finally, why do we do so much analysis? The main reason is that most customers tend to be affected by market sentiment cycles. They are reluctant to buy more when it goes up, buy more after it has risen for a while, and add more when it peaks and falls. So we are actually resisting the market sentiment cycle, the calmer the investment**, the calmer the portfolio manager, the better to resist the fluctuations of market sentiment and achieve real asset allocation.
Amazon founder Bezos once asked Buffett a question why others don't refer to Buffett's simple investment strategy, and Buffett replied that no one wants to get rich slowly, they all want to get rich quickly. Although everyone can understand Warren Buffett's investment philosophy, people are actually more inclined to get rich quick. We adopt the slogan "getting rich slowly and wisely" to emphasize asset allocation. However, asset allocation is not suitable for everyone, especially young entrepreneurs, who are encouraged to work hard to start their own businesses and contribute to the economic growth of the country and the world. Together, we can make our country and the world a better place.
This article is based on Mr. Chan's speech at the 8th Asia Pacific Wealth Forum).
About the author
Mr. Chan Man Kee is the Head of Products and Investment Solutions at CITIC Wealth Management (Hong Kong), where he is responsible for product and investment solution management, including developing and enhancing the wealth management platform, introducing new investment products, conducting due diligence, designing best-in-class investment solutions for clients, and providing product expertise to sales staff across various business units.
Prior to that, Mr. Chan was Head of Product Management at EFG AG*** where he was responsible for operational logistics and briefing in the Asia Pacific region, managing a wide range of products to ensure they met the requirements of relevant regulatory authorities. He also conducts product research and serves as a gatekeeper for third-party product and service launch processes, as well as providing multi-asset investment ideas to marketers to develop effective marketing campaigns.
Mr. Chan worked at Dongji** Management for six years as a senior investment manager, responsible for the management of ** and discretionary investment portfolios, as well as overseeing the operation of the investment department. Mr. Chan started his career in finance at Bank of China (Hong Kong)** as an investment analyst in the investment advisory team.
Mr. Chan holds a Bachelor of Business Administration (Honours) degree from the University of Hong Kong Chinese and is a certified Financial Risk Manager (FRM).
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