Deutsche Bank Private Bank aims to double the penetration of discretionary portfolio management in client assets within emerging markets. This will take a wholesale change in mentality, emerging markets CIO Jacky Tang told Global Private Banker.
One of the major industrywide ambitions in private banking is to grow their assets within discretionary portfolio management (DPM) – a solution involving the delegation of day-to-day investing to a team of professionals – to deliver robust risk-adjusted returns to clients while generating stable fee-based income. However, this can be challenging in emerging markets, where clients often tend to be self-directed, hands-on investors.
“Currently, discretionary portfolio management (DPM) penetration is 10% for client assets in emerging markets, which includes Asia Pacific, Latin America, and the Middle East. We are aiming to double this to 20%, hopefully within the next five years,” said Jacky Tang, Deutsche Bank Private Bank’s head of DPM and chief investment officer for emerging markets, in an interview with Global Private Banker.
“In the more mature markets like Europe, penetration is much higher because many clients have seen multiple cycles and they’ve concluded that it is unrealistic for them to chase returns in the long term.”
Covid: A lesson in behavioural finance
While some view DPM as just an exchange of investment responsibilities from one pair of hands to another, Tang believes this is an overly reductive view, specifically because clients are handling their own money, which naturally makes them emotionally attached.
He explained the behavioral nature of this based on the market environment in early 2020 during Covid when the S&P 500 saw its fastest 30% decline in history, at just 22 days. According to Tang, he most commonly faced three types of clients. The first type panicked and sold at the low, hoping for a lower entry point that never came, resulting in a 30% loss. The second type looked away in distress, waiting for a rebound and made 10-15%. The third type maintained discipline and their asset allocation strategies, rebalancing portfolios during the crash and reaped gains of 30%.
“In DPM, we are likely to be the third type because we are investing unemotionally,” Tang noted. “DPM is not only about outsourcing portfolio management. DPM is about outsourcing emotions.”
“Change in mentality” for bankers
In addition to convincing clients, bankers also need convincing as many have been accustomed taking on an investment advisory role for decades. To convert such seasoned veterans, many whom have found success during less uncertain cycles of bull markets, there is no shortcut, Tang stressed.
“You can try to adopt some incentive schemes to drive inflows but in my view, this will only result in a short-term boost,” Tang said. “The longer term structural driver of change is a change in mentality. This will require continuous education and the joint effort of not only the bank, but the whole industry, media, and more.”
Exploring shelf expansion
Currently, Deutsche Bank Private Bank has a comprehensive DPM offering that includes fixed income, equity, and multi-asset mandates. It also has a unique strategy based on the bank’s proprietary Risk Return Engineering (RRE) framework, which allows investors to substantially increase equity exposure while maintaining a comparable risk of loss in extreme market downturns, delivering efficient systematic hedging.
The German private bank is now considering the prospects of solutions outside of traditional asset classes.
“Although our existing mandates have an alternatives allocation, we currently do not have a pure alternatives mandate. This is something we are exploring,” Tang added.
