Private banking treads new path

If we can take one positive factor from the economic crisis, it is of financial institutions starting to take responsibility for the future of their clients. Private banks and asset managers are at last taking note of the importance of asset allocation. The world’s largest wealth manager, UBS, has had to act quickly to respond to the type of outflows, which would wipe out smaller private banks. Firstly, the top tier of management has been replaced. And in order to restore trust and convince private clients that there is still substantial investment expertise in the downtrodden, Zurich-based bank, UBS has restructured its approach to discretionary portfolio management. A NEW WAY OF THINKING Central to the new thinking, is the core-satellite investment model. There is recognition that active, long-only management may not be working for the largest asset classes. Typical private clients are now being instructed to allocate up to 50 per cent of portfolios to exchange traded funds (ETFs). For several years, the largest providers of these passive vehicles have been claiming the European industry is on the verge of an explosion in these computer-generated funds. While the likes of iShares and EasyETF have been diligently chipping away and have won over a strong share of institutional clients, it has been tough to make any real impression on the private banking world. The tables have turned But the ongoing crisis has done much of the marketing work for the banks. With UBS and other large wealth managers beginning to seriously buy into the ETF story, the active/passive table has finally turned. Increasingly, active bets from wealth managers are going to concentrate on thematic funds in areas such as eco-friendly transport, socially responsible investment and natural resources. Private banks including Lombard Odier, Pictet, Vontobel and Sarasin have been following this approach for some time, gradually building up thematic assets. Now the apparently staid Swiss partnerships appear to hold the key to private client destinies. But others will question this new orthodoxy. Credit Suisse has restructured its asset management arm to reflect the new reality, offloading its traditional, long-only business to Aberdeen, one of the fastest growing independent European managers. Yet the view from Aberdeen, clearly targeting private banks as its premier clients, is that the ETF craze is a temporary one and that the need for actively managed funds, even in major asset classes, will once more reappear. Meanwhile, new players, such as HSBC are planning to join the ETF space. And with the troubled Barclays banking empire likely to cash in on its iShares franchise, expect the passive sector to see plenty of activity. Is beta the new alpha? Private banks are beginning to bet that it may be.