The main objective for any investor is not just preserving wealth, but also preserving purchasing power, in the view of Mouhammed Choukeir, chief investment officer at Kleinwort Benson. “You have to grow your wealth at least in line with inflation. The magic number we talk about is 3%.”
For expats, there is the added complexity of where they will spend their wealth, says Choukeir. “For a certain country or currency, it’s reasonably easy to determine. The bigger challenge is if you have an expat that is global. For these individuals getting an inflation-proof basket becomes a little bit subjective.
“As a starting point, if you’re an expat, inflation on average is likely to be 3% year-on-year. 3% is the average we’ve experienced over the past few decades. You need exposure to asset classes that participate with rising inflation.” A good example, he says, is commercial real estate.
Touching base
The key for an expat is their base currency, Choukeir notes. “The first decision to make is how do I look at my wealth? For example, if I’m a dollar investor and I’ve got an allocation largely outside dollars, I’m introducing some currency risk. We want to target risk specifically rather than have it as a function of the asset allocation, so for a US investor we would tend to use US equities and US bonds.
“If we wanted to buy government bonds for a dollar investor, the de facto position would be to buy US bonds, unless we wanted specific exposure to, for example, gilts.”
All Kleinwort Benson’s asset allocation views have a three to five-year time horizon. “We’re focusing on undervalued assets,” says Choukeir. “They don’t translate into returns straight away. Our emerging markets view last year was okay. This year has not been so good. But over the next five years they will outperform developed equity markets.
“It’s the same with Europe. We made an investment [in European equities] two years ago and we feel there’s more scope to do so.”
A wealth of experience
Kleinwort Benson’s major focus is on private banking and wealth management. It offers a range of services to private clients, families, business owners and entrepreneurs, to charities, foundtations and endowments and to corporate clients and institutions, including pension funds.
In May this year the firm expanded its offshore private wealth management business with the appointment of Ron Dicks as head of private wealth management in South Africa. He is working closely with colleagues in Kleinwort Benson’s other offshore locations, the Channel Islands and the Isle of Man, to drive the growth of the international business and support the needs of intermediaries, corporate clients and ultra high-net-worth (HNW) individuals.
Prior to joining Kleinwort Benson in 2011, Choukeir was head of multi-asset class investing for Europe, Middle East and Asia at Morgan Stanley. There he was responsible for managing client portfolios for individuals, endowments, charities and family offices. His early career, before he joined Morgan Stanley in 2002, was spent in the fixed income division of Citigroup’s investment bank in New York, London and Madrid.
For Choukeir, there are two versions of multi-asset investing. “One is to have all assets in the portfolio all the time. In the other version, which is the one we favour, all assets are available for us to use but we will favour different asset classes based on valuation over time. It gives us much more conviction.”
The power of three
Kleinwort Benson’s investment framework has three pillars. “The way we evaluate investment opportunities is to ask three fundamental questions, on valuations, momentum and sentiment,” says Choukeir. “On valuations, the golden rule is to invest in assets when they’re attractively valued and avoid them when they’re expensive.
Look at the current value relative to history, is it in the cheap zone or the expensive zone?”
Currently, for example, he sees bonds at the expensive end of the spectrum while global equities are fair value and emerging market equities, in particular countries such as Russia and China, are cheap.
“Looking at momentum, we recognise the price at any point in time is a function of what the collective human beings who set that price feel about it,” says Choukeir.
“As human beings we are emotional. When you get a positive trend, it feeds on itself. If momentum is negative everyone piles out. We look at data across all asset classes and if the trend is positive we’re more likely to participate, particularly if it’s attractively valued with a positive trend.”
The third question is sentiment. “We try to be contrarian investors. We invest when others are overly pessimistic and avoid things when they are overly optimistic.”
These three pillars are interconnected and are applied at asset class, sector, region and stock level.
“We use different indicators,” says Choukeir. “Often these three things have inverse correlations – that’s the beauty of the framework. We’re able to diversify styles, for example we’ve been buying financial stocks from their troughs in 2008 and 2009. They’re undervalued, unloved but on a positive trend on the back of quantitative easing (QE). Most of the time they won’t tick all three boxes, so we diversify the styles within portfolios.”
Investing in cheap and positively trending assets translates into overweights in emerging market and European equities within Kleinwort Benson’s client portfolios. Within fixed income, it has been less a case of moving out of the asset class and more rebalancing within it, says Choukeir.
“One of the assets that stand to benefit [from rising interest rates] is floating rate notes. As rates go up, bonds go up. We’ve obviously got quite a meaningful exposure to equities, but we’ve maintained our exposure to fixed income, although we’ve moved away from longer-dated bonds.”
Choukeir agrees with the conventional wisdom that it is harder to generate returns from fixed income than in the past. “If you look at the 10-year bond yield it’s between 2.5% and 3%. If you adjust that by the 3% magic number you’re back at zero.”
The human factor
Choukeir notes that although global equities are up 11% in the past six months, global growth seems to have little to do with investment returns.
“Since 1962, the FTSE All Share index (ASX) has moved in the opposite direction to the previous quarter’s GDP 40% of the time. In fact, UK GDP growth and the performance of the ASX have virtually no mathematical correlation in either simultaneous or staggered quarters.”
This, he adds, is not unique to the UK. “Markets are more sensitive to factors such as speculation, expectations, human psychology and surprise events than they are to economic growth. And, over the past few months and years, nothing has impacted markets so much as the speculation around QE; particularly in the US.”
“For us, when we meet as an investment committee, the whole focus is to think about what might surprise markets,” says Choukeir. “We don’t look at tapering. Everyone’s talking about that and everyone knows it will happen, we just don’t know when. We force ourselves to look at what would surprise markets and what the outcome would be. For example if we saw 1970s style stagflation, that is not in the price. That would definitely surprise markets. We call these things ‘Tales of the unexpected’ – looking at a hypothesis and the outcomes.”
Choukeir also stresses some of these surprises can be positive. “Look at the European economy, where the patient finally got up and walked. It’s those glimmers of hope that saw us continue to add to our European equities position. On the negative side, one of the scenarios was that the Fed would do a U-turn on monetary policy, but the cat only got out the bag in May. Now people are questioning. Gold will come under pressure, so we sold off our gold exposure.”
At the end of the day, says Choukeir, Kleinwort Benson never forgets it is dealing with clients’ personal wealth. “All clients would say: ‘I want to grow this for the future’, but because it’s their money they feel the need to monitor it regularly. As an investment management community and an investment house, we’re responsible for working with clients to manage that. The only way to do that is to have an ongoing discussion with our expat clients.”
