Still Money to be Made in SA

Investment Opportunities Still There

An article in The Times discusses the recent drop in value of assets under management experienced by private client operations following the recent fall in markets. Sean Farrell, CEO of RMB Private Bank, says that the falling markets have affected the private banking sector, as clients have seen the value of their property and equity portfolios decline.

According to Farrell, primary residences tend to have the least effect, as people still need a home in which to live. However, the decline in property prices can also result in homeowners having negative equity in their homes, investment properties and business premises.

“Fortunately, we have not seen that in our business so far, as many of our clients who run into trouble on the lending side are able to trade out of their positions by shedding some assets,” said Farrell.

When it comes to equity, Farrell says that clients can literally see their net asset value decline as the market falls. Even so, RMB Private Bank’s net inflows into its wealth management business were over R1 billion in August, which suggests that clients still have cash to invest.

“We have built a very robust process when it comes to asset allocation. Wealth managers are particularly keen to establish clients’ short-term income and liability needs, so that there is no need to engage in fire sales in declining market conditions to meet their obligations,” said Farrell.

He went on to say that, “When there is a short-term liquidity need, we are not going to pump all the assets into equities, but rather keep an appropriate portion in cash. As a result, clients are well positioned to ride out poor market conditions and their losses remain paper losses that are reversed when markets turn”.

The poor market conditions serve to reinforce the need for a proper strategy that has been presented to and agreed with by clients. “We are going through an extreme downturn. Provided their strategy is still relevant, they must sit tight and ride the cycle and not panic. In equities there has been a fair amount of sector rotation and a weighing towards more cash than direct equities. It is in poor market conditions that your process is tested,” argued Farrell.

Mark Logan, head of private clients at Grindrod Bank, said that another consequence of poor markets is that revenues on the investment side of business fell. “However, falling markets also provide opportunities as it is at such times that clients start questioning their private banks’ investment philosophy and performance and there can be some churn as clients shift banks. Bad markets can result in you gaining or losing clients”.

Logan went on to say that volatile markets also force private banks to increase their level of communication with the client to both reassure and keep them in touch with events and market trends. He said that the wealth management operations of private banks must have a credible strategy and an investment philosophy that clients support.

The information in this article is courtesy of Andrew Gillingham (“Still plenty of cash to invest”, The Times, 27 September 2008).

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