NBAD Insights Podcast 04 – April 2017

MENA Stocks: Signs of an improving economy - Back to Basics on ‘Asset Allocation’

In this episode, Mohammed Ali Yasin, the Chief Executive Officer of NBAD Securities (NBADS) gives his forecast on the region’s stock markets, and comments on expected IPOs – including Saudi Arabia’s Aramco and valuation challenges – and current trends, as well as the big names to watch in the near future, including Aramex, Arabtec, Drake and Skull, among others. According him, investors’ sentiment is improving and will continue to do so later this year.
Banks have weighed on the region’s indexes and Mohammed Ali Yasin considers the positive Q1 results of several large banks in the region as a sign of an improving economy, as liquidity increases. The FED’s rising interest rates will also have a positive impact on the local banking sector. Good prospects for both the banking sector and real estate are expected for 2017.

In the ‘Back to Basics’ segment, Gerardo Amo, NBAD’s Head of Discretionary Portfolio Management at NBAD Private Bank (Suisse) explains why it is important to keep a balanced portfolio with the help of ‘Asset Allocation’ – kindly find the transcript of the interview below.

This episode was recorded on 18 April 2017, and produced and hosted by Nathalie Gillet, Editor at NBAD.



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Back to Basics – Asset Allocation
(Interview with Gerardo Amo)

Asset Allocation is a technical term that refers to the act of composing your portfolio with a variety of assets instead of just one type. Gerardo Amo, the head of the discretionary management explains what it means from NBAD’s private banking office in Geneva, Switzerland.

Nathalie Gillet: What exactly is Asset Allocation? How would you explain it to somebody who comes to you with a lot of money and has not clue?
Gerardo Amo: Asset allocation is just a way to mix different asset classes together to find the correct weightings that can produce for the clients a nice performance. What we are doing is building portfolios for clients who want to delegate portfolio management to the bank. We make the decisions with a group of people who are experts in the different asset classes. We take for example equities, bond, hedge funds commodities and we try to do a nice mix, depending on the risk appetite of the client. We decide which asset class we like for the moment, the ones we want to reduce because we don’t feel comfortable with them now, etc. It’s this mix that is very important.

Why is it that important?
It is very important because studies have shown that Asset allocation remains the leading driver - by far! - of historical performance. Asset allocation could explain about 80% or more of the variability in portfolio returns. So it’s something crucial. So Asset allocation can give a lot of value when it comes to managing a portfolio.

Is that something that any investor can actually do on his own or do we really need a financial expert for this?
For sure everybody can do it on his own provided you know and have experience on all the different asset classes, which is very difficult. You need to follow up what is going on in the market. But things are changing very quickly. Following the markets on your own on a daily basis is very tough.

So what Asset allocation is all about is finding the right balance of assets in your portfolio

What are the main asset class one can choose from to carry out Asset allocation?
Let’s focus on the classic assets, which are equities, bonds, hedge funds and commodities. What is important when we do this mix is to define the risk characteristic that the client wants. In terms of risk and return, we know that bonds are the safest part of the investment. Due to the markets and the characteristics of equities, this instrument is more risky. Then we have hedge funds that usually come to mitigate a little bit the risk of equities, the way the hedge fund managers are doing it, to try to have some kind of risk/return component that is a mix between equities and bonds. Then commodities, which means pure exposure to all these different commodities. The principal ones are gold, oil and all the agricultural ones.

Can cash also be considered an asset class?
Yes, cash can be included because cash management is very important. When you want to reduce the risk - sometimes because you feel that the market is not very good - it’s important to have a cash portion in the portfolio, just to protect the portfolio in general.

Cash, meaning current accounts, savings account, correct?
Yes, savings account, current accounts or fiduciary deposits, perhaps, just to have some return on the cash also in the short term. But in general all types of assets can be considered. That’s the beauty of Asset allocation. The risk of one asset class can be mitigated by the risk of another one. So it’s this mix that is very important.

What about real estate?
Real estate it’s more difficult to include in a Discretionary portfolio management – meaning when the bank does all the job on behalf of the client - , because it is less liquid. And the important thing for DPM mandate is the liquidity. So we do not include them directly. But if a client wants exposure, he can do it outside the mandate of course.

You mentioned risk. What are different risk models that asset managers usually propose?
We have 3 principal models. The first one, is the conservative profile. This one is more suitable for the client who seeks to protect his capital. It tends to be composed of 80% of FI assets, which are very defensive and 20% in growth assets like equities or commodities.

I guess this model focuses more on bonds, with the lowest risk component, rather than equities.
Exactly. Then we have the balanced profile, the one in the middle, for clients who agree to take some risks and volatility but at the same time they want to have a kind of protection in their portfolio. That’s why their portfolio is made of 50% of defensive assets and 50% in growth assets

And then the last one is the more risky profile, right?
Yes indeed the growth one. It’s for clients who have a long-term view. They don’t care if they lose some money in the short term because they know that in the long term they will benefit from the positive trend of the markets. These portfolios are made of around 30% in defensive assets because we need a core position that is safe in the portfolio but we have also 70% in growth asset.

So does it mean that somebody who goes for the growth model – meaning the risky model - will always get good returns in the long run in spite of the risk?
Yes, it’s always the case. If you look at history in the long term, we can add returns in these more risky models. A client has the freedom to move from one investment risk profile to the other. If you are a long-term investor, the growth one is the more suitable for you. But when you come closer to the end of your investment - clients close to retiring for instance - we propose something more conservative because we know that they will need perhaps to access what they have saved all these years. So it is important that they keep it very safe and don’t expose it to very risky assets.

But is the conservative model also always profitable?
Yes. The same applies for the three models. You know some clients are very reluctant to lose money so they clearly prefer to have something, which they know they will get less returns but at least they will preserve the wealth that they have. So long term investors can benefit from the market in a growth profile but at the same time if they don’t feel comfortable losing money in the short term they should maintain a conservative profile.

What is ‘short-term’ and ‘long term’ in an investor’s universe?
I think it depends on the economic cycle. Short term is for clients who need to have access to their money in 2 or 3 years - so they need to be very conservative. Long term it’s around 10 years. An investor who agreed to invest for the next 10 years can feel comfortable losing something in the meantime knowing that at the end the value of his portfolio will be higher than when he started investing.

Do all banks use these 3 models, is that very general?
Yes it’s pretty general. The only thing that we have on top of what others have is MENA exposure due to the bank we work for.

What do people go for in this region? Are they very conservative? Do they have a high-risk appetite?
The trend now is more to try to diversify what they have because clients, and in particular in this region, have a natural tendency of being more attracted to investments in their domestic markets and the companies they are used to do business with. It’s something that is called in finance the ‘home country bias’. And Middle East clients used to have this home-country bias. But now, over the last years, with the markets going through stronger correction than European and American ones, they tend to want to diversify a little outside the region. Some clients now are asking us to manage for them some international exposure through a discretionary mandate.

What about the type of asset classes that investors prefer in the Middle East are there any specific trends?
In the region they love real estate a lot, but as I mentioned before this is something less liquid and very difficult to implement in Asset allocation. But when it comes to more liquid assets, I think they are comfortable with everything - bonds, equities, etc.

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This podcast was recorded on 15 January 2017. All the price references and market forecast correspond to the date of recording. This podcast should not be copied, distributed, published or reproduced in whole or in part. The information contained in this podcast is not to be considered as an offer or recommendation to buy or sell any financial instrument or banking services. The views expressed in this podcast have been presented without regard to the individual financial circumstances and objectives of persons who receive it. Neither the National Bank of Abu Dhabi PJSC (“NBAD”) nor any of its subsidiaries or affiliates (including NBAD Securities (“NBADS”)) nor any of their representatives makes any representation or warranty, as to the accuracy or completeness of the information contained in this podcast.
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