Bitterly Michell: Generally speaking, most investors are always interested in non-correlated exposure, and they’re willing to pay for alpha. However, if the performance is not there, it’s hard to justify investing in strategies where fees are high and liquidity is low. We’ve seen larger demand for beta and smart beta strategies over the past two-plus years, and we’re seeking ways of creating non-correlated returns by using option strategies for our ultra-high-net-worth and family office clients.
PW: What do you see as the best investment opportunities and growth areas for ultra-high net worth investors?
Bitterly Michell: Good investment decisions are [based on] today’s complex markets and research, then customized to a client’s specific financial goals and risk appetite. Many investors have aggressive growth targets but still want to control risk in their portfolios. Others are looking for alternative sources of yield, given the low interest rate environment. We often discuss “smart and cheap beta,” that is, getting cheap, liquid beta with some consideration to portfolio and concentration risk.
Another frequent point of discussion is portfolio equity hedging and interest rate hedging. We also see demand for expressing more specific views on the market. For example, instead of investing in broad-based European equities, some investors want to create custom investment strategies based on companies that would benefit from European quantitative easing.
PW: What are the most popular industry segments your clients are looking to invest in?
Bitterly Michell: In North America, we have seen increased demand for U.S. real estate, concentrated in large urban areas, as well as European and U.S. equities. Developed markets have been more popular than emerging markets for most of 2014, although we’re starting to see a comeback in certain emerging markets. In commodities, some clients are active in crude oil and gold.
PW: What do your clients tell you that they want, beyond reliable returns and tax advantages?
Our investors seek transparency in performance and fees. We dedicate a lot of time at Citi to make sure that our investors are properly educated on investment strategies and are aware of how they will perform on a mark-to-market basis, as well as understanding the underlying liquidity. They are constantly looking for good investment ideas, especially in this market, where it can be challenging to determine where to invest with the very low interest rate environment combined with equity indices trading at all-time highs. For example, many investors are trying to reconcile the fact that they don’t want to miss out on potential continued upside in equities, but at the same time, they don’t want to enter into an investment at the 52-week or all-time high.
PW: Are you seeing an increase in socially responsible investing?
Bitterly Michell: We often use custom thematic baskets to help investors achieve exposure to socially responsible investments in their portfolio, as well as other themes that are not easily expressed via an ETF or index. We track global companies that have high, medium and low revenue exposure to themes like wind energy, clean water, energy efficiency, auto fuel efficiency, alternative energy, clean tech and climate change. We also see some demand for some new indices branded as socially responsible.