As one of the world’s largest financial institutions, Citigroup brings a global perspective to its private banking business.
New York City-based Kristen Bitterly Michell, as head of Multi-Asset Class Structured Notes and OTC Options for Private Client Solutions Group in North America, helps design products for high-net-worth individuals that use Citi's private banking services. She leads a team of capital markets product specialists that works with Citi Private Bank to provide complementary investment strategies to traditional portfolios for high net-worth and ultra-high net-worth clients. The strategies, which include multi-asset derivatives, structured notes, and hedging solutions, are tailored to meet specific financial goals.
Bitterly Michell spoke about current global trends and how she and her team are working to help clients manage the complexities those trends present for wealthy investors.
Private Wealth: What are you seeing as the biggest investment trends for ultra-high net worth investors and their advisors?
Bitterly Michell: One emerging trend in asset allocation management is diversification from traditional fixed income and equities. There will still likely be a continued inflow into equities due to their relative valuation, investors’ search for yield, improving risk-adjusted returns, upside optionality and reduced systematic risk. However, we are not necessarily seeing investors sell bonds to buy equities. Instead, there is a growing tendency to invest in other assets, such as real estate, exchange-traded funds and multi-asset investments.
PW: Are your clients investing aggressively or being more conservative?
Bitterly Michell: With the recent uptick and subsequent pullback in volatility, we saw many investors remaining on the sidelines until the market stabilized. However, as of November 2014, we have seen investors increasing their exposure to equities, with substantial consideration given to both liquidity and entry point risk. We’ve also seen investors use option strategies to hedge existing portfolio exposure and to build hedges into customized structured investments that offer some downside protection, as well as the ability to outperform in sideways markets.
PW: Where have your clients been putting their money since 2008?
Bitterly Michell: The best strategy for dealing with market volatility is to be proactive. Investors shouldn’t put off buying hedges until the time comes when they need them, just as you shouldn’t buy insurance when your house is on fire. This applies to both equity market and interest rate risk for investors with floating rate liabilities.
At Citi, we’ve seen many investors building equity positions over time. However, many were over-cautious post-2008 and missed out on large portions of the subsequent rally in the equity markets. With today’s low interest rate environment, we’ve seen demand over the past couple of years for high-yield equity investments, such as high-dividend-paying stocks and master limited partnerships, as well as option strategies and structured notes that can take an equity view and turn it into a yield generating investment as opposed to a growth investment in the portfolio.
PW: Hedge funds have been getting a lot of attention because of high fees and poor performance. What are you advising your clients regarding hedge funds or other hedging strategies?
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.
PW: What do you see as the next big thing or coming wave for ultra-high net worth investors?
Bitterly Michell: Citi Research believes that the outlook for the world economy as a whole is positive. Even after setbacks of the recent financial crisis, they believe there will be steady growth, averaging between 3 percent and 4 percent out to 2050 if current projections hold. According to Citi Research, GDP growth will largely be driven by the so-called “Emerging 7,” which includes China, India, Brazil, Russia, Indonesia, Mexico and Turkey.
Other drivers to watch are key technology innovations such as nanotechnology, biotechnology, mobile networking, faster and more accessible Internet, 3-D printing and sensors. Also, socially responsible investing and philanthropy should remain important topics for ultra-high net worth investors.
