Taking big clients "beachcombing"! Securities wealth management business has new moves

Brokerage wealth management business has a new "move"!

Historically, the products of star private equity managers and the product quotas of top quantitative institutions have once become the "battlefield" driving breakthroughs in the wealth management business of various brokerages.

In recent years, with the net value of equity products not performing well, institutions have spared no effort to find "stable" and "popular" asset management products.

But it is undeniable that the "killer moves" used by various institutions to attract high-net-worth clients are gradually becoming "scarce".

Fortunately, the market always finds its way. With the gradual warming up of overseas investments, large institutions have also gradually begun to enter new areas - launching overseas products.

By partnering with "international institutions" and collaborating with trusts, this field is quietly heating up.

A Roundabout "Investment" in Overseas Markets

Investing in equity assets beyond traditional geographical perspectives may have become a new "breakthrough direction" for the top brokerage wealth departments.

For example, a product named "Foreign Trade Trust - HSBC Global Consumer New Trend Gold Stock 1st Phase Collective Fund Trust Plan" recently "appeared" on the channel shelves of the wealth securities company under the leading brokerage in the industry.

Product information shows that after going through a three-tier structure, the underlying overseas fund that the product ultimately invests in will allocate at least two-thirds of its assets to global stock markets expected to benefit from consumer growth, with a large portion invested in emerging industries in emerging countries.

The historical scale of the underlying funds exceeds $6 billion, equivalent to RMB 43.2 billion, and the investment team comes from a well-known buyer institution in Northern Europe.

Another trust plan, also distributed by a leading brokerage, focusing on Japanese stocks, has followed the rhythm of the Japanese stock market.

According to related information, the underlying assets of this trust product are mainly overseas Japanese stock funds, with the "helmsman" being Nomura Asset Management, a Japanese asset management giant. The underlying funds are invested in high-end manufacturing, industrial automation, medical and health, and consumer upgrade sectors in the Japanese stock market.

"Junk Bond" Products are Also Included

In addition to overseas stock investments, some brokerage wealth departments have recently been recommending products targeting high-net-worth investors that ultimately invest in overseas fixed income markets.

Moreover, some of these bond products have relatively high expected returns and risks, suitable for aggressive and proactive investors.

Information from channels shows that some products, after going through several layers of structures, mainly invest funds in high-yield bonds.

The latter differs from government bonds (treasury bonds) and high-grade credit bonds, specifically referring to bonds rated below investment grade by rating agencies, which are bonds with higher default risks.

Perhaps for this reason, the related overseas fixed income theme products specifically mention in the explanatory materials:

**.....there is a dedicated distressed team to assist in handling defaulted bonds... Looking at the data from 2013 to 2023, the average annual default rate of the strategy is only 0.59%, with a default loss rate of 0.24% The vision and professionalism of this product are quite impressive.

Multi-layer Nested Design

Due to various factors, mainland investors often need to go through multiple products in overseas markets, a process known in the industry as "nesting".

In this market context, a relatively smooth overseas investment product often requires collaboration among multiple financial institutions.

The product mentioned in the previous text, distributed by a top brokerage firm, typically takes the form of: the "outermost layer" is a trust plan, which is also the main vehicle through which the distributing institution raises funds from investors, directing the clients' assets into the trust.

Subsequently, the trust plan invests the funds into a private equity product initiated by an onshore Chinese private equity institution, usually a product of a foreign buyer's subsidiary in China. After this step, the funds from the trust product enter the private equity product.

Following that, the private equity product of this foreign private equity firm will invest client funds into a USD fund issued overseas by the foreign parent company.

In other words, investors' funds need to go through several products to finally complete the overseas investment.

However, the multi-layer nesting also brings about the downside of "multi-layer structure", where investors bear multiple layers of fees, with the highest product having no less than ten types of charges. Additionally, multi-layer products may bring about uncertainties in the future, especially when facing market tests.

Historically, although such cases are not common, they do exist.

Exercise Caution with Expected Return Figures

Zishi Hall notes that for these QDII private equity trust plans distributed by top brokerage firms, the expected return rate figures often come from various sources, making it difficult for some outsiders to fully understand.

For example, the aforementioned global thematic fund, after the trust layer completes fundraising, the product is invested in a private equity product of a Nordic buyer's subsidiary in China.

It is worth noting that this onshore private equity product was established as early as December 2018, with an annualized return rate of 16.33% as of the end of March 2024.

However, this onshore private equity product will ultimately be directly invested in an overseas USD fund, which has an annualized return rate of 11.36% over the past five years as stated in the product prospectus.

Comparing the two return rates (which are relatively close in time), the onshore Chinese product clearly outperforms the offshore product.

However, theoretically, investors' funds ultimately flow into the bottom-tier overseas fund, resulting in a "gap" in the return rate.

Is this due to the contribution of exchange rates to the return rate?

Or is it because the onshore manager used leverage?

Or is it due to different statistical methods?

More information is needed to solve this mystery