Investors are under no obligation to listen to insights from Wall Street’s biggest firms even after they pay hefty fees for access.
And so about a year ago, after David Bailin took over as the global head of investments at Citi Private Bank, he sought to find out if there were any performance differences between clients who listened and those who didn’t. The private bank, with $460 billion in assets, serves clients with accounts of at least $25 million.
The exercise showed that, in fact, it paid to listen. According to Bailin, clients who had followed Citi’s global asset allocation recommendations outperformed those who did not by up to 200-300 basis points per year for between one and three years.
“All of it says the same thing to us, which is that our clients aren’t global enough, and our clients don’t systematically follow the asset allocation advise over a long period of time,” Bailin told Business Insider.
These are the lessons Bailin has been trumpeting to clients, even as it published its mid-year outlook on Tuesday.
Not global enough
As Bailin quipped, the first problem with the clients who underperformed was that they were not global enough.
This aversion to foreign investments is partly fueled by concerns of a worldwide economic downturn similar to the Great Recession, according to Steven Wieting, the global chief investment strategist of Citi Private Bank.
The problem is that most downturns are regional in nature, not globally synchronous. For example, the commodity slump of 2015 hurt several Latin American exporters and dragged down their equity markets by nearly 31% in the first year. But globally, the downturn was 1.8%.
For sure, investors can suffer synchronized losses in the short-term; for example, global equities sold off last week amid Italy’s political turmoil. However, it would be an “exaggeration” to think Italy’s politics would crush Asian and Latin American markets over a longer timeframe, Wieting said.
“Only 2009 and World War II before that has most of the world declined at the same time, Wieting told Business Insider. He added, “the difference between a local portfolio where you had a bad year [with] a local crisis and a global portfolio has averaged a 33 percentage-point difference in terms of performance.”
For US investors, a home bias could soon prove to be costly, after being helped by a historic bull market in stocks and the second-longest economic expansion.
“There are lots of reasons to believe, because of the business cycle, because of where we and the Fed itself expects real interest rates to go compared to its past history, that we’re going to see catching up in other international financial assets,” Wieting said.
One of the regions he’s bullish on the long-term is China, where the average Citi client has 2%-3% exposure according to Bailin, even though the country made up 15% of the world’s economy in 2017 according to the IMF.
Too much cash
Citi’s other key message after looking into clients’ accounts was just how costly it is to sit in cash.
“And I’m not talking about a small amount of cash here,” Bailin said. “The only person who makes money is the bank.”
Still, this was illogical given, for example, the 302% surge in the S&P 500 from the March 6, 2009 bottom. But it was an emotionally satisfying response to the crisis, Bailin said.
“It is impossible to rationalize it now because if you could earn 3% in the United States in a municipal bond, or you could earn 5% in a relatively high-quality, high-yield portfolio, or you can earn a 4% dividend in European equities, or 6% on AT&T— rattle them off — it’s very hard to argue that cash is a smart place to be,” he said.
According to Bailin, walking clients through these insights is yielding results: from this year through mid-May, Bailin said, Citi Private Bank saw $5 billion of net new money invested into markets through its platform.
“It is actually having an impact on the clients,” he said. “If you had lived through the last five months in my job, you would have expected clients not to have invested more money because it’s been uncomfortable to invest more money.”
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