2017 was a year full of surprises, with the global macro economy and various asset classes significantly outperforming pessimistic expectations in the beginning of the year. Ushering in 2018, the investment community is focused on global economic, policy and political changes which will impact investment markets, and how investment strategies should be adjusted to manage risk and generate positive returns.

On January 10th, CreditEase Wealth Management officially launched the 2018 Asset Allocation Guidance (hereafter referred as the Guidance). The Guidance is sponsored by the CreditEase Wealth Management Asset Allocation Committee and authored by CreditEase Wealth Management Asset Allocation Research Team and investment professionals in various asset classes, with inputs from local and global experts in the asset management industry. Structured to offer insights as well as solutions, the Guidance is research driven, practical and application oriented, and proposes an asset allocation that covers major asset classes.

CreditEase Wealth Management believes that 2018 see an increase in market volatility, and in this environment, allocation to alternative asset classes is increasingly important. As the Chinese wealth management industry evolves, short term speculative investment strategies will become unsustainable, while long term value investing, global asset allocation and technology driven investment will be the right path.

The 2018 Asset Allocation Guidance advises investors to continue to overweight alternative assets

2017 was a year when investors regained confidence, as: many countries registered GDP growth, China’s economy showed positive signs and the performance of global macro economy and various asset classes was significantly better than what was expected at the beginning of the year. Looking to 2018, the CreditEase Wealth Management Asset Allocation Committee believes that market volatility will increase.

Currently, valuations in the public equity and debt markets are at a historical high, and with a polarization of economic growth globally, markets may be more sensitive to unexpected outcomes and incidents. Potential austerity measures, geopolitical tensions in the Middle East, Russia and North Korea, Brexit negotiations and any unexpected weakness in economic growth rates may all exacerbate market volatility.

The Guidance posits that allocation to alternative assets is increasingly important in an environment with heightened risk of volatility. Against the backdrop of global financial integration, correlations among traditional equity and debt assets in different regions and countries has increased, making risk diversification within traditional asset classes difficult. Alternative assets, by contrast, can optimize portfolio performance. In the long term, alternative assets enjoy an illiquidity premium, generating higher returns than traditional asset classes. Benefiting from both economic growth and ample market liquidity, alternative asset classes including private equity, private equity real estate and private credit showed good performance in 2017.

Alternative assets accounted for a sizeable proportion in the 2017 asset allocation proposed by CreditEase Wealth Management. A portfolio structured on this asset allocation would have generated double digit returns in 2017, with additional outperformance if investors invested into the funds outperforming market median returns in these asset classes, as was the case for higher performing FOFs.

CreditEase Wealth Management encourages investors to continue to overweight alternative assets in 2018.

For an investor with RMB 100 million assets, CreditEase Wealth Management suggests an allocation of 25% to private equity, 20% to real estate, 20% to onshore fixed income assets, 20% to public equity capital markets, 5% to offshore private credit and 10% to insurance, as illustrated below.

Opportunities associated with each asset class amidst changes

Below are the key opinions of the Guidance regarding the changes and opportunities of main asset classes in 2018:

Private Equity: Capital inflows will increase global competition for assets, and benefit top-tier funds the most. Fund managers with vision and experience through cycles can still identify attractive investment areas, which may include secondary deals, M&A opportunities of the middle-market companies in Europe and America, etc. in 2018. Geographically, although China is second to America in terms of private equity market size, the sector has some way to go to reach the maturity and sophistication of the US sector. As at the end of 2016, American GDP is 1.63 times that of China, while the AUM of American PE funds is 3.33 times that of China, indicating significant headspace for the Chinese PE investment market. Looking ahead into 2018, CE WM holds an optimistic yet prudent view about the domestic PE investment market. The overall market will return to value-based investment, which bodes well for entrepreneurship in the long run. However, the drivers for high returns and associated potential risks are shifting, so we will focus on emerging industries, AI, fintech, enterprise services, healthcare and other technology-intensive industries in particular, as well as opportunities arising from the new consumption era.

Public Equity Capital Markets: CE WM continues to be optimistic but also cautious about the A-share and H-share markets. Some stock markets in emerging economies will also benefit from the mild global economic recovery. The asset pricing fluctuation caused by geopolitical instability and economic volatility will create investment opportunities for CTA and quantitative investment strategies.

Global Real Estate: The domestic real estate market is witnessing a shift from “expanding” (new developments) to “upgrading” (existing properties). Innovators in global markets have created new demand and access paths for more property investors, such as light-industrial/logistics sector developments, long-lease apartments, etc. Residential apartments in the first-tier cities in Australia, Britain and America have both long-term growth potential backed by stable economic growth, sound property rights laws and strong demand from both owner-occupiers and investors.

Onshore Fixed Income: A combination of regulatory policy changes and continuous market improvement should lead to an improvement in the quality of underlying assets and returns. The reform of multiple industries should give rise to creation of new fixed income issuance, enabling quality managers to construct portfolios with high diversification and low correlation.

Offshore Private Credit: Private credit comprises a valuable part of a balanced portfolio in the sense that it provides great risk diversification. Attractive sub-sectors include direct lending and select mezzanine strategies, and access is recommended via proven managers who can add value both in terms of asset sourcing and transaction structuring.

Insurance: The insurance industry is one in which technology is playing a more and more important role, and technology-driven efficiencies and high yielding underlying assets are expected to enhance investment-linked insurance products returns. In addition to their investment function, insurance products are increasingly being recognized as a valuable wealth inheritance and succession tool for high-net-worth individuals.

FOF - the path to long-term victory in asset allocation

CreditEase Wealth Management believes that as the global economy and political environments may be faced with unexpected developments in 2018, these developments will give rise to both attractive opportunities and hidden risks, including the risk of another round of asset bubbles. In the future, short-term speculation will be less sustainable, and investors will be better served by long-term investment, value investing, global asset allocation and tech-based investment – all key trends which will prevail in the Chinese wealth management market.

HNWIs should take positive steps to enhance their current wealth management approach, which means a transition away from sole focus on the Chinese market, and a small number of asset classes, towards a more visionary, internationalized asset allocation solution, encompassing multiple asset classes. CreditEase Wealth Management suggests that investors should adhere to asset allocation and long-term investment strategies to construct a multi-asset-class portfolio comprising traditional stock and debt allocation, in addition to a variety of alternative assets.

Dr. Randolph B. Cohen, scholar at Harvard Business School and MIT, believes that for most investors, FOF is the best way to invest in alternative assets.

FOF can diversify investments across multiple of top-class investment funds, including VC, PE, real estate and hedge funds, which further diversify across a variety of sub-sectors and investment strategies. This approach reduces the risk of loss incurred by volatility within a single fund, and establishes a more effective long-term asset allocation strategy.

In its 2017 Asset Allocation Strategy Guidance CreditEase Wealth Management emphasized the "Three Golden Principles" for asset allocation (i.e. cross-region allocation, cross-asset-class allocation, and overweight in alternative assets by FOF), and helped investors enjoy a year of robust returns in 2017. Being overweight in FOFs helped investors avoid single-project risks, and over-concentration in a single stock or asset.

Ning Tang, founder and CEO of CreditEase Wealth Management, shared his views in the Guidance, noting that "the new economy in the new era has two characteristics: one is the focus on quality, rather than quantity; the other is a focus on tech innovation. FOF is the best way for Chinese HNW and UHNW individuals to embrace the new economy, invest in the new economy and enjoy their share of benefits from the new economy”.

Remarks:

The 2018 Asset Allocation Strategy Guidance was prepared by the CreditEase Wealth Management Asset Allocation Committee, with a focus on three areas:

1. Research-focused: In-depth observations on the Chinese economy by veteran Chinese economists, as well as comprehensive viewpoints on the world's major economies and markets sourced via CreditEase Wealth Management's global partner network.

2. Experience-focused: Sector-specific in-depth allocation strategies building on the experience of external asset management partners and asset class leaders at CreditEase Wealth Management.

3. Practically-focused: Guidance on allocation percentages for each major asset class, to enable investors to review and assess their own portfolios for improvement and optimization.

The CE WM’s Asset Allocation Committee is comprised of over a dozen experts around the world. Some are investment & research experts of multiple asset classes, and some are top-class expert consultants in the global asset management industry (e.g. Zhou Quan, Senior Partner, IDG Capital Partners, and Wang Qing, Chief Investment Officer, Shanghai Chongyang Investment). All Committee members are well established in their respective research fields, which include global public equity capital markets, PE, hedge funds, real estate investment, corporate finance, fixed income, asset securitization, insurance, immigration and family offices.

About CreditEase Wealth Management

CreditEase Wealth Management, the wealth management arm of CreditEase, is committed to provide professional global asset allocation services, wealth management and investment advisory services for Chinese high-net-worth individuals. It offers holistic wealth management products and services, including but not limited to onshore/offshore quasi-fixed income, PE, capital markets, hedge funds, real estate, insurance and protection, investment immigration advisory, study tours & education. It has multiple-currency products, such as RMB, USD, Euro, etc.