Having always had a strong foothold in the advice and products segments, Lloyds Bank Private Banking is catching up quickly on the investments side as well. With 25 years of industry experience, Markus Stadlmann, CIO of the wealth and mass affluent division, is steering Lloyds Bank towards success. Meghna Mukerjee reports
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In October 2014, Markus Stadlmann took over as the chief investment officer (CIO) of Lloyds Banking Group’s (Lloyds) wealth and mass affluent division. For Stadlmann, the ex-Barclays Wealth discretionary head, it has been a "warm start" at Lloyds.
Recently, Lloyds gauged the challenges facing the financial markets and refreshed its strategic asset allocations.
"We made several changes. For instance, we excluded commodities from our long term investment portfolios just when the decline of oil price happened, so that was well timed," Stadlmann tells PBI.
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By GlobalDataAccording to him, the strength of Lloyds Bank Private Banking lies in its focus on conduct and superior advice. "We go to extreme lengths to make sure we provide the right kind of advice. Our clients think favourably about the banking products we offer as well."
Lloyds is also catching up quickly on the investments side, says Stadlmann.
Strategic partnership
In his previous role at Barclays, Stadlmann looked after portfolio management teams globally and specialist investment teams, alongside overseeing the relationship between Barclays and investment management firm BlackRock. This experience comes in handy for Stadlmann considering Lloyds’ strategic relationship with Aberdeen Asset Management (Aberdeen).
Lloyds’ Scottish Widows Investment Partnership (SWIP) business and related private equity and infrastructure fund management business was acquired by Aberdeen in November 2013 (completed in April 2014). Aberdeen entered a long-term strategic relationship with Lloyds that aims at a stronger asset management offering for all customers.
According to Stadlmann, the partnership successfully leverages both Aberdeen’s and Lloyds’ strengths.
"Lloyds, up until now, hasn’t been a major investment organisation – thus the strategic alliance with Aberdeen. More clients appreciate that.
"Aberdeen is an equity house – especially strong in emerging markets equities. I have interacted with Aberdeen for a long time and what was surprising to me was that they also have a lot of fixed income capabilities. These are newer areas that have evolved in the last 10 years. They are also strong is quantitative asset management," he says.
Advice and investment
Stadlmann explains that it is important for the investment process to start where the advice process ends.
"At Lloyds, client treatment is hugely important. We want to make sure we are ahead of the curve in how we manage the best conduct with clients and be the best bank for customers.
"The first thing we do is look at the risk attitude of the client and also other information that comes from the advice process.
"The banker will hand us information around where the client fits in terms of risk tolerance but also give us ideas about their attitude towards markets. We get informed around things like, are they sophisticated? Do they have experience? All this gets factored into the investment process," he explains.
Lloyds conducts in-house research around how markets will perform over the next 10 years, starting with economic considerations – inflation, economic growth, profit growth – and stretching out towards valuation measures for different asset classes. Once the estimations are in hand, Lloyds simulates different outcomes over the next couple of years, and chooses the best one, while keeping in mind the worst case scenario.
On the other hand, Aberdeen has both medium and short dynamic asset allocations, looking at three to twelve months expectancy, which is not influenced by Lloyds. Aberdeen also selects investments individually.
"They then create portfolios abiding by the seven risk profiles and the seven strategic asset allocations that we have. We pick it up again thereafter – do the governance, reporting, performance measurement and such. Out of the seven steps of the investment process, four are our job and three are Aberdeen’s job," explains Stadlmann.
UK and beyond
In 2013, Lloyds sold its international private banking business to Swiss bank Union Bancaire Privée (UBP) as part of its strategy to focus on the domestic wealth market. The business that remains is mainly in the Channel Islands, which is relatively small.
For Lloyds, the same seven risk profiles apply to both UK and international clients. "The distribution of clients, however, across risk profiles will be different for international customers as their risk appetites differ," he adds.
For the UK investor, real estate and equities are the chosen asset classes, informs Stadlmann.
"The typical UK investor is UK focused and they look to us to provide some international diversification within the real estate portfolio, which we do."
On the equity side, a lot of UK investors have relatively concentrated portfolios – typically having 35-50 stocks – and they look for experience as they "want to understand how we think about these companies and their stocks", making equities a constant topic in client conversations.
UK clients are relatively risk loving and comfortable with high percentages of equities in their portfolio, says Stadlmann, adding that there are differences in the way people think about risk.
"Bonds are interesting to our clients as well. We strongly emphasise that it’s also important, in terms of risk diversification, that clients have fixed income (FI) investments in their portfolios," adds Stadlmann.
Stadlmann explains that in the current environment, with increasing number of countries having negative interest rates, short-term interest rates will not rise significantly. Thus short duration fixed income allocations are still of value.
Path ahead
The year 2014 was a difficult year for active asset managers. Stadlmann calls it one of the three most challenging years, the other two being 1998 and 2011.
There were several reasons behind this. "Firstly, almost everyone got the interest rate forecasts wrong. Secondly, we had some unknown unknowns, such as socio-political issues with Russia and Ukraine that affected financial markets.
"Thirdly, the volatility of several asset classes were low, meaning there was little opportunity for asset managers to differentiate themselves. Fourthly, in 2014, we had poor performance of small cap stocks in the UK, US and other countries."
However, going forward, equities continue to look "promising and interesting", says Stadlmann. He also says that bonds have low returns in the current market. "There can be huge differences in income derived from holding the equity or the corporate bond of the same company."
There is clearly an opportunity, now, at Lloyds Bank Private Banking to do more interesting things with existing wealthy clients than simply banking, but "banking will always be the core", sums up Stadlmann.
