Citigroup’s Wealthy Clients Are Snapping Up Structured Notes

(Bloomberg) -- Just one day to digest everything. That’s all David Bailin, chief investment officer of Citigroup Inc.’s private bank, wanted after last week.

Saturday would be eaten up by writing about the markets, but on Sunday, he’d finally be able to take a deep breath and reflect on how much the world had changed in such a short time.

A big part of his job is synthesizing the implications of events taking place, and working with Citi’s markets teams, macroeconomists, portfolio managers and political strategists to try and create some order out of chaos.

Bailin spoke with Bloomberg about what how clients are investing and what he’s telling them may be down the road. Comments have been edited for space and clarity.

What kind of transactions are you doing for clients?

We’ve done an enormous number of structured notes. We’ve seen people buy structured notes that offer less downside and a levered upside for selected baskets of equities and equity indices -- a note might protect 10% to 15% on the downside but accelerates returns by, say, 150%, on the upside to a cap. Another popular note sells volatility to create income. The client needs to assume market risk if the underlying index falls to a level, say 25% below today’s price. We did more than $100 million in such structures last week.

We’ve also been identifying areas of the market that have been hard-hit. In particular, we see value in dividend stocks of companies that are growing earnings and dividends, especially in areas like health care. We put clients toward U.S. and non-U.S. dividend growth stocks in very large volumes.

Also, and I wouldn’t call this bottom-fishing, but people are changing the return profile of equities they want to buy. For example, we see a lot of interest in Brazil, which I think is unusually dislocated and inexpensive on an historical basis.

How have rate drops affected what you’re telling clients?

As interest rates go to zero, a theme to deal with next year is whether there should be a fundamental change in asset allocation.

Say you have an enormous bond portfolio with some high-yield, a large amount of municipal bonds and Treasuries. Assume that the portfolio had been hedged in the past few months with Treasuries. Do you rotate some of your fixed-income gains into the stock market?

We say yes -- that’s opportunistic with markets at this level. But when we look at portfolios in, say, 2021, and you ask is 50% bonds and 50% equity still the right equation, the answer is going to be no. You’ll probably want to own more equity and more income-oriented equity. The risk characteristics of those Treasuries are not going to provide the diversification they once did. We can imagine adding high-quality dividend stocks in lieu of fixed income.

How have client reactions differed around the world?

With the Asian markets moving beyond the virus, or moving through it sooner, the activity level of clients there has been much greater. Because our Asian clients are more opportunistic, they trade more often, and now they do so from home, and are really focusing more on the markets. The contact between bankers and investment counselors and clients has gone up more than 40% in Asia.

That might be indicative of what will happen in Europe and the U.S. over the next two to four months. People will slow down, have more opportunities to think about what’s happening in the markets and talk to their advisers more.

What are you talking with family offices about?

A lot of our clients are entrepreneurs and own businesses, so a lot of them are busy implementing the CDC programs. We had a family office call on March 9 where we talked about best practices, and shared how we were managing our business at Citi. Clients are dealing with practicalities -- they’re managing their businesses and getting them ready.

From a personal safety perspective, some families are taking precautions around where to be, and so on. Our client base tends to skew older, so there is more than the average amount of concern about the kids of these clients, but also how to deal with older people who could potentially be exposed to the virus.

What’s your basic investment advice right now?

I give the same advice to wealthy families as I do to my Dad. They have to have discipline in the face of uncertainty, keep core portfolios intact and be ready to buy in distressed parts of the market.

They have to understand, though, that they can’t time the market. We’ve done a good job there with clients -- we have not seen a lot of redemptions. We saw a lot of people buying into the market, particularly Asian clients, investing in things that seem unusually cheap.

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