Anurag Mahesh, head of global investments services in the Asia Pacific, at Deutsche Bank talks tactics with Innovative Investor and the importance of intelligent asset allocation and multi asset class structures.

Innovative Investor - What strategies will you be pursuing in 2010?

Anurag Mahesh - Ever since the beginning of 2009, we have pursued a strategy of dynamic asset allocation with a focus towards absolute return, rather than benchmark returns. There has also been huge emphasis on managing risk, rather than just maximizing returns. We intend to continue this approach going into 2010 and will maintain our emphasis on risk management in clients' portfolios. Additionally, from a philosophical perspective, we are cognizant of the fact that asset class correlations themselves change dramatically under different economic environment, and hence diversification needs to account for that. Termed as 'Intelligent Asset Allocation', this is possibly the single biggest departure from traditional asset allocation thought processes where little attention is sometimes paid to changes within asset class correlations.

Innovative Investor - What products have been developed to catch up losses resulting from the financial crisis and how have they performed?

Anurag Mahesh - Within Deutsche Bank Private Wealth Management, we have launched model and discretionary portfolios based on the dynamic asset allocation concept. These are typically long portfolios across asset classes. In retrospect, 2009 provided a return of about 20% with a very low volatility and peak to trough drawdown of less than 5%. Again, it is probably not very prudent to play 'catch-up' after a bad year like 2009 as many times clients could end up increasing risk inappropriately while pursuing such a strategy. From our standpoint, we clearly want to allocate more to different parts of credit - sovereign, corporate (Investment Grade and High Yield), EM local currency sovereign and EM hard currency sovereign and corporate - an asset class that was somewhat neglected during the last bull phase of the market.

Innovative Investor - What will be the most popular types of structured products in Asia in 2010?

Anurag Mahesh - Structuring basically is a way to change the risk-return profile of an underlying asset class. As such we do not view structured products as a separate asset class, but rather see this area as a means of achieving a bespoke solution to a client's needs. In 2009 we used derivatives and structured products as a means of taking advantage of market inefficiencies (like basis trades etc.). We will continue to focus on those products, but admittedly, the opportunities would be far lower in 2010 vs 2009. We think that multi asset class structures could become important. These structures would try to leverage again on the 'Intelligent' Asset Allocation approach. We might also see clients demanding more of capital protected structures. Again we think that the trend of de-constructing structured products into its components would continue.

Innovative Investor - What are the themes to watch this year then? What is the current thinking on government debt?

Anurag Mahesh - We believe that 2010 will see risky assets (such as equities, corporate debt, commodities and EM currencies) continue to outperform 'risk-averse' assets like G3 sovereign bonds. We have, for some time, been saying that there is potentially little value in G3 government debt with rates being at a relatively low level and many developed countries looking to borrow large amounts of debt in order to fund their deficits. 2010 will see the ceasing of an important pillar that has supported treasury yields in 2009 - in the form of reduced or no quantitative easing treasury purchases on the part of central banks. Within risky assets, we believe that the returns would be far short of the returns that we have seen in 2009.

Innovative Investor - How has Lehmans affected the type of products that investors want to buy? Is the back to basics theme set to continue or is there now an increase in risk appetite?

Anurag Mahesh - Lehman's Bankruptcy and the ensuing events did have a fundamental change in markets' and clients' risk appetite and perception. We did see 'back to basics' investing, but that, in our opinion, is a result of investment opportunities available in traditional asset classes like bonds and equities at that time. We do believe that as return per unit of risk available in the market place diminishes, clients would start looking at allocating derivatives in their portfolios. Again, we think that in 2010, like in 2009, clients would continue to use derivatives to hedge unwanted risks from their portfolios, while keeping the 'smart risks' - basically risks which pay the returns. To this end, derivatives and structured products will continue to be an important element within clients' portfolios.

Innovative Investor - How are private bank clients differing from those in the more mainstream mass affluent market in terms of the products they are looking at?

Anurag Mahesh - Private bank clients are fundamentally different from their retail bank counterparts. The larger portfolio size enables banks to provide a lot more of customization for private bank clients. Typically, clients in private bank tend to look at a broader array of asset classes and products with a view to achieve their specific risk-return objectives.