As the worst of the storm appears to have passed, wealth managers are carefully positioning themselves to benefit from investors’ increased interest to listening to advice on investment solutions and portfolio construction.
“While 18 months ago investors were not concerned about holding a lot of cash giving negligible returns, today they realise this is not acceptable,” says Nick Tucker, market leader for the UK and Ireland at Merrill Lynch Global Wealth Management. “I wouldn’t say people have huge optimism but they realise the world is not going to end. They appreciate they have too much cash in their portfolio, they want to do something about it, but they are nervous and are looking for leadership.”
Conversations with clients are much deeper, as they are rightly asking more questions about investments and the risk involved, he says, emphasising that across the whole industry a firm needs to provide its advisers with a significant growth of tools and upgrade the quality of advisers aggressively, as the technical competence of practitioners has to be a lot higher. While the major lesson learned from the downturn at the beginning of the century was diversification, what the recent crisis taught everyone was that liquidity and transparency matter, says Mr Tucker.
“We are spending all our time with clients on how to construct portfolios, to understand what they are trying to achieve, what their time horizons are and what money means to them. But we are looking at products that can be as transparent and liquid as possible.”
An example would be in the hedge fund arena, where Ucits III structures have drawn wealthy investors’ attention away from offshore hedge funds which can potentially have lock up periods for up to 12 months. “These Ucits III hedge funds may be giving up some returns or reducing some of the flexibility that offshore hedge funds are allowed, but clients are prepared to accept that, because they want to be sure of that liquidity,” adds Mr Tucker. In particular, the old style aggressive investors have significantly lowered their expectations and are prepared to accept lower returns for greater consistency and liquidity, he says, adding that high leverage is also off the table for those types of clients.
Enhancing stability
Some clear trends are emerging in the Nordic countries, where the traditionally equity-focused investors are moving towards a multi-asset type of portfolio to a greater extent, explains Hans Peterson, head of investment strategy at SEB Wealth Management. “Clients are less inclined to take risks and we are using all the possible sources of return available to enhance stability in a portfolio and generate growth even in tricky markets.” To build a multi-asset portfolio where alpha sources are not correlated, it is important to focus on what drives the performance of each investment and not so much on historical correlation or historical returns, he says.
Over the next 12 to 24 months, portfolio returns will be mainly driven by sectors sensitive to the business cycle, these may be generated by equities, private equity and to some extent commodities, he believes. “In equity investing we use a bar bell strategy, as we acknowledge that while developed economies in the world are moving at a much slower pace, some emerging markets are showing rapid growth rates,” says Mr Peterson.
“Therefore, on one side we focus quite a lot on slightly defensive stocks such as pharmaceutical or biotech, which offer stable growth with high dividends, and on the other hand on sectors that are exposed to increased demand for industrial production and infrastructure investments, in many cases linked to the growth in emerging markets. On average, we have an exposure to emerging markets which is at least double that of the MSCI world index, although that depends on the portfolio strategy,” he explains.
The way clients’ portfolios are constructed take into account that the economic cycle is still very fragile, as there is the fear of a double dip scenario in which economies might tumble again, if central banks increase interest rates too strongly or too quickly, believes Markus Taubert, head of private banking at Berenberg Bank, Germany’s oldest private bank. “The majority of our clients have a strong exposure to bonds, but that is a difficult class to get earnings and we recommend shorter duration in the three to four year range,” he says, explaining that expected tightening of monetary policy from central banks is going to lead to a slight to moderate increase in interest rates. Corporate bonds are not as attractive as a year ago but it is worth adding some defensive selected companies, he says.
