When Wall Street legend Michael Milken was indicted on 98 counts of securities and rackeering fraud by US prosecutors in 1989, few would have thought the ‘junk bonds’ he first pioneered and later discredited would make such a powerful comeback into the portfolios of US and European investors.
More than 20 years later, not only is ‘high yield’ – the updated politically correct name of the asset class – seen as a high-octane, equity substitute by many private banks, but it has been the subject of record inflows into exchange traded funds (ETFs), even though there has been doubt about how suited some of these bonds are to passive investing.
Now hedge funds, publicity victims of another scandal, are also looking for redemption and re-invention. And some say they have further to go to rebuild their reputations. After all, Bernie Madoff is serving life in prison for masterminding an unprecedented investment fraud, while ‘junk-bond king’ Mr Milken was only sentenced to 10 years for his crimes.
New York’s finance houses in particular are increasingly talking about hedge funds in a different way. At banks such as BNY Mellon, they are now called ‘diversifiers’ in client discussions.
Currently, the leading wealth manager is calling for 25 to 30 per cent allocations to such alternatives, while its very cautious client-base is clinging to the safety of cash. Yet these same investors are demanding yield and returns in one of history’s lowest interest-rate environments.
This is why BNY Mellon and competitors such as JP Morgan are calling for diversification, not just into hedge funds but also long-term private equity commitments, distressed debt and commodities, with energy a particular theme.
Indeed, the world of thematic investing is receiving a huge boost in recent times, with many Swiss, US and global wealth managers essentially adopting the story-telling approach to portfolio management. Not only is it easier to sell to sceptical private clients, wary of complex financial analysis of balance sheets and share price behaviour, but is becoming a more convenient approach for many banks to managing equities.
Even the likes of Coutts, private bankers to British royalty, are admitting that analysing individual stocks and shares is becoming too much of a lottery in today’s volatile environment. Instead the bank’s equity strategists are identifying themes which they say affect various sectors of the equity market, and then tilt wealthy client portfolios towards these sectors.
These can include export-led companies, making up to half of earnings from foreign markets, particularly Asia, high dividend-paying companies and those which will profit from lower energy prices in certain areas, notably excess gas from shale oil extraction in the US.
Themes do have their detractors, however, with critics particularly scathing about some Swiss banks who specialise in tempting investors into stocks which will apparently benefit from the expanding Asian middle class, ageing populations and replacement of traditional fuels with renewable energy sources.
But themes also have their place. Ten years ago, Goldman Sachs’ Jim O’Neill came up with the Brics acronym, describing how fast-growing countries such as Brazil, Russia, India and China would dominate portfolio investing for years to come. This is a theme few banks have ignored and many are now competing furiously to identify the next members of this exclusive club.
During the last 10 years, PWM has covered the rising and falling popularity of hedge funds through our first hundred issues. We have seen the regular re-invention of opaque products, against an often dramatic economic backdrop. But thematic investing has had a constant resonance and appears to be here to stay.
See Great Debate, Focus on Thematic Investing, and Alternative Agenda
