Keeping faith with the traditional approach

Jewson Associates, a London consultancy tucked into a historic alleyway behind Moorgate, close to the old City walls, is reporting rapid change to its traditional client base of universities, health charities and Roman Catholic Churches. During the last 12 months, increasing numbers of wealthy families are knocking on the doors of founder and chief executive Ed Jewson and leader of investment strategy Tim Brown. “We are definitely seeing a bias to families. There has always been a huge synergy between charities and family offices,” says Mr Jewson. “But the private wealth side has been growing rapidly over the last 12 months.” These are private investors who had previously been happy with asset management, but realised their portfolios were not effective during the recent crisis and needed a new source of ideas to revisit allocations. Unlike institutions, who are used to seeing their assets fluctuating, private clients are particularly uncomfortable with seeing the value of their portfolios dropping. “We are reviewing their investment management arrangements, revisiting their attitude to risk and giving them a range of options,” says Mr Jewson. “We don’t typically see many horrors in wealth managers’ portfolios, but we often find their clients can do better elsewhere.” His firm is relatively traditional in its approach, with exposure to hedge funds kept well below the typical 20 per cent recommended by many private banks. And despite the current fashion for highly liquid assets, private equity investments are extensively deployed. “I am of the view that you can achieve returns over the long run by traditional methods,” says Mr Jewson. “That said, there are some very good hedge fund managers out there.” Earlier this year, the group’s investment chief and former head of strategy at Deutsche Asset Management, Mr Brown, witnessed clients “shell-shocked” by 2008, moving assets from equities into safety-first fixed income. His job is to talk through various scenarios with the client. Despite a UK equities rally of 47 per cent since March, he believes stocks offer good value for the long-term and that the market is still ten per cent undervalued. “Economically, we think the worst of the recession is now behind us and that the Western world will experience some real growth next year and beyond,” says Mr Brown. Approach with caution Non-traditional assets should be approached with care, he says. “Clients have lost faith with parts of the alternatives market, as hedge funds have clearly not done what they have said on the tin,” he believes. Based on historical data, optimisers or algorithms throw a large “slug”, generally more than 20 per cent, into alternatives, he says, but this is not the same as looking as prospective data. “What will you get over the next ten years if alternatives are suddenly more correlated with equities? You will get a very different answer,” says Mr Brown. “Historical volatility in hedge funds is quite low. But last year, people put in a redemption claim and could not get their money back for nine months, and even then they could not be sure what they were going to get. How do you manage that in volatility terms?” That is why Mr Brown favours a more pragmatic approach, rather than a doctrinaire quantitative application of the efficient frontier model, using an optimiser. “If you slavishly follow the efficient frontier model, you are asking for trouble,” believes Mr Brown. There has been a tendency during the last decade to believe that complex mathematical models are the key to a better, guaranteed solution than more subjective strategies, he says. “A lot of people who have used models have selected data periods that are far too short, that have not allowed for the fact that the last 20 years have been atypical. We have seen pretty constant growth, low inflation, low unemployment and a housing boom, though there have been a few wiggles.” Those private banks and portfolio managers who rely on this short-term data to construct optimised portfolios are short-changing their customers, he believes. “It’s a bit like buying a weather forecast for December based purely on the experience of what happened in July and August.”