Transform your assets
A harsh reality has hit high net worth individuals – investment in traditional instruments is no longer providing the growth required to ensure a comfortable retirement. The only option is a portfolio make over. Anna Bawden examines providers’ response to the birth of a new trend.
With the high net worth market tipped to reach E4500bn by 2005, private banks, independent financial advisers (IFAs) and investment service providers are all clamouring for a piece of the action.
Until the TMT bubble burst in 2000, it was relatively easy to attract inflows. Providers, accordingly, witnessed a surge in business. Now, not only has the TMT bubble burst, but traditional investment styles are no longer keeping high net worth individuals (HNWIs) in the style to which they have become accustomed.
Interest rates are at their lowest for decades and the equity market is underperforming. Add to that September 11, the Enron scandal and the Argentinian crisis and it is all too apparent that investor confidence has been given a knock. So has the time come for wholesale transformation of portfolios?
Unfortunately, there is no consensus on how to translate these trends into asset allocation. Some providers, including US giant Goldman Sachs, continue to stick to the old formula of 60 per cent equities, 30 per cent fixed income, 10 per cent cash. Others such as JPMorgan recommend increasing bond exposure. Conservative private banks such as La Caixa in Barcelona are telling clients to salt away as much as 70 per cent in fixed income.
The most common response, however, has been to look at alternative asset classes and to increase the proportion in multi-manager products.
According to a recent report by London-based consultancy the Scorpio Partnership, HNWIs are expected to allocate $2700bn of their portfolio to alternative asset classes by 2005, up from the current $1470bn – or 12.85 per cent – in 2001. Of the $1,470bn, hedge funds are believed to account for between $400bn and $500bn, with the rest going into alternative asset classes such as venture capital, structured products and so on.
Crédit Agricole, UBS, GAM and Threadneedle all report growing customer demand for hedge funds and other alternatives. But they stress that these asset classes are sophisticated instruments and are not suitable for all HNWIs.
Stefan Laterner, deputy global head of UBS Portfolio Management, says: “Europe has witnessed an increasing demand for alternative assets, such as hedge funds. Clients perceive that these instruments do dampen negative price effects of equities. We are also seeing a growing demand for balanced portfolios – an account that consists of 50 per cent equities with global reach and 50 per cent fixed income, i.e. cash and bonds.” Fund of hedge fund launches from HSBC, Citigroup and a rumoured alternatives venture from Boston-based powerhouse State Street, are chasing this market.
But Declan Sheehan, chief executive of JPMorgan Private Bank for Europe, the Middle East and Africa, adds a note of caution: “Generally, we have seen some questioning of long-term allocations. Since September 11, clients have been nervous about the economy and global situation. People are more event-risk shy.”
Despite disparities in risk tolerance and growth objectives, the overriding objective of HNWI investment is wealth preservation. With pension fund reform becoming the norm, European HNWIs are facing up to an unpleasant reality: if they don’t assure their own provision for retirement, no one else will. Across the continent, investors must prepare for action.
Calculations of the amount that needs to be invested to provide a reasonable pension have been based on past performance of equity and fixed income markets.
“The consensus is that, in the mid-term at least, bonds and equities will not generate anything like the level of returns they used to,” says Christopher Cruden, managing director of alternative investment manager Tamiso & Co.
“Before, 20 to 30 per cent growth on a portfolio was de rigueur. Now, anything above 10 per cent is a very good return on investment. With much of Europe’s population approaching retirement in the next 10 years or so, there will clearly be a shortfall if investments continue to be made solely in traditional instruments.”
This presents a very real problem. How can advisers help HNWIs to achieve their investment objectives in such unfavourable times? Overly risky portfolio allocations are not appropriate but the traditional safe bets are not delivering the necessary growth.
Graham Wainer, group head of portfolio management at Global Asset Management (GAM), says: “Clients are increasingly reluctant to take risks. The appetite for downside volatility is reducing.”
This should be seen in context and, for now, traditional asset classes will continue to dominate. As Mr Wainer points out, they remain the most prevalent both by number and by value.
That said, there has been a marked shift in attitude. Mainstream HNWIs are making greater use of alternative investments. In order to get the growth required to ensure adequate pension provision, they will have to keep up this interest, and more. That is, unless they want to work until age 72.
Forests and art are the hot stocks
Some alternatives, it seems, are more alternative than others. And the unregulated nature of hedge funds and private equity investments, coupled with the decline in appetite for high yield bonds, has fuelled demand for some very unconventional asset classes.
Forestry, with returns typically in double digits over the past three years, has become a hot stock as part of the growing popularity of socially responsible investment. Admittedly, purchasing part of a forest would stretch the budget of most HNWIs, but there are several collective investment schemes which cater to this need.
GAM, meanwhile, reports a rise in investment in art, wine, antiques and other such alternative investments. This is not to say there has been a wholesale switching into these areas. For example, gold – whether jewellery, funds or bars – rarely represents more than one to three per cent of HNWI portfolios.
Such investments fared badly against traditional investments during the 1990s, but have done rather better recently, as the chart shows (source: Forbes).
But investors have to pick carefully – you have to know your impressionism from your modern art in order to outperform.
Sophisticated investments for the wealthy
Socially Responsible Investment (SRI) is also gaining ground among wealthy investors, with one of the key beneficiaries being forestry – a somewhat unusual investment class, even for alternatives. UBS reports growing demand for its range of timber investment opportunities.
More mainstream ethical investing is in SRI funds such as those run by Morley Fund Management, Henderson Global Investors and Friends, Ivory and Sime.
Although performance has suffered in the downturn, it has done so less than in mainstream equities. Ethical investment, unlike the fashion-driven shunning of fur coats a couple of years back, is here to stay.
Post-Enron, the appetite for high yield bonds has, understandably, slumped. According to Stefan Laterner, deputy global head of UBS Portfolio Management, the solution to credit deterioration is “tapping the growing market for structured bond investments such as asset-backed securities”.
But the unwary and inexperienced retail investor should beware. High yield bonds, according to Threadneedle communications director Richard Eats, are only suitable for the more sophisticated investors.
Money market funds have been one of the only traditional asset classes to maintain performance. Current market uncertainty has rendered them increasingly popular, particularly with conservative HNWIs. Index funds have also fared comparatively well, with Cerulli research indicating that 27 per cent of the largest houses’ assets under management are in index or passive funds.
And Exchange-Traded Funds (ETFs) are the latest buzz word in investments, with assets up to $133bn in 2001, from $80bn the previous year, according Lehman Brothers data.
But these asset classes, for all their merits, are still little known. Until they become more mainstream, HNWIs are likely to remain wary.
