Time for alternative investments to play their part
Private investors continue to sit on piles of cash, but it is up to bankers to educate them about the need for efficient allocations
Developed markets good, emerging markets bad and don’t forget to follow the Fed. Is asset allocation currently that simple? Yes, if you listen to a constant procession of chief investment officers from leading private banks, although there are a few important nuances which can spice up the spiel.
Those who once eulogised about emerging market consumers seem to have written off investing in stock baskets bought anywhere East of Vienna or South of New Mexico.
Japan (not really part of Asia, according to investment forecasters), Germany and the US top the buy list, with Morgan Stanley’s latest exclusive club of shame, the ‘Fragile Five’ of Turkey, Brazil, India, South Africa and Indonesia, best avoided.
The problem among private clients, however, is that market selection is the least of their worries. Many have yet to commit large tranches of their investment pot to markets, preferring to stay cashed up on the sidelines, despite historically low interest rates.
Clients who want to be more ambitious, suggests Citi Private Bank, need to trade some of their liquid portfolio for a lock-up investment, such as private equity, real estate or hedge funds.
Are customers queuing to invest in hedge funds and maxing up on stocks to profit from these calls? Not a bit of it, according to Citi’s Rich Expectations, Poor Allocations report. “Many investors have been hesitant to follow asset allocation advice and remain seated on significant assets of cash,” reports Citi.
Testing the limits of a liquid diet
Private bankers believe returns will be harder to come by this year and are encouraging clients to increase allocations to illiquid investments such as private equity and real estate in response. But do investors have the stomach for it?
Citi’s recent poll of family offices in more than 20 countries found the average wealthy family had only 25 per cent of assets in public equities, but a 40 per cent allocation to cash. Such a portfolio returned just 6 per cent last year in US dollar terms, while markets reeled in five times as much.
European stocks look particularly interesting, say strategists, because their valuations are well below US counterparts. While Citi is neutral on South East Asian stocks, it happily recommends Taiwan, Korea and China. Though institutions take a dour view of EMs in public, talking to the custodians gives a different picture.
Not only do their clients plan to launch more funds investing in developing countries over the medium term, but banks from Brazil, the Middle East and Asia are keen to give us Europeans access to their infrastructure builds, airports and agriculture facilities through mutual funds.
But it is long-short expertise which can be brought to both bring the portfolio to life and make sure it does not get out of hand, though there cannot be too many Citi clients with the bank’s full 16 per cent recommended allocation to hedge funds, commodities and distressed debt.
Most private bank clients remain wary of hedge funds due to negative experiences six years ago.
Because clients are no longer comfortable with these vehicles, banks don’t push them into it. But there is another issue here too. It is not just clients who need to be educated about hedge funds, but a lot of the bankers themselves, presenting complex strategies to clients without fully understanding themselves how they influence portfolio behaviour.
Hedge funds are no “silver bullet”, says Julius Baer’s Premium Solutions boss Andreas Leukert in Zurich, they just come into markets from a different angle, accessing some of the same components of a portfolio like bonds, equities and commodities.
If handled correctly, they can smooth volatility, minimise downside risk and – what is particularly impressive today – replace bonds when the bond is no longer the ultimate instrument of safety and uptight investing.
When the once raunchy hedge fund takes on the image of a dowdy fixed income instrument, then you know its time has really come.
