2020 was, as one private client advisor frankly said, “a crappy year”, not only for public health but also for companies who had to reconfigure to cope with the dramatic change in economic decisions. Citywealth’s April French Furnell spoke to wealth managers for their insight into the year; the intensified ‘search for yield’, appetite for alternatives and thoughts on ESG during the corona-coaster.
Buckle your seats, it’s going to be a bumpy ride. The challenging year for wealth managers and investors started to emerge around March but as Rob Lee, Co-Head of Multi-Asset Investments, at Signia Wealth explains, even in difficult times, with fear and panic everywhere, opportunities will present themselves. “When markets fall out of bed, it’s about getting ahead of the situation to preserve wealth; only to get back into the market when the risks are deemed to have subsided,” and subside they did. For instance, “We saw an opportunity following the unprecedented levels of stimulus from global policy makers and the US, in particular. We saw this before during the global financial crisis, and we flagged an opportunity to allow clients to participate in the market rally”, he said. Adding though that, “both the quantum and pace of the equity market rally were a surprise”.
Since the first lockdown though a slight shift in focus has happened as winners and losers have emerged. While the overarching approach to asset allocation has not changed, the selection of companies has. “Our stance hasn’t really changed that much”, confirms Art Baluszynski, Director, Head of Research, Henderson Rowe. “It’s not a question of fixed income versus equity, but within the equity space itself, stock picking for quality”.
Edward Loader, managing director at Integritas, agrees, “A small selection of stocks have recovered well, but most are still lagging, providing opportunity for active stock pickers. It’s really hard to find long-term value in fixed income with interest rates as low as they are. The question is: what will produce real returns for clients?”
More than anything, the pandemic is changing how we live, explains Art. As we see ‘Work From Home’ having lasting impact, “commercial property is expected to see a drop-off in cities, so these funds and companies will be downgraded and liquidations in the property fund space are to be expected. But, in all this there is an opportunity for distressed property buyers. We have already seen Amazon purchase space in urban areas for logistic centres, enabling improved 1-hour delivery options”. There are bound to be others ready to step in.
Along for the ride
“We’re looking at alternatives for effective portfolio insurance”, says Rob, who points to the risk of further severe market volatility and some yields which are zero-bound. “Gold is one, as well as a mix of safe-haven currencies like the Yen or US Dollar.”
Despite the big appetite for alternatives, there is a challenge. “Options are quite limited in terms of finding ‘liquid’ or easy to cash in, alternative investments, but this is what a lot of our investors are after”, acknowledges Edward.
A recent report from management consultants Oliver Wyman and investment bank Morgan Stanley, ‘After the Storm’, aligns with both Rob and Edward’s thinking, “The current market volatility on the back of Covid-19 may limit clients’ appetite for investments that are by-definition illiquid, with multi-year lock-up periods. However, we expect this to be a temporary phenomenon. Our long-term outlook builds on our research and finds that UHNW clients remain structurally under-invested in illiquid/alternative assets relative to their ‘target allocations’.”
Spotting this trend, UBS and Partners Group announced at the start of November an initiative to expand access to private markets. Under the initiative, UBS clients in Switzerland and other select markets across Europe and Asia will get increased exposure to Partners Group’s private equity buyouts and private debt as well as co-investments in certain Partners Groups assets, which will be pre-selected by UBS.
Jake Elmhirst, Head Private Markets, UBS Global Wealth Management, said of the strategy, “Private markets are an important way for wealth management clients to diversify their portfolios beyond public equities and fixed income. With low interest rates globally, especially in developed markets, returns on public fixed income will likely be lower than in the past, improving the argument for income-generating private assets such as private credit and real estate. While future returns for public equity or stocks in a public company will likely be higher than for public fixed income, factors like active ownership are expected to drive returns in private equity higher than in public markets. Fund managers have greater scope to act as active owners of assets in private markets than in public markets and have more flexibility to manage them to generate higher returns. With many of the opportunities accessible through private equity investments not available through listed markets, such investments also provide different return streams in a portfolio.”
Riding two horses at once
Another area which has been brought into the spotlight through the pandemic is ESG. Already, gathering pace beforehand, “The pandemic has brought values-based investment themes to the forefront. Consumers want to make a difference any way they can, and this filters down to the investments they choose”, said Vijay Raghavan, senior analyst at Forrester research. "Interest in the field has surged this year, in particular around the topic of climate change investment which remains a key focus for our clients", added John de Salis, Head of desk and Member of the Investment Committee at Mirabaud.
It’s worth remembering that investing wealth responsibly can make a larger impact than the steps you take at home, such as eating less red meat or taking fewer flights, highlights Edward. “In conversations with clients, ESG is becoming more frequently mentioned and over the last year demand for ESG investing has started to catch up with supply. For us as a business, ESG signals long-term sustainable investing, which is what we want. It’s part of our philosophy”. It’s the same message from Signia, “ESG is definitely a growing priority for the firm”, said Rob. “Not only in terms of client demand, but also as a business, it’s something we are prioritising”.
Rob sees an evolution on the cusp where clients no longer evaluate their wealth managers solely on financial return but are looking for a more positive ESG impact or ‘ESG feel-good return’ from their capital. “At the moment, the latter is still relatively hard to measure and quantify, but we will find solutions”. Signia currently have two ways of doing this, one is ensuring their funds have ESG screening integrated into their processes, and the second is lending to development banks and investing in green bonds.
Zero sum game?
Only time will tell if investors will accept lower financial returns as companies invest in and adjust their business models to the ESG lens, but as the world has slowed down and paused this year, it has been a time of reflection for all. “Clients are figuring out what is important to them and thinking about the long-term. It’s a reminder to everyone that the markets can and do fall, and that crucially, the value of trusted, reassuring advice is high”, rounds off Edward.
So as the corona-coaster continues, let’s hope the corporate dodgems (the original electric vehicle) remain steady, and don’t cause any further economic crunches.
To find out more about the advisors interviewed in this feature, click on their name to visit their Leaders List profile.