Advisers in the high-net-worth sector give Nick Fitzpatrick insight into how they are managing their clients' investments against the shifting background of risk. Feelings are mixed over gold but there are signs of optimism for equities.
HSBC Private Bank
Daniel Ellis, head of private bank investment group UK & Channel Islands Risk assets
We are neutral in relation to risk and not overweight in any particular asset class. There is still a lot of uncertainty despite the improving outlook over recent months.
For us, this has created tactical buying opportunities and we have been investing clients’ money in certain defensive areas and thematic ideas, such as exposure to emerging markets through developed market companies, and capturing growth in Asia through luxury goods.
Our allocation to alternatives and specifically hedge funds is quite high. We think we are a leader in this area, being one of the largest investors in hedge funds on behalf of clients in the world. We had £29.8 billion (€36.4 billion) invested in hedge funds mid-last year. We screen 1,500 funds, carry out due diligence on 800 and have an approved list of 230.
Gold has always been a good performer and we have remained constructive on the metal in the past year. Our exposure to gold is both physical and non-physical, and includes exchange-traded funds.
Vestra Wealth, London
John Jopp, partner; david scott, managing partner
“Over the past 12 months, we have decreased the allocation to bonds as they have looked more expensive – especially when the yield on the ten-year government bond dropped below 2% – and we have increased our weightings in equities,” says John Jopp.
“Within the equity portion, we have been focusing more on the United States and the UK, followed by emerging markets and Asia as opposed to Europe. We have been significantly underweight in Europe.
“Where we use third-party managers, we have focused more on those with an income and value bias as these have tended to display lower levels of volatility in the current (uncertain) environment.
“We have held absolute return strategies at a relatively consistent level in our portfolios but our focus in this asset class has moved more towards global macro. This is in order to obtain an element of further diversification at the overall portfolio level.
“We’ve always held a reasonable allocation to gold (6-8%) for insurance purposes, but started to reduce it after volatility in the price picked up in September last year… our current allocation to gold is 3%.”
“In the absolute return space, a lot of people have been disappointed over the past two years,” says David Scott.
“The majority of managers have struggled to deliver returns in a very difficult risk on, risk off environment. Absolute return funds would have traditionally been the place that people would go to if they were concerned about markets, but they
are more sceptical about absolute return now. For this reason it is essential to differentiate between the different absolute return strategies and through detailed due diligence identify the ones that are able to navigate these uncertain market conditions and provide proper diversification in a portfolio.
“If people can accept fluctuations in capital value with equities, they can pick up 3-5% dividends in good quality companies where these dividends are well covered by cash flow and have the potential to increase over time. People are beginning to accept this, and the fact that we are now living in a more volatile environment.”
Societe Generale Private Banking
Stéphane DeVaulx, head of business development, portfolio management services
Risk assets We have turned more positive over the past 12 months on a short and medium-term view, but we continue to be just cautiously optimistic because of doubts about the longer-term picture for Europe and the United States. There are signs that cast doubts on the strength of US growth, while in Europe, although some short-term problems have been dealt with, the problems are not over.
Concerns about volatility meant we entered European equities later than we did US and emerging market equities. Our equity exposure increased in the latter part of last year as we anticipated price appreciation in the short term.
Also, we increased our focus on credit, particularly BB, high yield credit and BBB investment grade credit.
Our feelings about markets in the longer term continue as before. We are positive about emerging markets, both on the equity side and on the credit side.
More generally, we are looking at emerging markets and Asia. Historically, allocations to these markets have been lower in our portfolio, but the impact of growth is making us ask if we have the right level.
Gold has rallied significantly but the market is back to risk on and so we do not think that gold is the best place to be at present. We have not increased our position in gold in the last few months, but there are still risks that cannot be excluded from the equation, such as another round of anxiety about Europe. Oil is a focus in this regard, too, because of the Arab Spring. However, renewed market tensions are making us think about gold again.
Views from elsewhere
US Treasury yields’ fair value is between 2.5% and 3%, according to Lombard Odier. The ten-year was at 2.4% in March. A buying opportunity could be on the way.
US corporate profits and margins are at record highs, but Newton warns that in an economy where households and government are overstretched, companies may be encouraged to spend, eating into profits.
Emerging market Equities
A mild upswing in growth is taking shape, and inflation is dropping almost everywhere. Raiffeisen Capital Management says as long as the oil price does not keep rising, central banks in many markets could support their economies with monetary policy.
Healthy corporate balance sheets and attractive credit spreads suggest the medium-to-long-term view is positive, says Ian Robinson, head of credit at F&C Asset Management. But technical factors and positive economic surprises that have driven the market rally are diminishing.
Merrill Lynch Wealth Management says ultra-loose monetary policy in the US, rising inflation expectations and a low opportunity cost of investment may continue to support gold. But Schroder Private Bank has trimmed exposure, saying after eleven years of increasing value, the price of protection against an extreme outcome is high.
Hedge funds saw strong performance in Q1, even as performance by various strategies was mixed in March, according to Hedge Fund Research. Eurekahedge reports that long/short equity, multi-strategy and relative value funds witnessed their best quarter since 3Q 2009, but in March they delivered a marginally negative performance.
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