The financial markets remain challenging for even the most clairvoyant investors. Turbulent, uncertain, and volatile are the frequently used adjectives to describe the outlook.
The advice offered to high net worth investors by the army of UK-based wealth managers, private banks and family office advisers is much sought after to steer a course through these troubled waters.
A quarterly, qualitative survey of professional investor sentiment, the Practical Intelligence Barometer (PBI), has recently been launched by the research and design company Fundamentals and PR consultancy Broadgate Mainland, to capture the views of these advisers on the markets and which products are in or out of favour. The panel gave their views on a range of investment products including exchange traded funds (ETFs), investment trusts, absolute return funds, hedge funds, frontier markets and sustainability funds.
The PBI panel fears we have entered a two-speed global economy. The western powerhouse of the USA and Europe crawling along with low, single digit GDPs encumbered by sovereign debt and banking bail outs; and the emerging markets of Asia and some countries in Latin America and Africa surging ahead, based on strong indigenous commodity wealth and low cost manufacturing. For the UK, there a lingering fear of a double dip recession and the government’s spending review is seen as a possible catalyst to tip the economy over the edge.
ETFs, which are expected to grow globally by 20%-30% in 2010, are not seen as the products of choice for equity investing but are widely used for commodity allocations, particularly gold. Verbatims included, “With markets likely to trade sideways for 18 months, we think you really need have active managers in this kind of environment,” and, “We use them for areas where a manager cannot add value e.g. gold.”
Often seen as the actively managed version of ETFs, investment trusts, received a more favourable press. After a relatively quiet 2009, it has been all go in the sector during 2010 with 10 new launches raising a total of £1.16bn since the start of the year. Respondents favour the products for their discounted pricing and long term out performance. They’re also preferred to unit trusts for their lower management fees and exposure to gearing. Critics complain of cases of a lack of liquidity and that they are under marketed with a rather dated image compared to ETFs.
While investment trusts have had a historical role in investment portfolio, absolute return (AR) funds are the new boys on the street. There are currently 48 funds with a total of £13.6 billion of assets under management in the UK alone, and they have been the investment of choice for most advisers for the last three years but they seem to be losing their shine. They are still popular for their lack of correlation and low volatility. But there is growing criticism of their lack of transparency and that many are correlated to the markets and consequently have suffered poor performance during the market wobbles in 2010. Comments included, “Often they are glorified bond funds, with a bit of long/short hedge fund exposure,” and, ”The Investment Managers Association was right about the greyness of the sector, some are more ‘directional’ than others.”
The lack of transparency in AR funds is also the biggest single criticism of hedge funds. There is a widely held desire for improved disclosure with investors still suffering a hangover from Madoff and other ponzi schemes. Improved regulation offered by UCITS III is seen as a definite plus and there was a 50/50 split between using funds of hedge funds and single managers.
Further a field frontier market investing is gaining in popularity but investors are proceeding with caution by using specialist emerging market or global fund managers. Concerns remain about liquidity but it is seen as a good long term investment prospect for adventurous investors.
If you’re looking for support on investing in the environment, professional advisers are unlikely to be your first port of call. The majority of advisers see them as being appropriate for rising markets and are unlikely to put them on the suggestion list unless driven by client demands.
With the latest research revealing that the UK is home to more than 250,000 millionaires who are collectively worth £1.28 trillion, the prospects for advisers remain good. The challenge is to make sense of the markets with clarity, direction and stability much in demand.
';