Senior Analyst Heike van den Hoevel has been working on our “HNW Asset Allocation Trends” report. Here we ask her about what she discovered in her research.
What has been the most striking change since you last researched this topic for the May 2015 edition of the report?
2015 was definitely a year filled with volatility for the various financial markets, and the start of this year has been the worst for markets since the onset of the Great Depression. There is a lot of uncertainty, and HNW individuals don’t know what to expect. We are seeing investors rush into gold and other precious metals to hedge against potential declines in the wider market. And at the same time, investors eager to diversify their portfolios are happier than ever to invest in alternatives. Last year, Brazil was the only country where a single alternative investment constituted more than 10% of the average portfolio. This year Switzerland and the US have joined the list with 12% and 17% of wealth invested in hedge funds respectively. Alternatives are definitely becoming more mainstream.
Another trend we are seeing is the retreat from junk bonds. Thanks to record low interest rates, high-yield bonds became extremely popular among HNW investors after the 2008 crisis. However, as uncertainties mount investors are stepping away from speculative debt. In fact, wealth managers will have a tough time promoting bond holdings in general. Their best bet will be bond funds thanks to the diversification benefits they provide.
What are the current key influences on HNW asset allocation?
It’s quite interesting – our surveying of the market shows there are two key themes driving investment choices in the HNW space: capital appreciation and risk aversion. This I admit seems to be a paradox; however, investors incurred steep losses during the second half of 2015, and after being burned have become more careful – hence the rush into gold. Yet cheap equity prices are tempting, and investors have found themselves desperate for returns. While this is good news for wealth managers in the sense that investors are more likely to seek advice in an environment where achieving decent returns is increasingly hard, it also poses risks. Our research shows that the main reason HNW investors seek professional advice is that they expect better returns through an advisor. Consequently, if the capital appreciation opportunities investors are betting on don’t materialize, advisors are likely to take the blame.
What do you consider to be the main challenges for wealth managers given the current asset allocation trends?
Picking up on the theme above, I think the main challenges continue to be expectation management and client education. Investors are afraid of losing money, but at the same time they are wondering when markets will bounce back and they don’t want to miss out. They want to buy when shares are cheap. But none of us have a crystal ball, and predicting markets is becoming increasingly hard as economic principles don’t seem to hold true anymore. This means a defensive strategy is still advisable as there are significant downside risks. Wealth managers should advise their clients not to put all of their eggs in one basket but to pursue a diversified equity strategy. Discussing the trade-offs between risk and returns is critical, and mostly it is those who take a long-term view that are rewarded – sentiment-driven short-term decisions are often risky business.
By Heike van den Hoevel, Senior Wealth Management Analyst