Asset Management
WealthBriefing Breakfast Briefing Report: Innovative Financial Products for Private Clients
As private clients become more discerning, one of the key challenges for the wealth management industry is to develop pioneering products to fulfil increasingly sophisticated investment needs. How best to meet this challenge was the subject of the latest WealthBriefing Breakfast Briefing which focused on innovative financial products for private clients.
As private clients become more discerning, one of the key challenges for the wealth management industry is to develop pioneering products to fulfil increasingly sophisticated investment needs. How best to meet this challenge was the subject of the latest WealthBriefing Breakfast Briefing which focused on innovative financial products for private clients.
Lindsay Tomlinson, vice chairman of Barclays Global Investors, the world’s largest provider of exchange traded funds with its iShares range, was first to address the briefing and covered some of the key investment trends in the industry.
According to Mr Tomlinson, in the late 1990s BGI “bet the company” on ETFs. This proved to a good move as there has been tremendous global growth with more than 1,000 ETFs and about $750 billion funds under management globally today. With 550 funds and $530 billion in the US, there is greater dispersion in Europe with 450 funds and just $125 billion under management, reflecting the relative immaturity of the market. BGI predicts assets of all types of ETF globally will rise to more than $2 trillion by 2011.
Mr Tomlinson described ETFs as “an index mutual fund category killer” and believes that they have an increasing popularity amongst private banks due to their transparency, cost-effectiveness, flexibility and diversity:
“They offer a Ronseal promise in that they do what they say on the tin, they are MiFID friendly, traded on exchange and priced continuously, offering immediate exposure to a wide range of asset classes,” he said. “As asset allocation rather than stock selection is increasingly recognised as the best means of achieving return for clients, ETFs are a perfect way to separate alpha and beta and gain low cost asset class exposure for firms looking to import the beta component.”
Mr Tomlinson said that ETFs are used to achieve both strategic asset allocation in core portfolios and tactical asset allocation, through use of ETFs covering more esoteric markets. They are also used as derivatives for risk control.
He puts ETF's relatively slow adoption down to both a lack of understanding and the fact that they do not pay commission and rebates, meaning advisors have not been incentivised to include them in clients’ portfolios.
Whilst increasing familiarity is solving the first issue, growing competition is at the same time creating a requirement for lower costs and more effective strategies. Mr Tomlinson’s belief is that regulation and political and social factors will also play a part in moving the industry towards fee based financial advice.
“Whilst this move can’t be made overnight, there are powerful nudges, such as MiFID and fiduciary responsibility which will change the savings world over time,” he said.
Next to speak was Justin Urquhart Stewart, director, Seven Investment Management who focused on the fact that investment managers for the retail market need to be doing far more about charges, investment discipline and broad asset allocation.
In his view, the prevailing commission-based and product led approach is rapidly coming to an end and fee-based financial planning is a more solid base on which to build a business:
“Of the 2,000 funds available, 150 that are most often included in clients’ portfolios are those that pay the highest commissions,” he said. “Performance of clients’ portfolios often look like geographical rock formations as advisors have followed the latest fashion fad funds like commercial property which spike and then fall in value.”
Mr Urquhart-Stewart criticised opaque and high charges in the fund management industry and where in the UK the average TER is 1.68 per cent compared to just under one per cent in the US.
“It is possible to get the same asset allocation immediately, with greater flexibility and lower costs through ETFs across a broad range of asset classes,” he said. “With annual management charges of 0.5 per cent and TERs of 1 per cent, ETFs represent much better value than traditional funds and enable inclusion of a much more diverse range of assets.”
Mr Urquhart-Stewart emphasised the importance of applying institutional discipline to the retail market through investing in planning, a constant focus on asset allocation, fund and stock selection. He believes it is possible to manage volatility and predictability over time in a way which just would not have been possible ten years ago.
Advocating managing a family’s finance as a whole, Mr Urquhart-Stewart quoted National Office of Statistics data, which found that there are 33 people across four generations of the average middle class family with between £3 and £5 million in assets. According to his calculations, assuming 7 per cent growth over time on the lesser figure of £3 million, this means on a multi-generational view, the average family’s assets would be worth over £1 billon in just over 80 years.
“The industry should understand that it’s a privilege rather than a right to look after clients’ money,” he concluded. “Things are already changing and the old and traditional are dying on the vine in a move towards transparency, fair charges, understanding of risk profiles and charges reflecting non-performance.”
Bruce Macfarlane, director, MMC Ventures next looked at the benefits of private equity and in particular the advantages of venture capital in prevailing market conditions.
He said that investing in companies at an early stage in their development offers investors a chance to make substantial returns, but counselled that as investments can be wiped out as well as go up and companies rarely grow strictly according to plan, manager selection is extremely important.
Quoting BCVA data Mr Macfarlane said:
“The returns show that investors would have been made to put money into anything other than buy-outs at any time over the last ten years,” he said.
A key difference between buy-outs versus venture is that whilst buy-outs rely on debt, which is extremely restricted in prevailing market conditions, venture does not.
Mr Macfarlance said that whilst cheap and plentiful debt and robust IPO conditions have come to an end and the number of IPOs has dropped by 60 per cent from Q4 2007 to Q1 2008, venture is not exposed to the banking crisis nor drying up of bank liquidity. However it is affected by limited pools of capital due to a record of poor returns and a rising aversion to risk. He cited examples of 3i and Apax withdrawing from venture and explained that funds are economically driven to do larger deals as they grow:
“This all means that serious venture capital investors are operating in a market with limited competition,” he said. “The fact is that the best venture firms can achieve high returns – the UK top decile achieved returns in excess of 9.7 per cent as at 31 December 2006.”
Mr Macfarlane also detailed the Enterprise Capital Scheme, where returns are leveraged by the UK Government on a two for one basis, to supplement the existing EIS schemes. This effectively means that investors’ loss is limited to 48 per cent.
According to Mr Macfarlane, his own company MMC has invested over £35 million since 2000 and finds no shortage of deals to invest in. Its returns since Q1 2005 after fees, but with EIS adjustments represent returns of almost 27 per cent.
Last to speak was Alexandre Zimmermann, group head of Advisory & Investment Solutions at SG Hambros. He propounded the benefits of hedge fund platforms as a way of accessing hedge funds without the associated drawbacks such as the absence of a regulatory framework, lack of transparency, poor liquidity and issues around redemptions.
According to Mr Zimmerman, hedge fund platforms are mandated to replicate the investment strategy of their own funds, with the minimum amount of tracking error.
The key advantages are risk monitoring and liquidity:
“Valuations are carried out in a detailed way and liquidity is weekly or at least monthly, which compares well even to fund of hedge funds which offer monthly liquidity and a month's notice, which worst case scenario can extend to three months,” said Mr Zimmerman.
“There are usually a team of analysts dedicated to looking after transactions. From a private client perspective there is a comfort in someone monitoring style drift, which is one of the main reasons for risk in a portfolio.”
Mr Zimmerman says that funds of hedge funds invested in a hedge fund platform, are preferable to fund of hedge fund schemes as there can be scarce capacity in a closed end hedge fund. Another advantage is that due to increased transparency and liquidity, the cost of structuring protection is also reduced due to increased certainty. Liquidity of the structure reflects that of the underlying and so is also enhanced, meaning if a strategy is successful, it is easy to exit.
For those clients not convinced about hedge fund platforms due to inaccessibility of top hedge fund managers or because they already have hedge funds in their portfolio that are not easy to liquidate quickly, tracker funds tracking implied volatility have proved a successful hedge for funds of hedge funds and achieved positive returns for private banking clients concluded Mr Zimmerman.
