Rothschild Wealth Management is gradually increasing its exposure to real estate, attracted by commercial property at a time of negative real interest rates and low bond yields, while it continues to be positive on equities, gold and commodities.

In its latest update on its views, the wealth manager says that, in the current environment, there is a structural shift in investment demand towards risky assets. 

“One area that looks increasingly interesting in this environment is commercial property. It is a tangible asset with yields from rental income that are both fairly predictable and typically much higher than those on government bonds. While short-term performance can be choppy, we believe there are attractive opportunities and we are therefore gradually increasing our exposure to real estate,” Dirk Wiedmann, head of investments, said in the note.

“We maintain our clear preference for real assets such as equities, commodities, gold and property over paper assets such as bonds and cash. Hedge funds continue to play a very valuable role within our portfolios,” he continued. “For all three of these asset classes, we are keen to raise our exposure, but we are doing this only gradually as timing is tricky and the short-term risks are high,” he said.

“Portfolios of government bonds and cash will not keep pace with inflation or generate a positive real yield. To meet their objectives, many investors – and pension funds in particular – will be pushed into holding higher-risk bonds, equities and other real assets,” he said.

“In the weeks ahead, record low interest rates, lifelines for banks and the prospect of more asset purchases may well bolster the current rally in risk assets. Yet while the immediate tensions have eased, we remain concerned about the fragility of both the financial system and the economic recovery,” Wiedmann added.

He said the firm is gloomy about the investment outlook for bonds, arguing that they will “produce very low returns” and are costly, overvalued and vulnerable to any increase in inflation. A sell-off in the near term is, however, unlikely given the central bank purchases of debt.

On the equity markets, Wiedmann said equities are trading at valuations that normally fit with robust returns but he is waiting for a better entry point before increasing the firm's exposure, given the risks of a setback to markets after what has been a strong run.

In the case of hedge funds, he argues that the sector looks attractive particularly in the case of those “agile managers” whose returns are not closely correlated with equities.

As for commodities, Wiedmann had mixed views. The oil price may fall if there is no shock to supply, but the investment case for gold, he said, remains as strong as “it has ever been”.