private client investment managers have struggled to outperform
cash over the current decade. Where do poor investors go next, as
they shelter their devastated portfolios in safe havens like cash,
government bonds and gold?
Investment managers face a long haul in tempting investors
back into equities, and away from the safe-haven positions built up
in cash and government securities in recent months.
Go deeper with GlobalData
US dollar and sterling-based private client investors experienced a
disastrous third quarter, according to Asset Risk Consultants
(ARC), a Guernsey-based research and consultancy based firm that
produces a series of widely-followed Private Client Indices
(PCI).
All these indices, which reflect actual portfolio performance at
firms that collaborate with ARC in the production of the indices,
recorded big falls during the quarter.
The ARC US Dollar Cautious PCI, which has a target relative risk of
between 0 and 40 percent of world equity markets, fell by the 4.8
percent during the quarter.
The ARC US Dollar Balanced Asset (target relative risk 40 percent
to 60 percent of world equity markets), Steady Growth (target
relative risk 60 percent to 80 percent of world equity markets) and
Equity Risk (target relative risk of 80 percent to 110 percent of
world equity markets) PCIs fell by 7.9 percent, 10.4 percent and
13.0 percent respectively.
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By GlobalDataSterling-based investors fared slightly better during the quarter.
The ARC Sterling Cautious, Balanced Asset, Steady Growth and Equity
Risk PCIs fell by 3.4 percent, 5.4 percent, 7.6 percent and 10.5
percent respectively.
Nonetheless, this will provide investors with scant comfort. With
equity markets continuing to tumble during October and most other
asset classes experiencing further falls most investors looks set
to experience double digit falls during 2008.
With the exception of those investors that have opted to pursue
relatively low risk strategies, most investors are probably already
sitting on big losses for the year to date, according to ARC’s snap
estimates. And even low-risk investors are still sitting on
losses.
The ARC Sterling Cautious, Balanced Asset, Steady Growth, and
Equity Risk have fallen by 4.3 percent, 9.6 percent, 13.9 percent
and 18.0 percent respectively for the year to date. The equivalent
ARC US Dollar PCIs have fallen by 5.2 percent, 10.7 percent, 14.7
percent and 19.9 percent.
All this makes for sorry reading, especially from the standpoint of
wealth managers intent on extolling the virtues of professional
portfolio management to clients. The fact is, according to ARC,
that investors may have done much better by putting their money on
deposit.
Cash is the best-performing asset class over the past 10 years. And
the adoption of a multi-asset class, or absolute-return, investment
approaches would have provided little comfort.
“The message from the first half of 2008 is that multi-asset class
investing is not a panacea providing preservation of capital in all
market conditions,” said ARC in its commentary on its indices at
the end of the second quarter.
“Taking a longer time horizon, over the past three years
discretionary private client investment managers have, on average,
struggled to beat the returns for cash. In fact looking back over
the past ten years, cash has outperformed all the traditional asset
classes. The last decade is beginning to look like a “lost
generation” in terms of financial market returns.
“Despite many discretionary managers adopting a multi-asset class
approach to building portfolios it is clear that there have been no
safe havens during this market downturn, except for government
bonds, an asset class that the majority of discretionary managers
have been avoiding for several years,” notes ARC.
“It is also worth noting that for the first time since the bear
market at the turn of the 21st century, many private client
investors will be looking at their portfolios and realising that
over the past 36 months they would have achieved similar returns by
holding cash.”
Jeremy Grantham of Boston-based fund trackers GMO has produced
performance data on a variety of traditional US dollar denominated
asset classes over a 10-year period to the end of June 2008.
These show a similar picture. US investors would have done very
well if they had focused on emerging markets, US REITs or
international small caps. But the likelihood is that their
portfolios would have a bias towards US equities and bonds. And in
real terms these produced miniscule returns. Indeed the S&P 500
failed to produce a positive return over the 10-year period.
Of course, investors might have done better with a portfolio
consisting of so-called alternatives such as private equity, hedge
funds, real estate and commodities, an approach that has served
some investors, such as the Yale University Endowment, very well
indeed.
Nonetheless, even this approach is not without significant risks.
As David Swensen, points out in Pioneering Portfolio Management,
his book which explains the Yale investment process, the trick
often comes down to manager selection as the range of returns
within alternative asset classes can be very large.
Looking forward there is no shortage of opinions about how to
reposition portfolios to protect wealth as well as profiting from
the opportunities that will surely emerge in the next stage of the
cycle (always assuming of course that capitalism survives).
Citi Private Bank tactical recommendations include overweighting
global equities, underweighting global bonds and remaining neutral
on hedge funds and managed futures and cash.
Barclays Wealth suggests focusing primarily on money market funds
credits during the immediate short term, rather than equities. In
particular it hopes to take advantage of the huge spreads between
interbank and swap rates, which look set to narrow from both sides
in the weeks ahead. But over the medium term it still suggests
overweighting equities with a bias towards emerging markets.
Mike Hollings, chief investment officer at Ansbacher still holds
with absolute returns.
“Is it too late to go into Absolute Return funds,” he asks. “Are
you kidding me? If the events of the past year have proved anything
they have proved that for far too long equity risk has been totally
mispriced. In fact risk on most asset classes has been totally
mispriced.”
Investors are only just beginning to realise that the “bull market”
enjoyed for the last 20 years was really built on flimsy
foundations, namely an abundant and easy provision of credit,
Hollings asserts.
“This de-leveraging process has only just begun and investors will
have to fundamentally reassess targeted returns within given risk
profiles,” he says, arguing for absolute return strategies even
though investors must be prepared to forgo some of the upside when
and if markets do rally.
Meanwhile, HSBC Private Bank says bluntly clients should stay in
cash. Fredrik Nerbrand, head of global strategy says the current
volatile state of the markets reinforces the bank’s view that ‘cash
is king.’
These ‘cash’ recommendations include allocations to high credit
quality sovereign debt with very short maturities, well diversified
liquidity funds and cash deposits held with a bank.
While cash holdings can offer a degree of security in times of
financial upheaval, the impact that inflation has in eroding
nominal yields is not suspended, Nerbrand notes.
Current indicators suggest that the onset of recession in the UK
will lead to a sharp moderation of inflationary pressures, but the
analyst says that “the likelihood of an expansion in the money
supply – initiated by governments aiming to support an ailing
financial sector, is such that the downward pressures on inflation
may be offset”.
Taking this into account, Nerbrand feels that cash holdings should
only be used to complement portfolios invested across a spectrum of
asset classes, and that long-term strategic asset allocation should
not be abandoned for fear of where the markets might be
headed.
EXPANSION
American Century opens office in London
American Century Investments, a US asset manager with $84 billion
under management, has launched a new office in London.
It will focus on delivering global growth, emerging markets and US
growth equities to institutions and financial intermediaries for
non-US clients.
Michael Green, a 20-year veteran of the global asset management
industry, will lead the London office. He previously served as CEO
of Morgan Stanley Investment Management, Non-Americas.
American Century’s management of assets for non-US clients has
reached about $1.3 billion, achieved without any intensive
marketing to foreign customers. A new family of mutual funds for
foreign clients to be launched in the first quarter of
2009.
