Global wealth trends worth watching

Globally, wealth is increasing, but returns have been low, creating challenges for investors seeking yield. Here are some of the major global wealth trends to watch.

Absolute return funds

With traditional low-risk investments such as cash deposits and Government bonds delivering little in the current climate, ARFs are emerging as a way of generating positive returns irrespective of the prevailing economic conditions. They employ derivatives, currencies, futures and direct investments into equities and shorting. Specifically aimed at the moderate- or low-risk investor, funds like Standard Life GARS or Aviva’s Multi-Strategy Target Return Fund have seen a big rise in inflow as a substitute for other ‘safe’ bets.

“Their target is to generate a mid single-digit positive return irrespective of what the market does,” says George Flynn, associate director with Smith & Williamson.

Bond iceberg

When interest rates are low, there’s only one way they can go – and the knock-on effect of a rate rise would see bond prices decline, even where they are Government-issued. Adam Cleland, head of wealth advice at Davy, warns of a “bond iceberg”, whereby the visible part above the surface represents the historically low yields currently available.

Hidden below the waterline, however, lies a much greater potential fall in bond prices if interest rates rise. “People expect a good wealth manager to bring them live recommendations that are going to help them and protect their portfolio. There’s a risk in this environment that people could get shocked,” he says.

Global outlook

Historically, investors who are new to wealth management tended to put their money into domestic assets, but this is changing. Capital from the Middle East and Asia is flowing into Europe. Similarly, investors here are finally turning away from property and looking beyond Ireland for opportunities.

“They are following the US or UK approach, managing inter-generational wealth. Instead of investing spare cash in property, they’re now looking at creating a globally focused diversified investment portfolio,” says Andrew Fahy, tax and financial planning director of Investec Wealth and Investment.

New type of manager

There is a strong emerging middle class across the Asia-Pacific region, with McKinsey forecasting net new millionaire wealth will reach $17.7 trillion by 2018 in Asia

. New private investors like these will all require quality advice around investment structuring, tax and retirement, and Fahy believes this is driving demand for a new type of investment firm. “What you’re seeing now is a composite aggregated service – investment management but also international-quality advice in other areas such as retirement succession and tax planning,” he says. “Because we’re becoming more global in our investment outlook, multi-jurisdictional aspects of tax and succession planning are coming more to the fore because now the typical high-net-worth individual has assets all over the world.”

Exchange traded funds

Exchange traded funds, or ETFs, have seen huge inflow recently, with some estimates suggesting they could overtake other forms of alternative investment in the years ahead. Some in the industry argue against ETFs because they aren’t actively managed but instead are passive funds that track the performance of an index like the S&P 500, sectors like consumer brands, or geographical markets. But they’re becoming too big to ignore. “ETFs drive a huge amount of liquidity in the markets, particularly in the US. There’s a huge broadening in that market. Now, there are ETFs that give clients access to a varied portfolio – although we would still advocate that they use an adviser to guide them on ETFs if they’re not financially savvy,” says Flynn. “Technology is a great enabler of these trends in that it lowers the cost and increases the access,” adds Cleland.

Third-party managers

Following the fall in the equity market after 2008, Irish investment managers increased the use of third-party managers, particularly in the area of alternative assets, as a means of reducing volatility. “With such strategies often incurring a high additional cost for investors, it will be key to ensure that they deliver on their promises in a more challenging investment environment,” says Niall McGrath, senior manager with PwC Wealth Management.

Charge transparency

In the wake of the financial crisis, clients evaluating their investments were sometimes shocked to discover additional costs on top of the management fees; for example, a charge levied on every transaction in the portfolio. Now, armed with more data about fund performance, terms and conditions, investors are demanding greater transparency in charging structures. Some fund managers are responding by removing layers of transaction costs such as dealing commissions. “Investment managers are moving to align their interests with the client interests, for example, charging a management fee and no transaction fees,” says Flynn.

Digital disruption

Investors now have information literally at their fingertips through their smartphone or tablet. Traditional investment firms have made their information digital in order to serve clients better, but financial technology start-ups are challenging them by offering low-cost online investment tools. Assets under management on these electronic platforms have grown significantly. Andrew Fahy of Investec says the greater use of technology is a natural trend, but he believes it should complement the role of investment firms. “Technology is there to help everybody, and it makes it easier to communicate, but based on what we see, clients want a hybrid service. I’ve never met a client who wanted everything digital and at arm’s length,” he says.

Goals-based management

A trend running counter to the recent market turmoil is a move towards goals-based wealth management. This type of financial plan links the individual’s long-term objectives with their asset portfolio. “It’s best summed up as ‘what is the money for’, as opposed to a conversation about equities and bonds. It should influence what that investment is and it acts like a guide along the way,” says Davy’s Adam Cleland. He notes that the start of 2015 saw very strong performance for euro-based investments, but that got much less media coverage than the summer sell-off. George Flynn agrees. “Investors that are savvy enough to have a plan will know there will be bumps in the road, but on a blended basis, they’re looking at 5-6 per cent returns per year. Some potential or prospective clients think the industry is all about trading. It’s not, it’s about picking good assets, taking a long-term view, managing the volatility and just being vigilant,” he says.

Commodity exposure

The commodity super cycle seen during the earlier part of this century is now rolling over, as demand for copper, iron ore, coal and other commodities has fallen due to oversupply. George Flynn advises caution for anyone invested in companies such as Rio Tinto or BP.

“It’s a huge trend and one to watch if you’re exposed to it. I’m not making a call on it, but it’s hard to see an inflection point where you would say commodities are cheap, it’s time to look at it again.”