What keeps investors awake at night? Five questions for asset managers

When private clients discuss their finances with asset managers, there is one common concern on their minds: geopolitical risks.

Ed Smith, co-chief investment officer at Rathbones, says the firm’s annual survey of clients shows that the risk of disasters, from cyber attacks to military invasions, “keeps them most awake at night”.

It’s a concern shared by some of the world’s wealthiest individuals. According to a global survey by Swiss asset manager UBS, family offices with an average of $2.6 billion in assets are “most concerned about the risk of a major geopolitical conflict.”

But “how do I protect my portfolio from global disasters?” is a tricky question for asset managers to answer — beyond perhaps the most common advice: buy high-quality fixed income, gold and energy. Major geopolitical risks are notoriously difficult to predict.

Smith says his company tries to help clients prepare by outlining different scenarios. “Each year, as a formal process, we assess what we believe are the four most consequential geopolitical risks and work with strategists to monitor them.”

The company’s sobering warnings include China’s invasion of Taiwan; the nuclear threat to Eastern Europe; full-scale war between Iran and Israel; and a systemic cyberattack.

But what do asset managers say when it comes to the risks – and opportunities – their clients identify?

FT Money spoke to companies in the UK about the most frequently asked questions from customers. These are the other four topics that come up most often in conversations:

Does the FTSE have a future?

Opinions are still divided over the debate over the relative cheapness of UK shares and whether private investors should buy them up.

“There seems to be renewed interest from some of our clients . . . but there are others who are convinced that UK equities will go the way of the dodo,” says Smith.

What is inevitable is that the UK stock market, once a mainstay of global equities, has become much smaller, both in value and in the number of listed companies. The decline has been exacerbated in recent decades by a shift from stocks to bonds to meet their obligations: payouts to retirees. This stemmed from an accounting change in 2000, which forced many companies, suddenly liable for any deficits, to adopt strategies based on long-term government bonds.

As a result, the UK stock market share in the MSCI World index has fallen from 10 percent to 4 percent over the past 15 years.

Many asset managers have therefore reduced their clients’ exposure. According to AJ Bell, an investment platform, the average balanced fund held 55 percent of its equities in the UK in 2009. This has fallen to 25 percent. In contrast, US equities have risen from 12 percent to 39 percent.

St James’s Place, the UK’s largest wealth manager for individuals using advisers, has also been steadily cutting into UK equities on behalf of clients. Figures show that around 9% of its funds under management are in UK equities, compared with 21% in 2018 and 30% a decade ago. At the same time, its exposure to global equities has increased.

Other major asset managers have taken a similar stance. “We’ve been consistently reducing our weighting in the U.K. for years,” says Caspar Rock, chief investment officer of Cazenove Capital. “People are taking a more global view.”

However, he noted that the mood towards UK shares has started to change. “There are some very cheap opportunities. M&A prices show they are undervalued,” he adds.

According to a recent survey by Rathbones, 81 percent of wealth managers and financial planners expect growth in large and mid-cap UK stocks over the next 12 months due to their attractive valuations and improving domestic economic outlook. Around 70 percent believe that valuations of UK stocks will rise relative to their US counterparts.

Edward Park, Chief Asset Management Officer at Evelyn Partners, says the UK is “now significantly cheaper than the US and continental European peers”, noting there is a “strong valuation argument” for owning some UK stocks.

“We believe in maximising a global set of opportunities,” says Smith. “But investment flows are returning to the UK — we are seeing a tipping point.”

Do I need an asset manager if I invest passively?

Asset managers are increasingly using low-cost index trackers when investing their clients’ money.

Even companies that have long had loyal active fund managers are now expanding their offerings to include passive investments.

St James’s Place, for example, has increased the use of passive investing in its Polaris multi-asset range. “The asset management industry as a whole is embracing and integrating more lower-cost investments than ever before and this will inevitably continue as the index fund universe . . . rapidly expands,” says Justin Onuekwusi, chief investment officer at St James’s Place.

Hargreaves Lansdown, the UK’s largest DIY investment platform, which has championed actively managed funds over the years, has launched a range of multi-asset funds investing in passive trackers.

But some consumer advocates say investors should be wary of paying high fees to a wealth manager who chooses tracker funds, which simply mirror the stock market. “If you’re comfortable using tracker funds, you might as well do it yourself and save the extra cost,” says Andrew Hagger, founder of consumer finance site MoneyComms.

One of the advantages of index trackers is their low costs. These can be less than 0.1 percent per year, compared to active funds, which typically charge more than 0.5 percent.

Asset managers claim they have no risk. “Liabilities are not a threat to asset managers, they are absolutely an opportunity,” said James McManus, chief investment officer of Nutmeg, which invests exclusively through index trackers. He says index trackers are “the best way to make broad investment decisions at the lowest possible cost.”

While active managers are suffering from withdrawals as clients seek cheaper passive investments, stock selection still has a role to play. According to the UBS survey, nearly four in 10 family offices globally say they are now relying more on manager selection and active management to diversify their portfolios.

“Amid rapid technological change, shifting interest rate expectations and uneven growth, the greater dispersion of returns offers opportunities for active management,” said Maximilian Kunkel of UBS Global Wealth Management. “As a result, interest in active management appears to be increasing again.”

Asset managers note that investors are interested in actively managed funds and discretionary portfolios that focus on sustainable or ESG stocks.

Frédéric Rochat, managing partner at Lombard Odier Group, says that “the next generation” in particular “is often fully committed to the ecological transition and wants to reflect their long-term convictions with the same consistency in their portfolios.”

How do elections affect my money?

The surprise announcement of the French elections in June caused shares in the Cac 40 index to fall 6 percent over the following five days. This was the worst weekly performance in more than two years.

As the UK heads to the polls next week, concern centers on what tax changes a Labor government could make if elected. “Many clients are concerned about changes to capital gains tax,” says Poppy Fox, a wealth manager at Quilter Cheviot.

Labour – widely predicted to win a majority – has said it has “no plans” to increase CGT.

But Nick Ritchie, senior director of wealth planning at RBC Wealth Management, says that hasn’t been enough to deter calls from worried wealthy clients. “A lot of people have noticed the silence on CGT,” he says. “A lack of detail makes people nervous.”

Charlene Young, pensions and savings expert at AJ Bell, says more and more investors have been selling assets in recent years to place them in a tax shelter, in what is called a ‘Bed and Isa’ transaction. “The CGT allowance is ‘use it or lose it’ and many investors have been incentivized to use the CGT allowance while it has remained more generous.”

The tax-free allowance has shrunk from £12,300 to £3,000 in the past two years. “We had discussions about CGT before the election, as allowances have fallen significantly in recent years,” says Quilter Cheviot’s Fox. “It’s unlikely that CGT will become more favourable.”

Will you have new management in five years?

As mergers and acquisitions increase in the UK market, asset managers have become attractive targets. This is partly because, as mentioned above, London-listed companies are cheap, but also because of the long-term growth prospects in the sector, which are linked to an ageing population. For example, Hargreaves Lansdown received a takeover bid from private equity firms in June, valuing the company at £5.4bn.

There has already been a degree of consolidation in recent years, including Rathbones’ acquisition of Investec Wealth & Investment UK and Royal Bank of Canada’s deal to buy Brewin Dolphin. Evelyn Partners was formed from Tilney’s acquisition of Smith & Williamson, Bestinvest and Towry over the years.

“Consolidation still has a long way to go,” says Rock at Cazenove. “There will be consolidation because of the cost of technology and regulation.” One of the most significant regulatory changes of recent times has been the Financial Conduct Authority’s Consumer Duty rules. The regulations, which came into effect in July last year to help consumers get a fair deal, have significantly increased the workload of wealth managers.

The shrinking of the sector is not without problems for clients, who are left with fewer asset managers.

“It is becoming increasingly clear that scale matters,” says Rathbones’ Smith, adding that the benefits range from managing regulatory burdens more efficiently to gaining access to parts of the market at the best prices.

“But of course there are also disadvantages to scale: the liquidity constraint for certain parts of the market.” As asset managers get larger, it becomes harder to put client money into certain funds, as these represent a larger share. This increases the risk that it becomes difficult to sell.

Just as they grapple with political risks and macroeconomic events, asset managers are preparing for further consolidation. The coming years could prove crucial in securing their future.