As Brexit arguments drag on and the prospect of prolonged political uncertainty continues to drip into their newsfeeds, clients are unsurprisingly nervous about investing. But even though UK politics are a sideshow to the larger investment world, fund managers agree: the character of global markets has fundamentally changed.
As many of our Top 100 firms noted this week, deep market drops at the end of last year undermined client confidence, and 2019 has not rallied them.
We took the opportunity to ask advisers at the Welsh leg of our Roadshow whether they felt the same. IFAs spoke of ‘gloomy outlooks’ and a potential for ‘market turmoil’, though much of this was mingled in with UK-centric concerns about the government’s failure to establish certainty around Brexit.
James Abram, financial planner at Cardiff-based Abram Partnership, told New Model Adviser® a noticeable amount of clients were holding back new investment due to uncertainty. ‘Some clients do not want to invest a large sum of money because they are unsure how the markets are going to react. They see the news, politics and Brexit have a huge impact on how people’s minds work.’
Ensuring funds fit a client’s risk requirement is paramount, Abrams says. What were previously conservative portfolios could become riskier.
Change in scales
Bertie Dannatt, an investment director at Ruffer speaking to advisers at the event, said one of the factors causing ‘classic’ or ‘conservative’ portfolios to take on risk is many contain corporate bonds. The bonds do not possess the liquidity they once did and, if there is indeed a downturn, there will be a rush to sell.
‘A classic conservative portfolio is one with a third of equities, one third of corporate bonds, a bit of cash, a bit of property and possibly a bit of private equity. But corporate bonds especially have been a clear area people have sought,’ he said.
‘Our concern here is bonds should not sit in neutral funds with managers promising day-by-day liquidity. Corporate bonds actually don’t possess that real liquidity. So if we have an accident or a downturn, a lot of people will be trying to sell.
‘Conventional portfolios now lack the general protection for the risks and changes we see ahead,’ he said.
Ruffer’s broader strategy of portfolio protection is a combination of maintaining capital to weather any potential downturn, and also to stabilise portfolios in part by making a greater allocation of government bonds, which Dannatt sees as a safer option.
‘We understand the case for protection, but where should that protection be sought? In our minds, when we see the next downturn, we feel the need for a mix of conventional and unconventional protections,’ he said. ‘At the heart of our conventional investments is the need for a greater allocation of government bonds, because we think after a decade these bonds will be more beneficial.’
Trevor Greetham (pictured above), head of multi-asset at Royal London Asset Management, believes the volatility and panic currently seen in global financial markets could potentially carry on for years.
‘We saw panic in December 2018. The market had the worst December on Wall Street since 1931 with the great depression,’ said Greetham. ‘We have to assess whether investors are still panicking or being too optimistic in the current climate. The volatility we have seen of late will carry on for two years.’
With whispers of a downturn growing louder, fund managers across the country are having to decide which approach is best: rolling the dice or reducing portfolio risk for their clients by including more resilient and diversified funds.
Ruffer’s investment director David Ballance (pictured above) claimed some wealth managers were pushing clients into riskier portfolios to project ‘an illusion of stability and liquidity’.
‘This downturn has brought a hunt for riskier portfolios and managers moving up the scale to find those streams of income to furnish people’s financial needs. People are being forced into things they wouldn’t naturally own.’
Ballance added the ‘tectonic plates of investing are moving and shifting’ and questioned whether a typically conservative portfolio was now suitable for the risks that lie ahead.
He also said clients need to be fully aware of any potential future risks, as they ‘cannot fall into the trap of thinking they can ride this one out’ because ‘why would you put your clients through the emotional stress of potentially losing their life savings?’.
While some clients are looking to decrease investment risk, many are now reluctant to invest at all.
Riding the storm
As uncertainty continues, some advisers believe consumers are ‘getting used to’ unsteady markets, and are looking at a more long-term approach. Advisers are also trying to shrug off domestic and world events by keeping to their tried and tested methods, while also seeking out any potential opportunities.
This is how Liam Fowler (pictured above), financial planner at Heron House Financial, is choosing to approach his work. ‘Things are slowing down, but we don’t pay too much attention to that,’ he said.
‘We are long-term investors, we avoid the noise that is going on within the market. So I don’t pay too much attention to what is going on externally, in the news and things like that, especially the news about the US, China and the trade issues.
‘All we can do in these sorts of times is use that as an opportunity for investors, instead of being concerned.’
Greetham agreed. While volatility and uncertainty are here to stay for the time being, he said investors that stay calm and actively monitor funds through these troubled times can still weather the storm and even get ahead.
‘Volatility can help if you are an active investor. When investors or consumers panic, nine times out of 10 it is a great time to buy. The worst thing to do is to sell during a time of panic.’
Chris Jones, propositions director at Dynamic Planner, said advisers were not bending to any client calls to de-risk portfolios, but the funds themselves are changing.
‘In terms of narrative and feedback, we haven’t actually seen or heard of advisers noticeably de-risking,’ said Jones. ‘What we have seen is asset managers doing it. There is a big difference between what an asset manager and a fund manager can do in terms of timeframe with multi-asset portfolios.
‘Asset managers are more reactive with short-term risk options. So generally speaking, when we have spoken with them it is to check what they are doing is not resulting in major changes to portfolios.’
As an example, Jones took a portfolio on the higher end of the risk scale: six or seven. A portfolio manager might invest more in cash in the short term to make the most of the opportunities created by volatility.
‘What they are doing is an active manager’s job while also operating within the controls the client has set. Advisers wouldn’t be able to do that because, generally, they are slower to react.’
Citywire’s head of investment research, Frank Talbot, says ‘huge numbers’ of mixed-asset funds had missed out on the bull market over the last 10 years by taking too defensive a position. Essentially, trying to call time on the rally is not new and those who have been doing so over the past few years have missed out.
‘While I agree with the notion that there are clouds on the horizon, that has been the case for at least the last two years, if not longer,’ said Talbot (pictured above). ‘The US Federal Reserve’s change of stance on interest rates may well have delayed a correction even further. And should the US-China trade war subside, it’s perfectly possible to envisage an extension to the rally.
‘That said, investors should avoid going into increasingly risky parts of the market that they wouldn’t do were it not late in the cycle. The drawdowns are sharper in those areas as they tend to be more illiquid.’
The message for advisers is to be watchful, either of funds chasing performance or drifting into high-risk positions by other means. But financial planners will have also done well to resist the urge to call the correction and de-risk.