Q: Which asset classes, sectors or strategies are attracting your attention and why?
Working on a UK small-cap strategy, I continue to be amazed by the abundance of value on offer. It has been a torrid few years for the asset class, particularly as high interest rates are like kryptonite for these businesses. It causes the double headwind of higher interest bills and valuation compression. Layer on challenging economic conditions and reduced domestic buyer interest and you have the conditions for a perfect storm.
See also: Bank of England holds interest rates steady at 5.25%
However, key attractions of the asset class remain. A common misconception is that these businesses are solely tied to the UK economy, but last year the Aim market derived half of its revenues from outside the UK, offering global diversification. International participants are waking up to the opportunity set. With inflation having peaked and expected rate reductions in H2 of 2024, the outlook now looks more supportive.
Q: What asset classes should investors be thinking about beyond equities and bonds?
Private investments have become the focal point of global discussions in recent years. Pension managers in particular are looking to increase their allocation to private assets in search for potential higher returns for their members. Hopefully we can channel some of the billions of assets held in UK DB schemes to help address our growth challenge in the UK. Retirement savings make up just 10% of Britain’s venture capital funding, compared with over 70% in the US.
As a general theme, in the UK we are very good at providing angel capital but nowhere near as good at scaling businesses. The Mansion House Compact is a step in the right direction, with nine of the largest UK pension funds voluntarily committing to allocate 5% of their assets to unlisted equities over time.
Q: How do you see sustainable and ESG-oriented investing evolving from here?
It will be interesting if we see any harmonisation of the measurement of ESG data and their methodologies by rating agencies. A stat from The Economist is that ESG scores from different rating agencies correlate less than 50% of the time, versus over 99% for credit ratings. I also think the emphasis placed on ‘E’, ‘S’ and ‘G’ will continue to evolve with time. Studies show younger generations are more likely to want to consider climate change in their portfolios, versus baby boomers.
See also: CCLA’s Corah and Berens: Why ESG funds need to raise the bar for their investors
Q: What will be different about the investment sector a decade from now?
The theme of consolidation across the industry seems set to continue, given the compelling advantages of scale, particularly for large passive houses. Smaller establishments that manage to compete effectively against larger counterparts will likely need to offer distinctive and niche services. Products will become more personalised and evolve to fit particular needs of new audiences.
To read the rest of this article, go to the March edition of Portfolio Adviser Magazine
