Wealth managers are expanding the alternative asset classes available to clients as a way of chasing returns against a backdrop of low interest rates and low bond yields, a survey has found.
Bfinance’s latest Wealth Manager Investment Survey gathered data from 120 wealth managers which collectively manage over $1trn (£720bn) in assets, found that there were “significant changes” in wealth managers’ investment capabilities.
More than two thirds added new asset classes for wealth clients within the last three years. Meanwhile, half provide exposure to private equity, emerging market debt and private credit, while 48% use infrastructure, and a further 42% provide access to hedge funds.
Low return on bonds
Fundcalibre senior research analyst James Yardley said that the low return on bonds is driving investors to look for alternatives.
“Not only do bonds not return much with their low yield, but because of the low yields, they are also far riskier than they were historically. This has made it harder to balance a portfolio and as a result, investors are looking for alternatives,” said Yardley.
He said infrastructure is a good alternative as it has higher yields and relatively stable cash flows. While emerging market debt is another example where investors can access higher yields.
Yardley also noted the recent boom in private equity.
“A lot of companies are now coming to public markets later because they are finding it easier to fund themselves in private markets,” he said. “The result is public market investors are missing out on a lot of the best returns, so naturally more investors are gravitating to early-stage private equity to get into companies before they grow and do an IPO.”
“In this crazy world of low interest rates and low bond yields, everyone is being driven to take more risk.”
Controlling risk and diversification
EA Financial Solutions financial planner Minesh Patel said alternatives such as hedge funds and infrastructure are necessary for controlling risk and diversification.
The Bfinance survey noted the shift towards alternatives is set to continue strongly in the next two years, particularly liquid alternatives such as hedge funds.
But passive strategies are getting less focus, with just 21% of wealth managers expected to increase use in the next two years, compared to 50% in the last three years.
ESG offering reaches record high and impact investing is on the rise
Elsewhere, ESG offerings and impact investing have shown considerable growth compared to previous years.
According to the survey, four in five wealth managers now integrate ESG considerations as part of their offerings, up from 37% three years ago.
While impact investing is also rising up the priority list, as half of the wealth managers surveyed integrate impact considerations and a third state they are actively considering doing so.
Patel said it is a surprise that ESG offering is only at 80%.
“Given the desperate issues surrounding climate change and the destruction of the environment, ESG integration should be 100%,” he said.
He added that wealth managers are nervous around ESG issues and not integrating this can be “detrimental” to the portfolio.
Patel works with Quilter and Smith and Williamson and said both firms express that ESG is a must have, rather than an option.
“At the end of the day, if there is no planet, there is no profit.”
New technology cuts costs
The study also found that wealth managers are digitalising their capabilities, with 87% adding new technologies for clients in the last three years and 90% suggesting they will in the next two years.
Cost efficiency is also high on the priority list. Charges to wealth clients have decreased in the last years by 46%, with only 9% of wealth managers saying that they have increased.
A trend that has helped cut costs is outsourcing investment to external asset managers, which can also add differentiated investment capability.
Balancing market share, profitability, and risk
The wider market also places pressure on wealth managers as firms compete for market share and profitability.
While fee compression and new tech-based competition brings additional challenges.
“Although, wealth managers are under pressure to ensure their portfolios are diversified and performing well. They are all competing for market share, it is a tricky balancing act,” added Patel.
Bfinance senior director and head of investment content Kathryn Saklatvala said the variety in investment capability has developed in recent years, with the support of in-house teams and the growing use of external asset managers.
She added: “Wealth managers are under real pressure to create high-value, differentiated product offerings, as well as find new scale-driven efficiencies that can support profitability.”
