Risk management is the
order of the day
The fear has been slowly building: First Brexit, then a trade war in the Pacific and, all along, creeping fears that the current economic cycle might soon end.
Seasoned private bankers have been here before. They know what to do when there’s a recession on the horizon. Hunker down with gold, cash and other safe assets; spurn debt-laden equities and err on the side of liquidity.
Data on all of these asset classes show private bankers are sticking to their mantra. Average allocation to cash has jumped 1% to 26% at UBS, the world’s largest wealth manager. Gold has also increased: The Royal Mint saw a 40% rise in interest in the yellow metal in July alone.
But there are many reasons to believe this time is different. Firstly, negative interest rates mean that many clients – even those at Credit Suisse and UBS – are now paying to for the privilege of holding bonds. That has knock-on effects for the rest of HNWIs’ portfolio: “If investors can no longer count on bonds for protection against losses in the equity part of their portfolios, then they need to prepare for higher risk or lower returns,” says Francis Menassa, CEO and founder of JAR Capital.
Then there are other allocations to consider. Private equity wasn’t a thing for HNWIs in 2008. Now investors cannot get enough of it: 63% of HNW entrepreneurs now invest in the asset class, according to BNP Paribas Entrepreneurs Report. But with private equity funds now paying ever higher prices for their assets, coupled with their five to seven year lock-in, investors are starting to get worried. Could the party soon be over for private equity as well?
Lastly, there are those who question whether things really are going to go south. Brexit and trade wars are old news, and there is positive data as well as negative – look at employment figures which are at record highs in the US and UK. The more bullish will see these times as opportunities to maximise returns: the years and months before a downturn are often the profitable for investors.
But the clock is ticking. Wealth managers just need to work out just how long they have before markets change course. This issue of PBI should help with that decision.
Editor, Private Banker International