| Unaccustomed to financial insecurity: the plight of the wealthy |
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| Mark Cunningham examines the Irish wealth management sector and predicts the winners and losers in the current bear market. |
An advert from a wealth management firm in the January edition of Barrons depicted an obviously wealthy, if slightly forlorn looking, middle aged American and carried the headline, ‘Unaccustomed to financial insecurity?’
What this advertisement reflects is the sea change that has gone on in the wealth management industry as a direct result of three years of a bear market. No longer will private clients be content with occasional tips in the equity market or single building bets in London property. Nor will it be adequate to find single tax shelters or a favourite fund. The experience of the past three years has been too challenging for many clients and the need for integrated advice that can bridge the various disciplines of wealth management is now firmly established both here and overseas. If anything, it is the one discernible trend that can be found amongst those who provide financial services to the high net worth sector.
Not that there has been a decline in wealth in Ireland in the past three years. There hasn’t, despite what the mainstream press might like us to think. Obviously enough there have been heavy losses in equity portfolios but continued growth in property markets, and in wealth generated from private businesses has meant that most private clients built significantly on their overall net worth in recent years. Neither is there a slowdown in the demand for high calibre advice - quite the opposite in fact as many seek out advice in face of unfamiliar market conditions.
But financial uncertainty there certainly is and for me, it was best encapsulated by the question a client recently posed: ‘Equities uncertain, property expensive, tax breaks gone, conflict in the Middle East; just where am I going to make some gains this year?’
Where indeed?
For those nursing equity losses it could be tempting to think that with three years of negative returns behind us that we must ‘naturally’ be at a turning point. Indeed many commentators, including us, would subscribe to the view that of the main asset classes, equities appear to make the most compelling case at this juncture. It is an argument supported by much less demanding valuations, stuttering economic recovery, a clean-ish bill of health for Corporate America and signs of recovery in earnings numbers (at time of writing I hasten to add). While the shocks that hit the equity market last year could scarcely have been predicted, the risks that exist in the near future are perhaps more apparent. Doubtless markets will look for a benign and speedy outcome to conflict in Iraq and the only true antidote to the bear market will be a sustained recovery in earnings. On balance however, we believe that we’ve seen the worst of the bear market and private investors should be in the market as opposed to being bystanders to a recovery, when it comes to pass.
While I would agree that it is difficult to make a case for a big rebound in equities, its equally difficult to point to another asset class that will outperform this year.
For the few who focussed their efforts exclusively on the bond market, last year was a rewarding one with many investors continuing to enjoy wide credit spreads (albeit less so later in the year). However, it is somewhat more difficult to make the case for sustained interest cuts from current levels - there is just no room for a repeat of the past few years. With the noticeable exception of the Euroarea, where economic conditions remain in the doldrums, bonds, at least of the government variety, are unlikely to prove as valuable to private clients in the coming year.
For those with a taste for the more exotic (hedge funds in particular) the past year has probably been a bit of a disappointment unless CTA’s, global macro or short selling made up a large part of the strategy. Expecting the average long-short equity manager to deliver a strong positive performance at times of such negative returns was asking them to be very, very short in 2002. However most should fair better in the year to come.
Look east...
In the past couple of years we have noticed a significant growth in interest from private banking clients in overseas property. It’s well known that Irish investors were amongst the most active in the UK market last year. A perhaps more recent trend has been the growing interest in continental Europe. Mature developed markets such as Amsterdam and Paris have certainly been of significant interest to Irish investors but for those with an appetite for greater risk and higher yields have already begun the ‘exploration’ of Eastern Europe, most notably Prague and Budapest. Yet the early movers may not have all the advantage here - indeed some Irish investors have not found it to be as straightforward as it first appears. There may be a premium in yieldm, and vacancy rates look reasonable, but it is still all about location and quality and that doesn’t always announce itself to the first buyer in these markets. What is almost certain on the property front is that 2003 will see considerable competition amongst the bigger players in the syndicate market, ourselves included, to woo the private investor into overseas property.
A combination of pressure on rental yields and continued high vacancy rates will hamper the Irish commercial market. While we would expect to see quality properties in continued demand, it’s hard not to make the case for a softer commercial market. The wild card always seems to be the residential/buy to let market but we’d be of the view that the heady days are (well) behind us. While we do not believe we will see a downward slide in prices, it appears that this market is finding much more of an equilibrium.
Put it all together and the traditional long-term alignment of the relative attractiveness of each asset class is beginning to look like the most probable outcome for the rest of this year. Our best estimate is that equities might just pip property, followed some way back by bonds and cash.
Changing client preferences during the bear market
The experience of the past three years has taught many private clients a lot about what they require of their advisors. No longer will it be enough to have the ‘product of the day’ on the shelf. Private client advisors will need to be in a position to advise on ‘the big picture’ and that means the integration of funds, property portfolios (including syndicates), share portfolios and alternative investment strategies into a coherent long-term plan that can serve for years to come. Advisors who fail to deploy pension planning, tax and estate planning and integrate credit strategy into these long-term plans will repeatedly find themselves incapable of meeting client needs in the broadest sense.
The last three years has also seen this change coupled to an increase in the demand for independent advice - most especially at the upper end of the private client market. Few high net worth individuals have the time to seek out and screen opportunities and most prefer to hire in firms who can demonstrate an ability to source ‘best product’.
The sea change that we have witnessed in markets has had a substantial impact on the wealth management industry. Here in Ireland many that saw it as a matter of simply riding the wave of the good fortunes of the wider economy, have learnt the error of their ways. The experience has been similar but perhaps more pronounced globally, with many well-known names suffering bruising encounters with the world’s wealthy and being forced to rein in their ambitions.
In the coming years, those who see an end to this period of uncertainty are preparing for continued and considerable growth in the need for professional advice. Nevertheless the industry will face significant changes ahead with the ‘one-ball jugglers’ likely to find it an unforgiving market. Those that can bring a breadth of service to accompany top-drawer advice should flourish once the current turbulence on global markets subsides. That fact alone underpins the continued attractiveness of the sector and shows just why we continue to see international entrants into the Irish wealth management business. |
Mark Cunningham is managing director of Bank of Ireland Private Banking.
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| Article appeared in the March 2003 issue.
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