James Hoare is Managing Director at MP Analytics Ltd, an aggregator of investment performance data from firms across the entire wealth management industry. In this exclusive interview, he gives important figures and hints to help our users assess the performance of their provider thus far during the coronavirus crisis.
As revered investor Warren Buffet quipped, “You only find out who is swimming naked when the tide goes out”. When it comes to the investment performance – and risk management – wealth managers deliver, the coronavirus pandemic has proven very revealing indeed.
Anyone who believes that wealth managers are all alike should now certainly think again since, as James Hoare observes, “there has been very significant divergence in performance between managers during the pandemic”.
There has been very significant divergence in performance between managers during the pandemic
This divergence was particularly stark in the chaotic early phase of the crisis, he says, when the traditional correlations between asset classes broke down. Although medium-risk (sterling) portfolios fell by 12.8% on average, this figure belies a chasm between the best and worst-faring wealth managers: investors could have seen drawdowns of anything between -2% and -25%.
The unprecedented monetary and fiscal stimulus thrown at the crisis by governments and central banks in the second quarter did of course prompt strong rebounds across all asset classes. As a result, MPI’s sterling medium risk index recovered 10.9% to stand at -3.3% since the start of 2020 (as at 4 Aug). Following a similar pattern, low- and high-risk mandates now stand at -2.2% and -4.8% respectively.
Many cautious investors may have been aghast at the performance of low-risk mandates in the early stages of the pandemic, Hoare observes. These were hit disproportionately hard as many corporate bonds that had been teetering at the bottom of investment-grade were tipped into high-yield. However, much of these early losses were recouped due to the support provided by the US Federal Reserve’s strenuous bond-buying programme.
Hallmarks of outperformance
There are important nuances to note here though, says Hoare. Among those with high holdings of corporate bonds, the real winners were those typically deploying put options (instruments giving holders the right to sell those bonds at specified price at a future date). “These protective strategies fared exceptionally well in Q1 and still allowed managers to participate in the Q2 rally,” he says.
Those investing more internationally or holding more US dollar in their portfolios have fared better. Managers with long-dated government bonds will have also done well during this difficult time
Generally, global diversification, the “greenback” and (certain) fixed-income instruments seems to have marked out the better-performing wealth managers, according to Hoare’s analysis. “Those investing more internationally or holding more US dollar in their portfolios have fared better,” he notes. “Managers with long-dated government bonds will have also done well during this difficult time.”
Turning to the future, Hoare sees most wealth managers happy to sit on higher than usual levels of cash for now, with holdings having increased in the first quarter and then again in the second. However, some firms took buying opportunities in early April, and it will be interesting to see whether diving in then or staying on the side lines turns out to have been the better call (some see plenty of scope for markets to retest their bottoms as the true impact of the crisis becomes apparent in the months to come, or indeed as second waves hit).
Amid unprecedented uncertainty, Hoare reflects that “safe haven” alternative assets have predictably come to the fore. As its recent price surge confirms, the time-honoured one of gold is proving increasingly popular, but so too is infrastructure since many see this asset class benefiting from supercharged government spending intended to prop up ailing economies.
However, what is really on wealth managers’ minds – and should be on investors’ too – is inflation. “While we are clearly in a deflationary environment, several managers are thinking about the medium- to long-term prospects for inflation in the face of prolonged low interest rates and loose fiscal policy,” Hoare concludes. “The sense is that governments would be happy to see inflation rise above target.”
While we are clearly in a deflationary environment, several managers are thinking about the medium- to long-term prospects for inflation in the face of prolonged low interest rates and loose fiscal policy
Hoare’s insights and figures will provide plenty of food for thought among those wondering if their wealth manager has really done as well as they ought in past months. However, it is his words on inflation that should perhaps be taken most note of. Its ability to rapidly and dramatically erode the value of wealth held as cash is something all too easily forgotten. And, at a time when the vast majority of deposit accounts (and even cash ISAs) are paying desultory levels of interest, this issue really should be front of mind.
Don’t despair, compare
If your wealth manager has fared unfavourably compared to peers then don’t hesitate to compare their performance to the host of alternatives out there vying for your business.
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