Nearly every adviser invests for their clients over a period of decades. So what happens when they can't see past the end of the year?
Investing in the UK’s largest companies used to be a pretty safe bet. You put your money in, be it into equities or managed funds, sat tight, and watched it grow.
Consumers do not quite feel the same way anymore. The FTSE 100 is lower than ten years previously for the first time in its history. And that is beginning to impact how advisers deal with clients.
“There is no three-year or five-year trend anymore,” said James Baxter, managing partner at Tideway Investment Partners. “If you look the markets, they have simply stopped going up to the right. The vast majority are soaring up and down and tracking sideways.
“In that scenario, clients are beginning to lose patience with the idea that if you buy something and hold it for five years it will be alright.”
The knee-jerk response, he said, is to pile into short-term products like deposit accounts and cash.
State of shock
Such anecdotal evidence is borne out by a survey of 11,000 consumers across Europe released this week, by fund manager BlackRock.
“Investors are in a state of shock,” said head of EMEA product development Steven Crocombe, “and that has made them very short-termist.”
Some 36% of UK investors have increased their cash holding in the last year, with more than three quarters now saving in cash and deposit accounts. When asked what their main investing priorities were, 79% said “preserving their current wealth”.
Clients have also become more risk-averse. Less than one in five of respondents were willing to take higher risks to achieve higher returns – “a pretty stunning number”, Crocombe said.
And despite repeated accusations of poor performance and misleading labelling, inflows into the absolute return sector – with its promise to beat inflation and protect wealth – have been booming.
Earlier this year, the Standard Life Global Absolute Return Strategies (GARS) fund surpassed Neil Woodford’s Invesco Perpetual High Income fund to become the UK’s largest – an impressive feat given its four-year history.
“[Clients would] like to buy absolute return funds, but there have been precious few that have delivered consistent returns,” Baxter said. “But the fact that £13bn has still found its way into GARS tells you a lot. People are quite happy to accept lower returns for certainty.”
Lack of trust
The lack of trust in UK equities presents a problem to advisers and fund managers: only a third of investors surveyed by BlackRock thought the stock market offered any attractive investment opportunities.
But so too does an over-reliance on cash. Short-termism doesn’t bode well for pension funds and retirement plans, said M&G’s Graeme Abell.
At the Institute of Financial Planning conference last month, he argued advisers had to take action to avert a crisis caused by customers’ reliance on “safer” investment options.
Gilts and cash could no longer be relied upon, he said: “We need to be at about 3% to 3.5% real growth over a retirement period of about 23 years to ensure that a client does not run out of money. But this is made all the more difficult for advisers as clients currently have no appetite for risk. There is a crisis looming that will see people simply running out of money.”
What to do?
So, what are the options for advisers?
Baxter pointed to the growth of retail bonds. Launched on the London Stock Exchange at the beginning of 2010, they attracted £230m of investment. Last year that rose to £1.25bn, with £913m so far this year.
The number of high profile issuers (including Eddie Stobart, Tesco and Direct Line) and in some cases, generous returns, have piqued client interest for the first time since the beginning of the equity bull market in the early eighties, he said.
Advisers should look at a combination of corporate bonds and global equities over a longer time period, Abell added: “Traditionally, we have been wedded to UK equities.”
That strategy, of course, is far from foolproof. But whether it’s emerging markets, a mix of active and passive or a range of other techniques, advisers can no longer rely on the ballooning FTSE – or long-term client confidence.
Partner Insight Video: Advisers have had to adapt to the changing investment landscape.
Investment trust savings scheme