Graham Harrison, managing director at Asset Risk Consultants, looks at the performance of discretionary portfolios for private investors in recent years and months
The last quarter of 2007 saw the 'average' private client portfolio in each of the four Arc Private Client Indices risk categories make money, albeit only just for higher-risk portfolios. Certainly, the PCI results suggest that in general the higher the risk profile of the portfolio, the lower the returns recorded.
In terms of the range of returns delivered by the 28 PCI data contributors, the dispersion rose significantly in the last quarter of 2007 as financial markets underwent a rollercoaster ride. Table 1 below reveals that even in the Sterling Cautious risk category, there was a minimum of 1.5 percentage points between the top quartile and the bottom quartile. This range rises through the four PCI risk categories to 2.6 percentage points for the Equity Risk category.
The Sterling PCI results for the fourth quarter of 2007 send a clear message to investors - in turbulent times the performance differential between investment houses rises and greater investor vigilance is required.
Looking at the longer-term performance experienced by sterling investors with discretionary portfolios, Table 2 below shows discrete annual performance for the last four years. The data reveals that, although 2007 was a difficult year, except for those portfolios in the Cautious PCI risk category, which marginally underperformed cash, the average private client portfolio matched or beat cash returns for the fourth consecutive year.
Another way of presenting the longer-term results is to plot each of the data contributor averages across the four PCI risk categories in a risk-return space. The resultant scatter plot displays the state of the discretionary private client industry.
Each dot in the chart below right represents an average of the actual performance delivered by discretionary private client managers for their clients across the four PCI risk categories (Cautious; Balanced Asset; Steady Growth; Equity Risk) over the three years ended December 2007.
To place manager performance into context, an 'efficiency' line has been drawn from cash (on the Y axis) through world equities and beyond. This line represents the trade-off between risk and return that could have been achieved through holding combinations of cash and a world equity tracker. It would be hoped that a discretionary manager would be able to deliver superior returns and therefore be located above the line.
The actual results are fascinating as they suggest that, over the last three years, despite the ever widening range of alternative asset classes being utilised for private clients seeking to take only modest risk, managers have found it hard to beat cash for their lower-risk clientele.
The portfolios that have performed the best relative to a simple cash and equity tracker portfolio have been those with middling to higher risk profiles.
In pure return terms, the last three years have delivered incremental returns for taking extra risk. However, the best return per unit of risk has been delivered by portfolios classified as being in the Steady Growth PCI risk category.
What this analysis suggests is that, during the last three or four years, investment managers of lower-risk portfolios have struggled to add value, while those managers running predominantly equity portfolios have generally beaten a passive tracker-style approach. However, the greatest value added by discretionary investment managers has come in the middle-risk zones where multi-asset class approaches are common and asset allocation is the main driver of returns rather than sector or stock selection.
This result is encouraging as the majority of private client portfolios have mandates that would be placed in the two middle PCI categories of Balanced Asset and Steady Growth.
Looking ahead, it may well be that mid-2007 turns out to have been an inflection point in absolute returns. What seems even more likely is that the return differential between investment managers will continue to trend upwards as volatility both within and between asset classes remains high.
Picking an investment manager who will outperform is never easy but the relative reward for getting manager selection right is higher now than it has been for many years, particularly for those clients seeking a balance between capital growth and capital preservation.
COMPANIES PARTICIPATING IN THE ARC PRIVATE CLIENT INDICES
The following companies supplied the data used in the formation of the ARC Private Client indices:
- Ansbacher & Co
- Baring Asset Management
- Brooks Macdonald Asset Management
- Collins Stewart Wealth Management
- Credit Suisse (Guernsey) Limited
- Credit Suisse (UK) Limited
- Dawnay Day Milroy
- Ermitage Global Wealth Management Jersey
- JO Hambro Investment Management Ltd
- London and Capital
- Merrill Lynch
- Newton Investment Management
- Rathbone Investment Management International
- Rensburg Sheppards Investment Management
- RMB Asset Management
- Rothschild Private Management
- Royal Bank of Canada IM (UK) Ltd
- Sarasin Chiswell
- SG Hambros Bank Limited
- Stenham Advisors
- Taylor Young Investment Management
- Thurleigh Investment Managers
- Veritas Asset Management (UK) Limited.
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From 6 April 2019