Wealth management: uncertainty is not over yet

While global equity markets have clawed back some of the losses they experienced during the March selloff, the recovery has not been uniform.

For instance, though the S&P 500 hit a new record high in August, wiping out losses from the Covid-19 selloff, just 38% of stocks in the index drove the recovery.

"Covid-19 has lost much of the shock factor that led to the initial market crashes in March. While further crashes of that magnitude are unlikely, the remaining uncertainty means that investment markets will remain volatile for some time," explains explains Farhad Sader, MD of Old Mutual Wealth.

And wealth managers will face numerous challenges in preserving and growing client wealth. This is because global economies are still some way from a return to pre-pandemic growth levels, global risk factors are rising due to second infection waves, and Brexit and a messy US presidential transition have an effect. "It is almost impossible to construct a portfolio for specific events such as pandemics, elections or Brexit, because we cannot predict the outcomes with absolute certainty," says De Wet van der Spuy, managing executive of Stanlib Multi-Manager.

The subsequent lack of a uniform or consistent recovery across markets and sectors as well as sustained uncertainty underscores the importance of diversification.

"Diversification across asset classes, asset managers, investment styles and geographies remains essential. Blending these considerations is critical for the construction of a robust portfolio that can help clients navigate any potential future economic and market turmoil," adds Van der Spuy.

With regard to high net worth (HNW) clients, the right mix of investments and allocations in a portfolio will vary according to a specific needs and circumstances, such as their time horizon and risk appetite. "A prudent approach starts by taking a holistic view of a client’s financial framework to identify the different asset categories that form part of their balance sheet," explains Murray Anderson, CEO of FNB Financial Advisory.

With this understanding, wealth managers can construct appropriate portfolios based on principles that apply to different asset classes.

"For example, a more secure low-risk portfolio typically follows a broad diversification strategy across a range of uncorrelated asset classes to provide inflation-beating returns for clients that require wealth preservation for their financial independence in retirement."

Conversely, a self-employed HNW individual who typically generates wealth via their business, property portfolio, or a share scheme, requires a different approach.

"In this instance, a wealth manager would consider the client’s entire portfolio and set up an appropriately diversified investment strategy. Depending on liquidity needs, exposures could include fixed income, allocations to alternative or unlisted assets, or offshore equities," adds Anderson.

Among these options, a focus on offshore investments is vitally important, affirms Sader.

"Most SA investors have an estimated 65%-80% of their total wealth invested directly in the local economy, which represents only 0.5% of the global market."

Anderson explains that there are several ways to achieve global diversification. "These include asset swap mechanisms, or converting rand into hard currency and investing the assets into offshore listed or unlisted funds or shares."

Van der Spuy says: "Offshore linked platforms can also help wealth managers to diversify into offshore markets easily through discretionary plans and life wrappers."

In this regard, Sader asserts that there is a clear need for wealth managers to provide expert advice and solutions to navigate what is a broad and often confusing landscape. "Wealth managers must conduct an investor risk and needs analysis to determine the appropriate asset classes to invest in abroad. The investment manager can then structure a discretionary portfolio according to the investor’s risk profile," he says.

"Crucial considerations when planning to invest offshore include the optimal investment vehicle, the related tax implications and currency fluctuation factors."

The global market has the added complexity of a choice of thousands of companies and funds in which to invest.

"In this regard, many wealth planners rely on discretionary fund managers to navigate this complexity and assist with model portfolio construction," adds Van der Spuy.

"Expert discretionary fund managers typically have well-resourced teams that conduct asset manager research and construct appropriately diversified portfolios for wealth planners, and leverage offshore teams and global partnerships to assist with international fund manager selection."