The investment performance of wealth managers has lagged this year’s strong rally in stock markets, though they have recovered most of their clients’ losses over the credit crisis.
Average returns ranged from 10.4 per cent on “cautious” portfolios to 28.7 per cent for higher-volatility “equity risk” portfolios between the end of February and the end of September, according to figures from performance measurement company Asset Risk Consultants (Arc). Balanced portfolios – which consist of half equities, half other assets – were up 15.9 per cent on average.
However, over the same period, the FTSE 100 index rose nearly 40 per cent, while the MSCI World equity index was up more than 35 per cent.
Similarly, in the past three months, when the FTSE 100 soared 21 per cent – its biggest quarterly gain for decades – managed portfolios showed good gains but still underperformed.
Cautious portfolios, which might hold just a quarter of assets in equities, were up an average of 7.8 per cent in the third quarter of this year, against 10.7 per cent for balanced portfolios. Equity-risk portfolios, where about three quarters of assets are in equities, were up 16.5 per cent, says Arc, whose performance figures are based on the discretionary portfolios of dozens of wealth management companies.
“This very big rally has caught out some managers – they weren’t quick enough to rebuild their equity holdings,” said Graham Harrison, Arc managing director.
After last year’s record stock market falls, when many indices were down about a third in sterling terms, managers were still “derisking” their portfolios in the first quarter, he said, and so were underweight equities when the rebound came. “They then needed to be selling bonds in the second and third quarters and buying equities. Instead they were buying into bonds.”
“Understandably, many managers would have been waiting to see if the rally had any momentum. But when they realised it had legs, they were already behind,” he added.
Ronnie Armist, executive director of the Stonehage Group, the family office and wealth manager, said that being defensively positioned in high-quality blue chips would also have held back portfolios. “Managers would have underperformed unless they were very nimble in shifting into more cyclical and highly-geared companies.”
However, he said it would have been “very hard” for managers to call the bottom of the market in March, given the uncertain effects of government actions to stabilise the financial sector and put liquidity back into the markets.
“Without doubt, some managers have been forced to chase the rally. There’s almost been capitulation on the upside.”
Now, though, with the momentum of the rally having “ebbed away”, Harrison said: “Managers who’ve ridden the rally are taking profits while those who have been underweight are praying for a ‘W’ [shaped market recovery]”, so they can buy in on a correction.
But while wealth managers have trailed the recovery, portfolios are typically less than 10 per cent down over the credit crisis. And the average cautious portfolio is up 6.3 per cent since mid-2007, according to Arc.
“By and large ‘cautious’ portfolios did their job and preserved capital,” said Harrison. He added that their 10 per cent average gain during this year’s rally had also been substantially more than that available to investors holding only cash.
In spite of most portfolio types still showing losses since the credit crisis started in mid-2007, they have outperformed the FTSE 100 index – which is still down nearly 15 per cent, even including dividends. Weak sterling has helped investors with overseas holdings.
