Having learnt bitter lessons from the global economic downturn, wealth managers are now returning to the basics of investment and putting money into simple and safe assets.
Last year, the crisis triggered a domino effect in stock markets and dented property values in major economies around the world, wiping out billions of dollars of high net worth individuals (HNWIs) investments in these assets globally.
Wealth managers had their share of losses too, resulting from this global maelstrom, which left them wondering how to put their clients' wealth to the best possible use to circumvent losses as much as they could.
Cut to 2010. Wealth managers believe there are telltale signs that the global wave of downturn seems to be on its way back to recovery. Nevertheless, the return to normalcy is still too far.
So how should HNWIs and wealth managers navigate the road ahead? What are the emerging trends in the wealth management sector in the UAE and the GCC? Are they any different from global ones? Wealth managers do not think so.
One of the common trends is that wealth managers and HNWIs are following a cautious approach in the current market conditions and their risk appetite for complex and riskier assets has retreated.
"The trends in the UAE are not too much different from what the global trends are. There is a cautious approach prevailing globally as well as locally. Banks across the globe are in the middle of the credit cycle, while portfolio performance continues to remain fragile globally as well as regionally," said Shahid Niazi, Head of Royal Preferred Banking and Business Banking at RBS, UAE.
One size does not fit all
One of the lessons both wealth managers and HNWIs learnt from the downturn the hard way is that putting all eggs in one basket is a risky proposition. One of the biggest risks emanating out of this investment approach is that if the price of the high-yielding asset drops, the investors end up losing considerably, as they did not have a broad-based investment strategy to fall back on in case of a disaster.
One of the realisations among the investment experts is that diversity is a virtue and investing in a diversified asset class tailor-made according to a client's individual portfolio allocation and risk appetite is a preferable way now.
There are three things that determine a client's portfolio. The first is the risk that the client is prepared to take in order to achieve a fair return. The second is the level of return that a client needs, and thirdly and most importantly, what the client himself is trying to achieve. Depending on what the client is trying to achieve, the structure of the portfolio is completely different. So, one size does not fit all and it is all bespoke, said Khurram Jafree, Director and Head of Investment Advisory Mena, Barclays Wealth.
One of the lessons most investors have learnt over the past year-and-a-half is to ensure their portfolio is diversified, not only by asset class, but also diversified across the region. Clients are looking at their wealth more holistically, he said.
Another visible trend in the region's wealth management is that the HNWIs investment strategy is becoming global, a departure from the earlier trend noticeable a few years back when they invested their capital in regional assets only, such as local stock or property markets.
"The asset allocation has changed and has become more global. What the past two years in the Middle East, particularly in Dubai, have taught investors is that what goes up can also come down and that managing risks is often about spreading your investments across many different things that may well be not correlated to one another, said Nigel Putt, Head of Private Banking (Middle East), Lloyds International Private Banking, Dubai.
The biggest mistake is to over-concentrate their wealth into a single asset class. Very often, clients think if they are making money in a single asset class, they should put all their money into that. But when the prices drop, they lose considerably. Risk is not so much about volatility, but it is all about the ease with which someone can replace a loss, he said.
Return to simplicity
Another major emerging trend in the region's wealth management is that private bankers and HNWIs are returning to more simple investment instruments.
Market volatility continues to be a predominant feature and there is a shift happening from longer-tenured products, offering less volatility, into shorter-tenured products that relatively offer more liquidity, said Niazi.
One of the things that many clients have learnt is that something that might be complicated may appeal to their intellect. However, when it comes to their performance, often something that is simple performs as well if not better, said Putt.
"One of the lessons of the financial crisis is that complex instruments have actually not been well understood even by the provider, and certainly not by the buyer. It is almost like back to basics," he said.
Putt said it would be some time before the majority of clients start to go back into things that are by their nature complex, or possibly even viewed as sophisticated.
What people are most concerned about currently is safety and security, pointed out Rohit Walia, Executive Vice-Chairman and Chief Executive Officer, Bank Sarasin Alpen (Middle East) and Alpen Capital (Middle East).
Investors have always been concerned about security, but now they have become more cautious. This is markedly different from their earlier position two years ago when they said we want a double-digit return on investments, he said.
Where to invest
Traditional investment options still rule the roost in the current market conditions, believe wealth managers.
Although investors are concerned about the stock market volatility, but they still invest in equities market as fundamentals are still strong, said Walia.
Valuations are very attractive and it is a great time to buy. Investors are not specifically looking at sector-wise performance of stocks, but they look at fundamental pricing structure of the markets, he said.
Investment in agriculture is another emerging trend, according to Walia, and HNWIs are looking at acquiring farmland assets or looking to invest in companies that are into agri business globally.
Besides, regional sovereign bonds are also in flavour as they offer good return over a period of three to five years. And even if property investment has fallen out of favour, check your facts again, as for wealthy investors it is still a great idea today.
"A right kind of property is still an interesting asset class," said Walia.
Other investment options are mutual funds and exchange traded funds (ETFs).
"We are seeing a gradual shift of clients from structured products to mutual funds, ETFs and bonds, among others," said Niazi.
The UAE is still a very good wealth management proposition because of a large number of non-resident Indians and non-resident Pakistanis in the country. Banks have started to ramp up their wealth management operations and are hiring more front-end staff such as relationship managers, private bankers and so on, to gear up for the turnaround in the market, said Niazi.
Key investment takeaway
- Risk appetite for complex instruments has declined
- Complex investment instruments need more transparency
- Wealth managers inventing bespoke investment products for their clients
- Diversified investment strategy pays in the long term
- Regional high net worth individuals are deploying capital globally
- Presence of a large number of NRIs and NRPs makes the UAE a wealth management hub
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