How are the mighty fallen. This summer shared office space provider WeWork was expecting to debut on the stock market with a valuation of more than $47 billion as a plumb equity investment. The enormous figure then halved and roughly halved again when investors withdrew support. A few weeks ago, the initial public offering (IPO) was abandoned altogether.
WeWork’s experience follows the pattern of a number of unicorns and other high-profile companies that have either seen valuations slashed following their debut on the stock market or have also withdrawn their IPOs.
According to research by data and analytics provider Refinitiv, worldwide IPO activity in the first nine months of this year fell by 27 per cent compared with 2018.
The Capgemini World Wealth Report 2019 shows equities were replaced by cash as the most held asset class by high-net-worth individuals (HNWIs) in the first quarter of 2019, with equities’ share of financial wealth falling from 31 per cent to 26 per cent. Wealth managers say the escalating trade war between America and China is partly to blame.
Equity investment out of fashion
Jochem Tielkemeijer, investment consultant at Dynamic Solutions, points to research showing that over the past 12 months all equity sectors experienced net outflows, with the exception of Japanese small caps, while European and US equities sectors saw most outflows.
He says: “Nothing scares investors like significant volatility spikes and from what we hear a number of investors have the correction of Q4 2018 on their mind still. Next to this it’s the mix of well-known fears that have been discussed extensively in the media, including the global growth slowdown, trade war and Brexit.
“There’s almost never been a moment in market history where there isn’t a combination of fears investors fret about, but this time it’s perhaps aggravated by the fact that the current bull market is getting long in the tooth. We can all safely agree that we’re closer to the end than the beginning, but the question is what happens from here to then. Historically these last periods before the crash tend to be quite positive for equity markets.”
Investors’ discomfort with equities, while understandable, can be costly, especially if they shun the asset class completely
So what effect has this shunning of equities had on wealth managers looking for investable assets? “There’s still a hangover from the financial crisis which tarred the entire financial sector with the sins of investment bankers,” says Chris Barrett, investment director at JM Finn.
“We’ve maintained a dialogue in terms of explaining our rationale for equity investment and therefore our clients have not missed out on the ten-year bull run. Bespoke service and granular understanding of the client’s objectives are tantamount, and this usually involves capital growth, not merely income generation or preservation.”
Equity investment – new opportunities
Mathieu Saint-Cyr, managing director and head of asset management at Geneva Management Group, believes that asset managers need to challenge the traditional asset allocation models for an equity investment and think outside the box in the search for returns.
One area for sustained growth that provides good portfolio diversification and new types of equity, he argues, comes in the form of innovative technology companies, such as fintech and blockchain startups. “These niche markets can be more resilient during challenging times,” he says.
Stéphane Monier, chief investment officer at Lombard Odier, warns: “Investors’ discomfort with equities, while understandable, can be costly, especially if they shun the asset class completely. We believe a prudent positioning is key right now and advise our clients to use option strategies on equity indices to minimise drawdowns in their portfolios.
“For our sterling portfolios, we currently recommend holding equity put spreads with January 2020 expiry to protect this year’s gains. This helps to hedge around 10 per cent of the overall portfolio value for a balanced profile, while mitigating costs.”
As part of their portfolio diversification, many HNWIs are looking to tried-and-trusted alternatives, such as venture capital and property. Property investment firm CapitalRise has seen an increase of 62 per cent of HNWIs registering on its platform in the first ten months of 2019, compared with the whole of 2018.
But they’re also exploring new areas alongside their equity investment portfolio, such as funding legal cases. “Litigation finance is an attractive proposition to fund managers because it offers good yields, it’s uncorrelated to bond and equity markets, and it can form part of a diversified portfolio for major institutional investors,” says Robert Hanna, co-founder and managing director of Augusta, the UK’s largest litigation funder by volume.
The company has a fund of about £250 million and typically invests between £250,000 and £5 million on a case. “It’s important to have a wide range of cases in your portfolio, as even the best cases can still lose if they go to court,” he cautions.
Tangibles – a good investment decision for HNWIs?
Penny Lovell, chief executive of Sanlam private office, says: “What many professional wealth managers, as well as high-net-worth individuals, have correctly identified is that real assets are one of the most powerful and effective ways to fill that gap in portfolios, while also providing a buffer to equity market volatility.
“Investments in tangible things like renewable energy projects and wind farms offer less correlation to equity markets and the economy, with the potential to generate decent returns over and above inflation.”
Generally though, wealth managers need to rethink their strategy, according Ferréol de Naurois, head of global capital markets at Capgemini Financial Services. “Against the backdrop of a changing wealth environment, firms will be forced to rebuild their business models and redefine the relationships wealth managers and clients share so as to stay competitive and relevant,” he says.
Reliance on asset performance is risky for firms managing their clients’ equity investment requirements, Mr de Naurois argues, as it’s dependent on external factors, and HNWIs are also looking for better experience and connection than just asset performance.
“This could also be seen from our analysis in World Wealth Report 2019, which showed that while the market performance went down in 2018, the trust in wealth management firms and wealth managers was still high. Hence, the need for a value proposition that differentiates on personal connection remains a critical factor to build trust and confidence in an uncertain environment.”