The Merrill Lynch Global Wealth Management Report 2011 published earlier this year found that HNWIs, at the end of 2010, were allocating 33 per cent of their portfolios into equities. The S&P 500 Index gained around 11 per cent, whilst the likes of commodity futures such as corn doubled in value.
2011 however has been a different story. According to Andreas Feller (pictured), Head of Investment Advisory, Zurich, for Swiss private bank, Julius Baer, there’s been a huge shift over the last six weeks into cash. He estimates that clients’ portfolio allocation into equities has probably dropped to 25 per cent.
“What we’re seeing more and more is that clients don’t even trust overnight bank deposits. They’re happy parking cash into institutions with no operational risk even though they’re getting zero per cent,” says Feller.
Commodities are still being favoured with Feller confirming that Julius Baer remains overweight on soft commodities. Decent allocations into precious metals, particularly gold, and the slightly riskier silver, platinum and palladium metals have been a standard play this year, with both gold and silver spiking to record highs. But given that European HNWIs are fairly conservative by nature, the rampant volatility of equity markets has understandably spooked them.
Feller says that clients were geared into markets like the German Dax in Q1 this year and remained overweight on German companies, many of whom have exposure to Asia. Recent events, however, have changed all that thanks to the Eurozone’s debt crisis. Germany’s economy practically ground to a halt in Q2, GDP growing a mere 0.1 per cent.
“When you had the first sell-off six to eight weeks ago some clients started to buy but in the process ended up getting their fingers burnt, that’s why they’re sticking to cash. Analysts are only now revising down their estimates. GDP growth softened in Q2 and could be negative in Q3, that’s what people are afraid of,” comments Feller.
That said, he sees opportunities in the consumer discretionary space such as Louis Vitton because they were amongst the first to be dumped. The smart money, he says, has also been going into cyclical stocks, a more contrarian play given their large sell-off in today’s risk-off market climate. “We also think that focusing on high dividend yield stocks is a good place to be,” adds Feller.
Right now, the tactical play is cash in Feller’s view, with clients happy to sit back and wait to deploy it back into the market. He concedes that some investors are starting to allocate into Emerging Markets, particularly Asian countries, and expects to see more capital flowing East “if the bad news here eases a bit”.
“We’re telling clients they should allocate quota to those markets, particularly China and the A share market. We recently launched a China A shares fund and placed around USD70million so far; people buy into the growth story. We also like Thailand whose market usually provides good performance in inflationary conditions,” says Feller.
On the FX front, Feller thinks that, as a pure asset play, HNWIs are allocating 5 to 10 per cent maximum: a similar level he says to last year. “Recently we were hedging euro and US dollar exposure against the Swiss franc but we’re currently unhedged as we think the USD might experience a short-term recovery.”
From a trading perspective, Feller says that one of the main trading ideas that ran and did well for clients between January and August was being short the Turkish lira against the Russian rouble. He confirms that that particular trade has now stopped. On the long side, Feller adds: “We favour the Swedish krona, the Norwegian krona, the Indian rupee. Anything that’s not the Euro is okay!”
Hedge funds continue to be a touchy subject for Julius Baer’s clients, some of who still have assets tied up in side pockets. The bank understands their frustration and although it favours them – in particular managers with exposure to the VIX – it has refrained from pushing too hard.
“As a result we’ve mostly been focusing on commodities. Portfolio positioning into alternatives, as a whole, is 15 to 17 per cent in total – slightly higher than last year when we recommended 12 to 14 per cent. Slowly but surely, though, clients are thinking about allocating back into hedge funds. They’re happy with CTAs, global macro and some equity l/s products, including UCITS, that offer good liquidity but they’re totally off funds trading asset-backed securities,” says Feller.
He says the major curveball of 2011 has been the performance of US 10-year treasuries which have now returned 28 per cent. “The 10-year treasury has been a total surprise. Most clients have been short.” Corporate bonds, which Julius Baer has been strongly recommending, have held up well this year says Feller, and have been an important source of returns.
With Europe in a deep malaise, conservative portfolio management remains very much the order of the day. Unlike Asian HNWIs, who are perhaps a bit more trading-minded, Feller says that the primary concern for its European clients is protection of wealth.
“The sovereign debt crisis is frightening to all our clients, they want to know whether inflation is coming, will the euro break up. Everyone is afraid of buying long-dated government bonds. They want to make returns, naturally, but right now it’s a case of being on the safe side. We need capitulation in the markets. If it comes, I’m sure our clients will start investing again.”
According to Andreas Feller (pictured), Head of Investment Advisory, Zurich, for Swiss private bank, Julius Baer, there’s been a huge shift over the last six weeks into cash.
