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November 15, 2023

Exposure to equities leads to weaker third quarter for wealth managers

Investors with greater exposure to equities struggled in the third quarter, but performed more strongly than those relying on fixed-income for 2023 as a whole

By Rory Sachs

Wealth managers have grappled with tougher market conditions over the past three months, with investment portfolios across most major currencies seeing negative results due to exposure to equities, new data published by ARC Research reveals.

While early data for the first half of November shows tentative signs of healthy growth for GBP sterling wealth manager portfolios, data for July, August and September has painted a negative picture overall for investor portfolios. 

The ARC indices, which compare the portfolio performances of wealth managers with different levels of exposure to risk, found that only ‘cautious’ portfolios – which have a greater proportion of fixed-income investments – in GBP sterling terms had managed even modest gains in the third quarter. By contrast, portfolios with greater exposure to traditionally riskier equity investments saw negative results, with falls across the board in Q3.

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ARC’s indices are put together from 350,000 anonymised portfolios submitted by around 140 different wealth managers. Contributors to ARC’s data collectively manage around £2 trillion in assets. 

These portfolios are then placed into four different risk ‘buckets’, allowing researchers to see the performance of different managers compared to how much risk they are taking on. ‘What we want to see is how well they do, essentially with the “risk budget” that clients have given them,’ ARC’s managing director Paul Kearney tells Spear’s

Only sterling portfolios in ARC’s ‘Cautious’ risk bucket saw a modest index rise (of 0.3 per cent), compared with falls in buckets with a greater exposure to risk. By contrast, ARC’s ‘Steady Growth’ (with a 60-80 per cent risk relative to equities) saw an index fall of 0.2 per cent.

Wealth manager portfolios in dollar terms saw significantly worse results than all other currencies, with managers facing a headwind when making international investments given the strength in the US dollar. Portfolios in ARC’s Cautious risk bucket in dollar terms fell by 1.3 per cent between July and September, while portfolios in the Steady Growth and Equity Risk buckets fell by 3.0 and 3.9 per cent, respectively. 

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For the year as a whole, the picture is more positive. In ARC's Steady Growth bucket, where between 60 and 70 per cent of client portfolios in the private client universe are found, there were gains of 1.9 per cent in 2023 in GBP sterling terms, with a 4.8 per cent growth in USD portfolios.

Meanwhile, for November alone, tentative live data from ARC has revealed that for the first half of the month, GBP sterling portfolios in the Steady Growth bucket have seen healthy returns of 2.67 per cent.

'Internationally-focused managers were probably struggling’

In a webinar for advisers, ARC’s managing director Daniel Hurdley looked at the GBP sterling portfolio results of wealth managers in the Steady Growth risk category, comparing their performances across July, August and September. Around half (70 out of nearly 140) of wealth managers submitting portfolios to ARC manage sterling portfolios.

‘Everyone had a positive July — it was quite an easy month, equities were up, especially US and emerging markets,’ Hurdley said. ‘Bonds were broadly positive, so not surprisingly the peer group all generated positive returns.’

August had trickier market conditions, with only one manager out of the peer group seeing portfolio growth. ‘Equities were down, especially emerging markets [and] Europe,’ Hurdley said, adding that bonds had ‘flattened out’ making it harder for investors to make returns.  

September, meanwhile, saw more variation in portfolio performance across the wealth managers. UK equities were positive in September, while US equities were ‘very poor’. ‘The more internationally-focused managers were probably struggling,’ Hurdley said.

‘Those managers that did best seemed to have maximised the gains in July and minimised the losses in August and September,’ he added.

[See also: The best wealth managers for UHNW individuals in 2023]

Equities have negative reception as investors favour bonds

For the third quarter, ARC also polled different wealth managers to gain a picture of market sentiment for different asset classes.

Unsurprisingly, bonds were viewed positively by a majority of wealth managers (64 per cent), while equities had a more negative reception, with only a small proportion of wealth managers viewing the asset class positively (17 per cent). Nearly half, on the other hand, had a negative view of equity investments in Q3 (47 per cent). 

The picture for alternatives investments was more mixed, with just over half of managers (52 per cent) reporting a neutral outlook. Meanwhile, 31 per cent of managers viewed alternatives with a positive attitude.

[See also: Family offices shift to fixed income and alternatives amid high inflation and interest rates]

‘The world of fixed income has become more dramatic’

More cautious portfolios, which tend to be geared towards bonds, have seen greater levels of risk and return as the ‘world of fixed income has become more dramatic’ over the past 12 months, Kearney tells Spear's.

‘Risk is measured by volatility. Those [more cautious] portfolios will have a lot of bonds, and bonds have [recently] been a very volatile asset class,’ Kearney says. By comparison, following a long period of low interest rates, bonds have traditionally been a ‘volatility dampener’, he says. 

‘It’s not so much that people overtly took more risk, it’s that those portfolios experienced more risk.’

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