BT’s annual study tour this year took advisers to the United Kingdom.
The five-day trip included meetings with advisers, investors and industry bodies. This short article is part of a series of key lessons learnt from the trip.
Participants on the BT UK study tour heard that increasingly, clients in the UK invest passively. They heard of a surge in demand for ESG and alternative assets. And participants heard of very long-term trends in investing – around the economy, science and society, and what that means for assets.
From the team at Square Mile, the participants heard that passive investing is growing in the UK, providing a challenge for active managers, who typically have a larger share of the investing pie. Adding to the challenge for active managers is that passive has outperformed active in recent years.
Square Mile says few advisers believe the next ten years will be like the previous, low interest rate decade. While that supports the need for active investing, it isn’t easy to convince investors of that, particularly if they think they can get a six per cent return being passive.
ESG principles are another increasing focus and the UK’s Sustainable Disclosure Requirements will force funds to classify themselves along those guidelines, though details are still pending.
Alternative investments are also popular among some cohorts, such as high net worth individuals chasing returns.
Passive investing with choice
Representatives from Hambro Perks (HP) agree that passive management is growing in popularity, but clients still want choice, particularly the ability to shift into ESG options and alternative assets.
As a firm, HP is edging towards investing almost solely in what it describes as assets that are ‘good for the planet’. Half the portfolio of companies HP directly invests in are tied to the United Nations Sustainable Development Initiatives, and that will soon be 75 per cent.
Alternative investments have appeared ‘exciting’ to many investors in recent months. There is an emotional pull from clients to put money into a compelling story where growth and job creation is often higher, according to HP. Also, for several years, returns among some alternative assets have been strong.
While public markets now look more attractive because the interest rate cycle is turning and equities are again more attractive, it takes about 12 months for that information to filter through, and hence asset re-allocation isn’t immediate, according to HP. That is a challenge for advisers to explain to clients the outlook for asset classes.
HP also notes that more women are controlling household finances and taking a longer-term approach. That is an opportunity not only in investing, but also in creating brands that speak to women specifically.
According to HP, women are generally more risk averse, and the engagement model of advisers needs to be different.
Long-term investing themes
Wellington Management has undertaken extensive analysis around future themes that have the potential to provide outsize returns. They are divided into four categories.
- Systems – macroeconomic, financial markets, geopolitical.
Science – innovation.
Sustainability – social, environmental and economic.
Society – future work, leisure and self.
One thesis is that the planet will face a major global water crisis and it will become an asset class where demand outstrips supply. That involves investment risks in asset classes like agriculture and commodities, and certain geographies. It also presents opportunities in recycling, water capture and desalination, as well as sustainable food chains.
Another thesis of Wellington’s is that genetic testing and genomic sequencing will fuel a revolution in drug discovery that will transform the health care system. A third is that current financial systems are inefficient and ripe for disruption, which will have a big impact on legacy financial companies and digital money.
For long term investors, it is important to consider structural changes to economies and what that means for long term returns.
