Wealth Managers Turning To Emerging Markets
Friday, July 29, 2011

The majority of wealth managers are increasingly turning to emerging markets in Asia-Pacific and Latin America in an attempt to deliver stronger returns for their clients.

This is the conclusion of research conducted by Scorpio Partnership and sponsored by LPEQ, which found that 84% of senior investment professionals at wealth management firms expect to increase their allocation to the Asia Pacific markets in the next 12 months. In addition, 33% are looking to boost their allocations to both Latin America and the Middle East and North Africa.

The research was carried out between April and June 2011 and included senior investment professionals from 22 international wealth management firms that together manage USD5.7 trillion in high-net-worth assets. This is equivalent to 33% of all private client assets managed by wealth management firms worldwide. The participants included universal banks, private banks, private client asset managers, multi-family offices and single family offices.

The report also found that equity allocations are also set to increase further, with 40% of wealth managers expecting to increase their equity allocations in the next 12 months, even in their most conservative portfolios.

Alternative investment allocations are also on the rise with about one-third of wealth managers looking to boost their allocations to alternative investments in the coming months.

Meanwhile, 41% are reducing exposure to fixed income and cash allocations are also on hold or declining, reflecting concerns about inflation and the impact of sovereign debt problems, the report finds.

“Complex economic and market factors are forcing wealth managers to reassess how they generate above average returns for their private clients over the longer term with solid downside protection and an inflation hedge," says Catherine Tillotson, managing partner of Scorpio Partnership.

“Many recognise that emerging markets and equity markets offer an attractive source of investment return, but with heightened volatility, persistent concerns about the robustness of the recovery and frontier market fears, managers need effective strategies to counterbalance the associated risks. It is therefore not surprising that we are seeing an increasing allocation to alternative investments – particularly hedge funds – as inflationary concerns hit the bond and cash markets,” Tillotson adds.

The research finds that wealth managers classify hedge funds at the low-risk, low-return end of the alternative investment spectrum, highlighting their growing importance of defensive hedge fund strategies in client portfolios.

By contrast, private equity is classified as high-risk, high-return within the alternative investments allocation. Most firms currently have a cautious allocation to private equity either at or below benchmark. However, 50% expect to increase their allocation to private equity this year as a source of long-term investment returns.

The research concludes that since 2009, when the previous survey was undertaken, wealth managers have reassessed their wealth management strategies across all asset classes in response to changing economic and market factors, a challenge which they are approaching with due caution.