There are few places for wealthy investors to turn to achieve strong returns in a world plagued by uncertainty, low growth and geopolitical concerns.
The advice from the experts is not to take on too much risk in a desperate attempt to generate yield.
Definitions vary about what constitutes high net worth individuals, but it normally refers to people with more than $1 million to invest, outside of their principal residence.
Some advisers set a higher limit and there are some who base it on a very high income alone.
Chief executive of Koda Capital, Paul Heath, says the question investors should be seeking to answer is how to position portfolios late in a bull cycle.
"Over the last three years, globally and in Australia, high-quality, low-risk yielding securities have been in favour. Sixty per cent of developed world government securities are trading at negative yield. The search for yield has driven safe asset classes to crazy prices. What that means is you need to find yield in places where it hasn't existed elsewhere," he says.
Although Heath says most assets are fully priced, he is not predicting a catastrophic correction. But he does think volatility will continue.
"Owning a portfolio of blue chips stocks may have served you for the last three to five years. But now you're going to be looking for [fund] managers that might be able to deliver performance in markets that move sideways but are volatile. This will tend to be long-short funds or absolute return funds," he adds.
Bryan Ashenden, head of financial literacy and advocacy at BT Financial Group, agrees volatility is here to say. "As soon as it feels like we're getting a bit more stability back, something happens and the market goes backwards. There's also concern about what stability we're going to have from a government perspective."
Investors more conservative
Simon Swanson, managing director of ClearView Wealth says investors are shell shocked about the reality of lower investment returns for the foreseeable future.
"They're all pondering what they can do with their investments to protect the downside. People see heightened risk in the share market and the bond market. Whether they correct at the same time, who knows? We feel there's going to be a real grind up with only modest returns for the foreseeable future," says Swanson.
He says as a result, investors are becoming more conservative. "There's a movement to bonds and fixed interest investments."
But Swanson says the real issue is convincing clients to better manage their expenses. "There is going to be a seismic shift at the high net worth level and at the mid-market level."
Given the market's cycle, Heath believes investors should be exploring opportunities to take an interest in mid-market businesses given the big global firms are being challenged by start-ups that have new, digital business models that are not encumbered by clunky legacy systems.
"Growth opportunities in mid-cap and small-cap companies … represent much better value than the big end of town. That applies not just to developed market, but also emerging markets," he adds.
Heath says an opportunity he has found for clients is a manager that specialises in catastrophe bonds.
"Weather patterns drive economic returns from catastrophe bonds. Performance has nothing to do with interest rate cycles, currency moves or corporate earnings, which drive so many other aspects of clients' portfolios. If you blend something that is completely uncorrelated to economic market returns with an investment that is highly correlated with market returns, you can end up with a very different risk/reward profile for clients," says Heath.
"Trying to find asset classes that will perform in different circumstances is an important part of preparing portfolios for that late-stage bull market where we can see sideways volatility, and you've got to find ways to create returns in that environment."
Annuities increasingly popular
In a low return environment, Ashenden says annuities are also becoming more popular given they deliver a guaranteed return. "There will be periods when you do have low growth, but it doesn't mean you stop doing anything. It's a good opportunity to sit back, and reflect on where you are."
Anthony Kapetanovic, managing director Akambo Private Wealth, which specialises in providing advice to self-managed super funds, says the strength of the Australian dollar has produced opportunities to buy overseas assets.
"High net worth clients are looking to own international assets on a direct basis. Clients are really seeking out a greater yield with high levels of security. A lot of corporates have issued instruments that are paying a more attractive yield than cash, albeit with slightly higher elements of risk," he adds.
Kapetanovic adds that insurance bonds are becoming more attractive, with investors looking for alternatives to save in a tax effective manner.
Heath says: "Clients should be exploring tax-effective vehicles to use as investment platforms. Super remains a very effective way to accumulate wealth. But investors are now considering family trusts and other tax-effective mechanisms to do that."
Fears over fresh global crisis
The fragility of the global outlook is also concerning clients. Says Kapetanovic: "Corporate earnings are low. There are political issues around the world. They're things that are keeping investors awake at night."
He also says the wealth management and advice sector is going to be impacted dramatically by changes to the accountants' licensing regimes. "I think accountants will begin entering the advice space and they will really adapt to make sure they're helping their clients in a complete sense."
Heath says investors are still concerned another GFC is around the corner.
"Statistically, these are one in 100-year events, and we've just had ours. If you think about the commentary that emerged following Brexit, it was a doom scenario. Yet that's not what materialised in markets at all. There is a post-GFC bias towards looking for the disaster, which frankly doesn't exist when you look at the economic circumstances we find ourselves in, and where we think we're going to be."
However, it's the desultory outlook for markets that's the real bugbear for wealthy investors at the moment.
"What we're saying to our clients is that you can achieve decent returns for decent risk, but not in the traditional places where you might have been looking over the last five years. You need to look outside the usual investment opportunities, and for that you need hard work, thoughtful research and good advice," says Heath.
In light of the current environment, he also advises investors to be responsive to market movements.
"Act quickly to capture market opportunities when dislocation occurs," says Heath. "That's very important, because set-and-forget has been a little bit of a mantra for many private investors for a long time. This isn't the right strategy for where we're going, given we're seeing so many unusual things in the marketplace."
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