Communicating with clients has been a big focus as markets enter bear territory, the head of UK wholesale at M&G Investments has said.
Speaking to FTAdviser, Alex Matcham said for several years clients have enjoyed strong investment returns, meaning the company’s quarterly results have been relatively straightforward.
“This year is the first in many where the outcome is materially different,” he said.
The re-pricing of bonds specifically is one of the areas on clients’ minds at the moment, he explained.
Communicating with the market around fixed income has been a focusAlex Matcham, M&G Investments“That’s where we’re talking to clients the most…what are the ramifications for investments and financial strategies in general in a higher inflationary and interest rate environment.
“There are big existential questions around what a low risk asset looks like.”
However, a problem for IFAs is that clients tend to look at absolute returns, rather than relative returns, Matcham said.
This means although a fund or portfolio may have done well compared to the rest of the market, clients may still be focusing on the fact that it has lost value since the start of the year, for example.
“Through this period of time, for us, communicating with the market around fixed income in particular was one of the biggest areas [of focus]," Matcham said.
Downside protection focus
Global markets have seen huge volatility since the start of the year, as the decade of low interest rates and cheap debt came to an end.
Inflation in developed markets soared, prompting swift hikes of the base rate of interest by central banks, and a subsequent significant re-pricing of assets in almost all classes.
UK wealth portfolios have suffered as a result, losing a third of their value on average, according to the Financial Times.
M&G has been focussing on funds that can provide investors with a greater downside protection than other equivalents, and Matcham highlighted infrastructure exposure, total return funds, and shorter dated or inflation-linked bond funds as areas that could do well.
Infrastructure exposure in particular has been attractive, he said, through both equities and REITs, across investments like university housing, the national grid and even internet and data storage operators.
Your average client will be less willing to put money into their investment portfolio when they are worried about paying heating billsAlex Matcham, M&G Investments“[These assets] are a bit more defensive in nature in terms of their cash flows, and their equity tends to have held up better.”
Matcham said one of the outcomes of all the volatility seen in the markets has been a move into cash, and a slowdown in market flows.
UK investors pulled a near-record £7.6bn from funds in September, according to the Investment association
“Your average client [will be] less willing to put money into their investment portfolio when they are worried about paying heating bills.
“I think that’s a challenge for all asset managers at the moment.”
Another difficulty is how to communicate to clients who may be holding funds for varying amounts of time.
Matcham said M&G considers itself a long-term investor, and hopes that clients hold its funds for three to five years and beyond.
“It can be frustrating to be honest, as you have to have the [short-term] performance to get interest, but you have to respect that there are funds in our stable that have done well over five years or from tenure.”
In its most recent assessment of value, M&G Investments flagged two of its funds as not delivering value to customers, the M&G Absolute Return Bond fund, and the M&G Recovery fund.
The first fund underperfrmed its benchmark by around 1.5 percentage points in the five years to the end of March this year, and the second underperformed by around 5 percentage points.
The bond fund is subject to an ongoing review, however the company said while the recovery fund has not delivered value to investors, it believes it still provides them with benefits from its economy of scale and lower charges than most competitors.
The end for the UK?
One trend Matcham is picking up is the start of an anti-UK sentiment among investors, which isn’t specific to M&G.
He said clients have been speaking about the role of UK equities within a portfolio, which is shifting in favour of a more global approach.
The wealth business models are going to have to change massivelyAlex Matcham, M&G InvestmentsUK equities have been out of favour for years, with net outflows from the funds hitting £1.3bn in September alone, as volatility tore through the home market after the “mini” Budget.
Larger wealth manager clients are moving from the Wealth Management Association’s benchmarks to MSCI’s, which in practice is moving from a 25 per cent exposure to UK equities to a 5 per cent exposure, he said.
“It’s not every client, but to me the question is, what is the role of UK equities in a portfolio?”
Other challenges Matcham sees in the future are the task of demonstrating the benefit of active management over passive, and the changing face of wealth management.
This will mainly be how wealth managers deal with the intergenerational wealth transfer.
“How do [younger clients] want to view their statements? How do they want to interact? What are their sustainability preferences?
"The wealth business models are going to have to change massively."
sally.hickey@ft.com
