Using Private Client Investment Data As Reality Check

Tom Burroughes Group Editor London 13 February 2024

Using Private Client Investment Data As Reality Check

A point that often comes up in conversations with wealth managers is the importance of accurately setting clients' expectations – no easy task. Trustworthy data, set in full context, is important, argues Asset Risk Consultants.

Asset Risk Consultants – which this news service has interviewed here – is marking 20 years of providing performance data for the great and the good of the wealth industry, keeping an eye on how they are doing against a genuine benchmark and, of course, against their peers. 

We caught up with its managing director Paul Kearney, who joined the firm three years ago after spending a long career working for private banks.

The kind of detailed investment returns' data from private wealth advisors that Asset Risk Consultants (ARC) produces is vital in anchoring clients’ expectations, the organisation said after issuing 2023 figures a few days ago.

Reliable figures that help keep clients grounded about what’s realistic are important because problems often arise when people think they must chase returns, Paul Kearney (pictured), managing director, ARC, told this news service earlier in January. Kearney now looks at these issues from a different perspective, having been the private banking head at Kleinwort Hambros. He’s gone from “poacher,” so to speak, to “gamekeeper.” Kearney appears to be enjoying himself, although he has little patience for those who claim that performance isn’t a key if not the main test of wealth management.

“The ARC Indices were launched 20 years ago to provide average, and quartile returns, net of fees, across four risk profiles and in five currencies. Understanding the realistic range of returns for a given level of risk had historically been an almost impossible task,” says Kearney. “Certain managers still regard their approach to investing as so different from what everyone else is doing that they cannot be ‘benchmarked’ by the ARC Indices. This is gibberish. Outcomes are key and it is important for the integrity of the process.” 

Indeed, the central concept behind the design of the ARC suite of private client and charity indices was the notion that investors are interested in outputs rather than inputs. Thus, there are no pre-set asset allocations; no asset class restrictions; no concentration limits; and no index performances used. Such rules are concerned with inputs. Rather, according to ARC, it is the output that determines the classification and ranking of each portfolio. The risk of each portfolio is compared with the risk of equity markets. Then the performances of portfolios that have evidenced similar risk characteristics are compared.

“All private clients awarding a discretionary mandate to a wealth manager essentially sign up to a strategy that gives the manager a clear risk budget to work within. How they choose to invest in line with that risk budget is entirely at their discretion,” says Kearney. “Whether they seek to invest in low-cost passive ETFs, actively managed fund of funds or undertake fundamental equity research, the outcome for the risk taken can, and should, be compared in a net of fee basis.”

The rises in interest in the past two years, taking the “risk-free rate” to around 5 per cent, means that the days when a person would be forced to hold relatively risky equities or other assets to obtain any kind of return over zero, are over. Notably, the ARC data reflects the shift in portfolio construction with the percentage of sterling private client portfolios falling into cautious and balanced asset categories declining. The proportion of portfolios in the cautious category fell from around 10 per cent at the end of 2010 to below 1 per cent at the end of 2022. Taking the two lowest risk categories together, the percentage has fallen from around 40 per cent of portfolios to around 15 per cent. Today, private client discretionary portfolios with a calculated risk, below circa 60 per cent of world equities account for only around 20 per cent of the PCI portfolio universe.

But the changing landscape has arguably also put a premium back on active wealth management, keeping pressure on fees, meaning that repeatable performance is important. So, to the Consumer Duty regime that came into force in July 2023. Wealth managers are also under more pressure to show credible, sustainable results for clients against stated risk preferences. That is bound to be a positive for organisations such as ARC, which charges a fee for commercial use.

“In addition to private investors seeking to understand how their returns compare, the ARC Indices are equally valuable to their IFAs. These firms are seeking investment managers on behalf of their private clients and need a robust method of selecting firms to work with,” Kearney said. “The advent of Consumer Duty regulations has made it even more vital that IFAs and the wealth managers themselves assess the investment outcomes that they deliver for their clients and more critically assess their value.”

Another significant change over the past two decades has been the rise of ESG. While it has been around for some time, Kearney suggests that it has “matured." Amongst the private clients ARC works with, Kearney says there is a growing desire for their portfolios to achieve net zero greenhouse gas emissions.

Kearney explained that the world equity index has carbon intensity measured as Scope 1 and Scope 2 emissions of around 100 tonnes per £1 million ($1.3 million) invested. However, most private client portfolios have a much lower carbon intensity due to being underweight in energy, mining, and utilities. In our experience, the average private client equity portfolio runs at around two-thirds of that figure, or 65 tonnes per £1 million invested.

“One area where we are advocating direct engagement with managers on their ESG strategies is to seek a better understanding of the carbon intensity of investment portfolios. Requesting the carbon intensity of your investment portfolios provides a clear data point from which carbon offsets can be calculated and a better understanding of the climate impact of investment strategies used by your managers,” says Kearney. “The FCA’s Sustainability Disclosure Requirements tackle the issue of greenwashing by seeking to ensure that statements are fair, clear and not misleading. This simple data point is part of that journey to positive engagement.”

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