Consumer trust isn’t something to be taken for granted, but reports from the UK, US and here at home are all pointing towards an uplift in trust levels around financial advice, which can only be a welcome development.
There are significant tailwinds behind the financial advice industry at the moment, but some major obstacles are still preventing advice practices from taking advantage of surging demand according to a new study from CFS.
Manager selection key in PE
Returns for the classic 60/40 portfolio are expected to be “uninspiring” for the 2020s, according to Schroders, and investors are rushing towards private markets to recapture some approximation of the returns they’ve enjoyed over the last decade.
According to data from Schroders, private equity has on average produced a 2.4 per cent net return above listed markets – represented in this case by the average of all private equity managers against the S&P500. But the dispersion in returns in PE is still huge, and manager selection is key.
“If you were unfortunate enough to invest in the bottom quarter of managers throughout the past 20 years, you’ve almost returned nothing,” Claire Smith, alternatives director at Schroders Australia, told the Inside Network’s Alternatives Symposium on Wednesday (February 23).
“But if you’re lucky enough to pick those top performing managers, that’s where you can get those really outsized returns – managers delivering a 20 per cent internal rate of return.”
Schroders maintains a database of 6000 PE managers around the world, and keeps an eye on individuals within companies as well based on the deals they’ve done, so that they can “delve through and find the right managers and the individuals with the access.”
“Good investors with a good track record get better access to deals; it’s not a market with a lot of symmetry of information,” Smith said. “… Particularly if you look across markets like Europe, where there’s a lot of different languages and cultures – it’s a hugely asymmetric information market, and you can use that to your benefit to exploit the best language opportunities.”
“We know that a lot of financial advisers don’t have the time or the expertise to do that, and we’ll do it on your behalf and in offshore markets where it’s really difficult to undertake that onsite due-diligence and understand the market dynamics. And it’s difficult to build – when you’re talking small amounts of money – a globally diversified portfolio.”
The opportunity is predominantly in the smaller end of the market, where that asymmetry is heightened, and Schroders doesn’t have to contend with cashed up mega funds hungry for yield
(for private equity, “small” is less than one hundred million dollar/euro enterprise value).
Healthcare and technology are particularly lucrative sectors, and are more accessible through private markets; there are only around 2500 listed healthcare companies, but 145,000 in the private markets. Schroders also “particularly likes” the intersection of those two markets – artificial intelligence that can diagnose a patient, software systems for medical practices – and the consumer story in China, which is a “trend that Schroders has been following and which has been quite profitable in recent years.”
