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Wealth Management

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A CONSUMER debit 1010 0111 0110 1010 10-10-11 01001011 VALID FROM 10/01 EXPIRES END 01/10 A CONSUMER debit 1010 0111 0110 1010 10-10-11 01001011 VALID FROM 10/01 EXPIRES END 01/10 T wo months into 2015 and financial markets in de- veloped countries have exhibited considerable buoyancy. Despite a weak global macroeco- nomic backdrop, equity markets in the United States, Europe and the UK have tested new highs, while bond markets continue to remain broadly supportive. All this should provide good news for UK investors many of whom endured a challenging 2014. Although gilts or government stocks prospered during the year, the UK equity or shares market remained flat. Furthermore many alternative asset classes, such as hedge funds, private equity and property also found the going tough during 2014. Sterling-based investors could have boosted portfolio returns by either increasing their UK gilts and/ or international equity exposures. The likelihood is, however, that rel - atively few opted for this strategy. As a consequence, most wealthy in- vestors would probably have expe- rienced sub-par returns during the year, at least as far as their financial assets were concerned. But investors and especially the wealth management firms that in - vest on their behalf are nothing if not optimistic. So despite a number of potential headwinds, such as geopolitical tensions in Eastern Europe and the Middle East, continuing prob - lems surrounding Greece and the eurozone, a slowdown in China's economic growth, uncertainties surrounding the outcome of the UK's general election in May, and the prospect of an eventual in - crease in interest rates, any one of which could spook markets, at least in the short-term, the consen- sus remains broadly upbeat. BLACK SWAN Indeed the markets already seem to have discounted some risks, not least the prospect of a Greek exit from the eurozone. Markets remained unfazed by the stand-off between Greece's new government and the troika over - seeing its rehabilitation or indeed by the prospect of a default. Of course, there is always the prospect of the emergence of an as yet unseen " black swan" or surprise event in the aftermath of either a so-called Grexit or Greek default. But the €320 billion at risk is not too dissimilar to the debt outstanding when the US city of Detroit defaulted in 2014. Finan - cial markets and investors' portfo- lios can probably cope. A big fall in the price of oil, the prospect of extremely accommo- dating monetary policies remain- ing in place, coupled with evidence that economic recovery in the UK and US is gaining traction and may even impact on the eurozone, could all provide both developed, as well as a number of emerging econo - mies' financial markets, with sup- portive tailwinds. And these could help boost financial asset prices during the remainder of the year. Equities still remain the finan - cial asset of choice for most rich in- vestors. But significant exposures to UK equities were probably best avoided during 2014. Notwith- standing the UK's economic re- covery strengthening during 2014, both the FTSE 100 and the broader market, as measured by the FTSE All Share index, both failed to make any progress. Both indices finished 2014 down in price terms. Hampered by its bias towards oil and mining companies, the FTSE 100 fell by 2.71 per cent. Taking dividends into account, however, it managed to generate a 1.04 per cent total return for the year. The broader FTSE All Share did slightly better, falling by 2.13 per cent in capital terms while generating a total re - turn of 1.47 per cent. Fixed income and internation- al equities performed much bet- ter. Gilts once again confounded expectations as continuing yield compression enabled the asset class to post a 14.67 per cent return during the year, according to the IBOXX Gilt Total Return Index. Boosted primarily by US equities, which still account for a significant proportion of the index, the MSCI World produced a capital return of 9.43 per cent for sterling-denomi - nated investors and 12.32 per cent on a total return basis. Alternative asset classes did very little to boost investor returns during 2014. Hedge funds failed to 08/03/15 #0302 With the FTSE 100 share index hitting a new high, passing through the previous record set in December 1999, the outlook for investors looks promising after disappointing returns in 2014, writes Ian Orton Wealth Management generate positive returns for ster- ling-denominated-based investors, at least according to the HFRX Global Hedge Fund Index. Although some segments of the UK property and real estate sec - tor continued to make progress, notably trophy assets in central London, the IPD Total Return Index, a much broader measure of the global market, fell by 24.37 per cent. Private equity, or at least listed private equity, generated a total return for sterling investors of 4.18 per cent, according to the LPXSI Listed Private Equity In - dex. Commodities also endured a torrid time, as epitomised by the fall in the price of oil. PRIVATE CLIENTS Perhaps not surprisingly, it was not a vintage year for wealthy UK investors. Indeed, three of the four private client indices (PCIs) pro - duced by Guernsey-based Asset Risk Consultants (ARC) registered sub-par returns in 2014. Only the ARC Sterling Cautious PCI, the least risky of the four indi - ces, which encapsulates portfolios with equity weightings of between 0 and 40 per cent, performed in line with its historical annualised return of 4.6 per cent. The ARC PCIs reflect the per - formance of around 50,000 real portfolios managed by the 54 of the Portfolio diversion should remain a paramount objective; nonetheless, return-orientated investors should favour heavier equity weightings relative to bonds UK's leading private banks and pri- vate client investment managers. Each PCI represents a different measure of relative risk. Despite a significant variation in relative risk, as measured by their holdings of equities, the riskiest financial asset class, all four PCIs generated similar returns during the year. The ARC Sterling Balanced Asset PCI, which encapsulates portfolios with equity weightings of between 40 per cent and 60 per cent, produced a return of 4.8 per cent, 100 basis points below its annualised return of 5.8 per cent. T h e A R C S t e r l i n g S t e a d y Growth PCI, which encapsulates portfolios with equity weightings of between 60 per cent and 80 per cent, generated a return of 5.0 per cent in 2014, 140 basis points be - low its annualised long-run return of 6.4 per cent. T h e A R C E q u i t y R i s k P C I , which encapsulates portfolios with equity weightings of between 80 per cent and 100 per cent, pro - duced a return of 4.6 per cent, 260 basis points below its annualised long-term return of 7.2 per cent. Clearly it paid UK investors to have significant bond holdings during 2014. Notwithstanding recent events, private client asset allocators and investment strategists have reit - erated the advice they gave their clients at the beginning of 2014. Given the ever-present threat posed by a market correction or worse, portfolio diversion should remain a paramount objective; nonetheless, return-orientated investors should favour heavier eq- uity weightings relative to bonds. "[Equity] valuations are no longer cheap, but corporate earn- ings growth should be sufficient to drive mid to high single-digit per annum returns over the medium to long term," advises UBS, the world's biggest private bank with around $2 trillion of assets under manage - ment. It prefers to overweight US equities relative to the UK. LOW BONDS YIELD Although bonds yields are very low by historic standards, UBS be- lieves they will continue to provide stability during periods of equi- ty-market volatility. But investors should increasingly look to credit as a source of return. Rothschild advises that rough - ly two thirds of a long-term bal- anced portfolio should consist of growth-related, compounding return assets with the remainder devoted to diversifying assets, such as bonds. It favours both US and euro area stocks ahead of most others during 2015. "We have little conviction in either direction on Japan and Abenomics [measures introduced by Japanese prime minister Shin - zo Abe aimed at stimulating the economy]; and we think the UK large-company market is likely to continue to lag, given its heavy re - sources – oil and mining – content, though we do prefer it to gilts," Kevin Gardiner, Rothschild's global investment strategist, concludes. Taxing issue of politics and wealth What pension freedom means if you're rich An interview with Britain's Bill Gates In this issue P06 P04 P02 Although this publication is funded through advertising and sponsorship, all editorial is without bias and sponsored features are clearly labelled. For an upcoming schedule, partnership inquiries or feedback, please call +44 (0)20 3428 5230 or e-mail info@raconteur.net Raconteur is a leading publisher of special-interest content and research. Its publications and articles cover a wide range of topics, including business, finance, sustainability, healthcare, Publishing Manager Josh Roberts Head of Production Natalia Rosek Managing Editor Peter Archer Design, Infographics & Illustration The Design Surgery www.thedesignsurgery.co.uk Contributors DISTRIBUTED IN lifestyle and the arts. Raconteur special reports are published exclusively in The Times and The Sunday Times as well as online at www.raconteur.net The information contained in this publication has been obtained from sources the Proprietors believe to be correct. However, no legal liability can be accepted for any errors. No part of this publication may be reproduced without the prior consent of the Publisher. © Raconteur Media TRISTAN BLYTHE Group editor at PAM Insight, he oversees thewealthnet, a real- time online information site, and eprivateclient website and news service. PADRAIG FLOYD Former editor in chief of the UK pensions and investment group at the Financial Times, he is now a freelance business writer. WILL GRAHAME-CLARKE London-based financial journalist and investment writer, as senior reporter for thewealthnet, he specialises in private banking and wealth management. KATHRYN HOPKINS Property and economics correspondent at The Times, she was a spokeswoman at HM Treasury and an economics reporter with The Guardian. IAN ORTON PAM Insight's editor at large and founder of research consultancy Slump Associates, he specialises in the banking financial services sector. ELIZABETH PFEUTI European editor of aiCIO magazine and newswire for global institutional investors, she was formerly at Dow Jones, Financial News and Global Pensions. EDWIN SMITH Writer and editor, he has contributed to The Guardian, The Independent, The Sunday Telegraph, London Evening Standard and City AM. INVESTORS WISH FOR MANY HAPPIER RETURNS IN 2015 RACONTEUR.NET /COMPANY/RACONTEUR-MEDIA /RACONTEUR.NET @RACONTEUR 1 i f t THIS SPECIAL REPORT IS AN INDEPENDENT PUBLICATION BY RACONTEUR MEDIA Overview 45% believe it likely or very likely the UK market will be higher in six months Source: Investors' Confidence Index 2014 70% of respondents think interest rates will rise this year

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