One of my favourite analogies comes from Rory Sutherland, the Vice President of the Ogilvy Group and author of ‘Alchemy: The Power of Ideas That Don’t Make Sense’:
‘A flower is a weed with an advertising budget.’
Rory has an acute ability to turn conventional wisdom (he’d prefer the term ‘rationality’ or ‘logic’) on its head and presenting it as something which is utterly concealed by our own preconceptions.
It is these preconceptions or, indeed, ‘biases’ that I wish to touch on today. In particular, how the financial services industry has stuck to its own conventional wisdom, even as much evidence is pointing to the fact that the playbook is being rewritten.
Whilst I am sceptical of those who term everything as ‘’unprecedented,’’ I think there is no term more befitting of the last 5-7 years. And, to the Websters’ credit, this is something they foresaw as far back as 2014 after the Russian invasion of Crimea. It is because of these unprecedented times that the conventional wisdom of the traditional finance sector is the square peg in a round hole.
The Demise of ‘Conventional Wisdom’
It might not be immediately apparent, but there are a few golden rules of financial services that have, largely, stood the test of time… until recently.
The traditional 60/40 portfolio, used the world-over as a means to structure a client’s portfolio, has been met with one of its most damning challenges this year.
It is important to understand why this portfolio has become one of those ‘golden rules.’ Having been around for some 40 years, invented by the Vanguard founder, John Bogle, it was conceived to weather all market conditions: with 60% in stocks to provide returns, 40% is then put in bonds to reduce volatility and provide income.
This year, however, stocks are down (the S&P and NASDAQ have reversed their gains of 2021 falling 23% and 32% year-to-date, respectively, at the time of writing) and bonds are down even more.
Furthermore, reports earlier in the year saw BlackRock, the world’s largest asset manager with over $10 trillion under management, break records. Whilst BlackRock is used to breaking records, this record was one not to shout about. BlackRock recorded a loss of $1.7 trillion in clients’ money in the first six-months of 2022: the largest amount of money ever lost by a single firm over a six-month period. Larry Fink, BlackRock CEO, said, “2022 ranks as the worst start in 50 years for both stocks and bonds.” The bigger they are the harder they fall, I guess.
Morningstar’s Director of Manager Research, Tim Murphy, said, ‘’The big challenge of the last 12 months is it’s been the first time bonds and equities have gone down at the same time – there’s no place to hide.’’
During these ‘unprecedented’ times, conventional wisdom is being tested and it’s coming up short. For example, Vanguard’s balanced ETF is down 12 per cent over the last 12 months. This is before looking closer: its allocation has a more conservative 50/50 split, rather than the traditional 60/40, but that hurt it, rather than helped it.
Now, if these so-called ‘golden rules’ are failing in the face of ‘unprecedented’ economic times, with mass sell-offs of stocks – particularly in the tech markets – and the bond markets, where are investors turning?
The answer: alternative assets.
The Rise of Alternative Assets
An alternative asset is one which sits outside the traditional realms of equities, bonds and cash. In particular, an alternative investment can be anything from private equity or venture capital, hedge funds, art and antiques, commodities, wine and whiskey, and real estate.
It is these assets which are getting the most attention as investors push for higher-yields in the prevailing high inflation, low growth economic environment. The reason for such an interest is because alternative assets are not affected in the same way by market swings, geo-political tensions or supply chain shocks, as are stocks and bonds.
The attention garnered by alternative assets was echoed by Jonathan Shapiro of Financial Review when he said, ‘’The move away from 60/40 has also involved allocating away from stocks toward private equity, unlisted infrastructure and property. That is a trend that is here to stay as more super funds and advised investors are moving towards alternatives.’’
Similarly, Hamza Malik of City A.M. writes, ‘’Demand for alternative assets is set to soar by 46 per cent over the next 12 months as inflation sends investor interest surging.’’
This is something I have witnessed myself. During my day-to-day, I interact with professionals across the finance and real estate sectors, many of whom oversee clients and their investments. It has become a common theme in discussion with them to hear them say how they are looking to ‘diversify’ their clients’ portfolios – and by ‘diversify’ they mean invest in alternative assets.
Those more revealing types tell me their ‘normal’ investments of bonds, stocks, mutual funds and structured notes have done little less than hit the proverbial fan. It is the Seventy Ninth Group that has given them some respite to be able to regain some of the losses their clients have experienced this year.
This is not a temporary reallocation into alternative assets. I believe there is a more permanent element to this shift. For instance, large financial brokerages have opened their client portfolios to alternative assets already, working with investments in commodities, real estate and private equity. This is a clear indication of how alternative assets have the ability to shield investors during dire economic times.
Ultimately, firms and individuals in the financial services and wealth management space who do not take this opportunity to change course may see there is no space left for them.
The Seventy Ninth Group – The Vendor of Choice
The Seventy Ninth Group continues to go from strength to strength, and as we gear for what could be a nasty, prolonged recession, we are confident in our ability to capitalise on the opportunities that lie ahead.
Distressed market conditions are where the Seventy Ninth Group performs optimally. And, directed by the expertise of the Webster family and the global, corporate expertise that surrounds us, it’s easy to see why our investors and partners impart their confidence in us, even as reports of doom and gloom are now commonplace. During the COVID-19 pandemic, our client base grew from 380 clients to over 800: recognition that the Seventy Ninth Group is the alternative – and is successfully investing in things that are beating inflation and still making money.
The demise of the conventional wisdom of the financial services sector has created a groundswell of interest in alternative assets. Where the Seventy Ninth Group operates across the UK real estate sector and the natural resources sector in the Republic of Guinea, we have become the vendor of choice for professionals in the financial services space who are looking for alternative investments.
Whilst we have seen much interest in those wishing to work with the Seventy Ninth Group and our investment opportunities, a looming intransigence in the sector remains. This unwillingness to delve into the alternative asset space may be the writing on the wall for these firms and individuals who cling to the mask of their conventional wisdom contrary to all the evidence. After all, the definition of insanity is to do the same thing over and over again and still expect a different outcome…
In all, will 2022 be remembered as the year which rewrote the playbook in favour of alternative assets?
If you ask me, I think it’s already The Times bestseller.