NEW YORK (Reuters) - Memories of a sharp market drop in early 2016 coupled with fresh uncertainties over votes in Britain and the United States are prompting some top wealth management executives to lay out more conservative plays for their clients.
Caution is creeping into the vocabulary of executives at some of the industry’s biggest wealth firms as they suggest safer investments in municipal bonds, plus alternative investments like real estate, to protect portfolios against big negative moves in the months ahead.
“We are seeing more caution now and higher-than-usual cash balances,” Andy Saperstein, Morgan Stanley’s (MS.N) co-head of wealth management, said at the Reuters Wealth Management Summit in New York this week, adding that the largest unknowns are tough to analyze.
With Britons heading to the polls next week to vote on whether to leave the European Union and Americans electing a president in November, forecasters are bracing for fresh stock market drops plus currency swings, especially in the British pound. On Thursday, investors pushed the main U.S. stock indexes down for a sixth day, worried not only about the vote in Britain but also the Federal Reserve’s comments about slower growth in the United States.
“Absolutely, there is more caution,” said Ida Liu, a managing director at Citibank and market head of Citi Private Bank’s metro New York region who spent years working with wealthy Asian clients who wanted to invest in the United States.
Liu and other Citigroup Inc (C.N) bankers are advising clients to shift more to fixed-income investments, including triple tax-exempt municipal bonds, where Liu said investors can earn taxable equivalent yields of roughly 4 percent to 4.5 percent. Clients who have real estate debt may also want to swap some floating-rate obligations to fixed-rate obligations, she said.
With the Standard & Poor’s index up only about 1.7 percent for the year after having tumbled 9 percent in the first two months of 2016, many investors worry this summer may be a repeat of last year when fears about global growth, particularly in China, unhinged stock markets in August.
“We would agree with those who say to expect more muted returns,” said Donald Heberle, chief executive of Bank of New York Mellon Corp’s (BK.N) wealth management business.
But he and other top wealth executives are telling clients not to become too frightened, assuring them that money can be made even in uncertain times.
For clients with bigger wallets and longer time horizons, executives are recommending private equity investments, which have delivered double-digit returns annually for decades, according to data from research firm Preqin, as well as natural resource investments and infrastructure.
“Some people are choosing alternatives to cut off that tail risk,” Morgan Stanley’s Saperstein said about ways to protect a portfolio.
Hedge funds, long a domain for wealthy investors, are less popular now that they are losing money again this year.
“There are a few outperformers (in hedge funds), but for a lot of people the fee structure doesn’t look compelling versus the investment returns,” Anna Marrs, chief executive officer, commercial and private banking, at Standard Chartered, said in Singapore.
Some are still betting on U.S. markets.
“There are still lots of things to like about the U.S. economy,” said Mark Casady, chairman and chief executive at LPL Financial, one of the country’s largest independent broker dealers. While some U.S. stocks are expensive right now, Britain’s vote or other events could push prices to more reasonable levels in the future, he said.
BNY’s Heberle said his advisers might jump on a stock market sell-off as an opportunity to buy.
“We are advising our clients not to overreact,” he said.
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Reporting by Svea Herbst-Bayliss; Additional reporting by Sumeet Chatterjee and Paige Lim; Editing by Leslie Adler