The ructions in the financial markets have left many of Yorkshire’s richest investors scurrying to safer investments. Peter Baber reports.
With news headlines going the way they are, it seems all the wealth in the world may not be enough to guarantee you a safe income and secure resting place for your money.
Many private wealth advisers are also warning that anyone looking to invest their money in the near future – whether that be people in our rich list, or those who wish emulate them – could find it hard to navigate their way around what will be fundamentally a changed financial world.
Michael Dicks, head of research and investment strategy at Barclays Wealth, says: “Ructions in the markets have been on an unprecedented scale, and we believe market conditions will remain tough for some time. The financial world post-crisis will also be much more regulation-heavy and financial sector-light.”
So in this world, and with other favoured investments only starting to emerge, where can an investor leave their money to ensure a reasonable return, rather than an outright loss? Is there such a thing as a safe investment?
Dermot Callinan, private client partner at KPMG, says these worries have sent many investors scurrying back to some types of product they haven’t touched for decades, at least for now. “For the first time in years we are seeing in UK treasury bills,” he says.
These are issued on a weekly basis, and work by maturing one three or six months later. You also need to make a minimum investment of £500,000. The returns on them are not dramatic, says Callinan – typically about 4.5 per cent, which is why they haven’t been popular in the past. “But people perceive government debt to be so secure that they are willing to use them, even with a poor yield. There really is a flight to safety at the moment.
In fact, in investment as a whole a focus on yield seems to have given way to a focus on security – and that even applies to property.
Callinan has also noticed renewed interest in government gilts, too, another type of product that has been viewed as solid but boring in the past. These float in the same way as stocks, which obviously means they can go up as well as down.
“Some US gilts, for example, are actually trading at a loss,” he says. “But they are generally not as volatile as company stocks, which is why they are proving popular. There is also a connection between interest rates and gilts. If interest rates are low, for example, as they generally are at the moment, gilts tend to start going up in value.”
Like many advisers, he also recommends those who are worried about holding on to their cash to invest more in the structured products many institutions are offering – provided you do have a lot of cash. Generally speaking these tend to work as a spread bet on a basket of shares, with at least your initial investment guaranteed unless the shares you invest in fall spectacularly.
However, Hina Desai, senior financial planning manager at Grant Thornton in Sheffield, says she would only recommend them to someone who was fully aware of the risks. Because of the complexity of their structure, they are only open to people who can invest a substantial lump sum up front.
That’s another reason why she tends to dissuade people from assuming you can make a killing in the current market if you have access to cash and think you can pick the right shares. “It takes a brave person to do what everybody else isn’t,” she says. “It’s also difficult to predict the top or the bottom of a market, and if you get that wrong, even by a couple of days, because of the way the market is structured you can lose almost all the potential growth.”
Good times or bad times, the message from Grant Thornton seems to be plan for the long term. “We look back at least 37 years before deciding what is worth investing in,” says Desai.
Her colleague Neil Messenger, head of financial planning at Grant Thornton UK, adds: “Many academic studies over the past 30 years have concluded that market timing adds little value to an overall investment strategy. More important in determining the overall outcome will be whether you have decided on your long-term asset allocation.”
That is why, says Desai, she sits with a client and discusses their long-term plans, in particular whether they need to use any of the money they are planning to invest. “Most people need them, but if you don’t it can really make a difference,” she says.
The client’s attitude to risk is crucial – a platitude that is often trotted out, she says, but needs to be discussed in depth. “They need to understand what risk means in terms of numbers rather than words,” she says. “So I take them through a scenario where there is a 1 in 100 chance of their portfolio falling below a certain level if they take this action. They understand 1 in 100 much better than just asking them if they want low risk or high risk.”
Messenger says lon term is the key. “The investment industry thinks in five-year periods,” he says. “But what is an investor going to do in five years – sell and reinvest? Of course not. In fact, many clients are investing for their whole life, or the next generation. It’s just that they haven’t seen it like that.”
That is why, he says, the safest option for anyone really worried about seeing their money disappear is to sit on some of it and wait. “One way to mitigate short-term volatility is by drip-feeding money into the market,” he says. “Instead of investing a sum all at once, we suggest dividing it up and feeding it over a longer period to achieve an average entry price,” he says.
But what about those whose experience of the investment market is such that they would rather not put anything in at all? Property was traditionally seen as useful alternative, and Nick Talbot, a partner at Carter Jonas, says that despite the fall in house prices he is sure property will continue to be seen as a good investment. “In the past week we have actually sold two properties over the £1m mark,” he says, “one of which, in Linton-on-Ouse, we sold for well over £2m in a matter of weeks.”
He admits, however, that only really marketable houses are selling, and there has to be realism on prices. “There are plenty of investors waiting for a more positive sign in the market,” he says.
Overseas investment property has also been seen as an asset worth considering. Deborah Fox, a director at Emerging Real Estate, says the “holiday home in Bulgaria” market is “dead”. But the canny investor, she says, has two options. “Those who are cautious can spend £30,000 or £40,000 on a seed fund to buy land,” she says.
Seed funds work by providing enough money for development to get started or reach the point where it can generate more conventional funding. The Leeds-based company is working with a Thai developer on a project where seedcorn investors, it claims, could see a return of 38 per cent. A more conventional approach would involve buying a plot of land with planning permission and build on that.
Those willing to spend more on a much safer investment, she says, need look no further than Germany – Berlin in particular – where it is possible to buy apartments with a guaranteed tenancy for ten years, and which the tenants have undertaken to maintain to a high standard.
Renting is a more common in Germany than the UK – only 13 per cent of Berliners own their house, which makes it a more reliable rental market. But Fox says there are even more incentives for choosing Berlin over other cities, for reasons that date back to the Cold War.
“East and West Germany wanted to encourage as many people as possible to live in the city,” she says, “so they subsidised rents considerably. It has taken a while for all these subdisidies to go, which is why Berlin has been cheaper than Frankfurt or Munich, but we expect Berlin to see real capital growth in the next 15 years.”
Other cities in Eastern Europe, she says, are also good possibilities, including Sofia and Istanbul. “You should remember you are buying these properties for locals,” she says. “not aiming to live in them yourself.”
And what about art? Damien Hirst’s auction in London achieved returns many times over what was expected, but was this a high water mark in art investing before the credit crunch really took hold, as some have claimed?
Randall Willette, managing director of Fine Art Wealth Management, a London-based consultancy, says the historical view that you should get involved in art only if you are a connoisseur is changing. This is in part because people realise art has a low correlation with other investments – and so helps build a diverse portfolio – but also because of the market.
“Because the market remains highly inefficient,” he says, “there is a substantial opportunity for out-performance through active management much like the value private equity or venture capital funds create.”
He has noticed two types of individuals populating auction rooms. “One has a detached financial point view, treating art like real estate and other financial investments, and his expertise lies in following the market,” he says. “The other is the collector who has mixed motives, but whose first is about passion and less about investment.”
As the owner of the largest collection of Socialist Realism art outside Russia, Kevin Linfoot, one of our rich list entrants, is one of the former category. He has told Insider he treats his collection like a business.
Willette says those looking to enter the market for the first time have been helped by a near doubling in the number of art investment funds. “A fund can help mitigate some of the risks of investing in art by reducing overall transaction costs, providing access to leading experts and spreading the risk across a diversified portfolio,” he says.
But there are caveats in however you invest. Art should make up no more than 5 per cent of your portfolio, and should be considered as one of a number of alternative investments. Many of the funds that are operating have been set up so recently there is little data on their track record.
“Given its dependence on other aspects of the economy, it is not assured that a fund will be able to dispose of its investments at the time or on the terms it desires,” says Willette.
And finally, “the rate from which prices in the art market are driven by tastes and fashion is much greater than other financial markets where value is a function of market fundamentals”.
In other words, Yorkshire high-net worth individual, while today you may view that original Tracey Emin you have in the hallway as a way of paying your grandchildren’s school fees, in years to come the market may view it as the unmade bed it really is. You have been warned.