Mirabaud reminds clients of risks linked with alternative assets
Alternatives can improve the risk-return ratios of portfolios, says Mirabaud's Paul Whelan, but clients need to be aware of the risks involved with these assets.
Holding court in the basement of the Artigiano café, in the shadow of the London Stock Exchange, Paul Whelan waxes lyrical about his clients’ rising positions in alternatives, including oil, gold and diversified funds of hedge funds. As client director of Swiss private bank Mirabaud, he is happy to see these allocations now nudging 15 per cent, a trend also reported by other houses.
“We might have some clients who have €2m ($2.1m) to invest, versus a family office with hundreds of millions,” says the youthful Mr Whelan, previously at Credit Suisse and Barclays. “The more money you have, the more you can afford to go into alternatives. The idea is to improve your risk-return ratio by adding diversification.”
As we speak, the café’s sound system plays music from 1960s’ British band The Kinks, with Mr Whelan nodding to the beat and recognising the lyrics, with a smile: ‘The tax man’s taken all my dough/ And left me in my stately home/Lazin’ on a sunny afternoon.’ It reminds him of badly-advised wealthy investors, rattling around crumbling houses, bereft of investible assets.
“People have short memories,” he says, remembering the liquidity crisis of 2008, when private clients were stranded in illiquid funds they no longer had faith in. “Part of the wealth manager’s job is reminding people of these risks, including liquidity. They might think they don’t need their money for 10 years and tie it up in alternatives, but they don’t know what will happen in six or seven years.”
Limited understanding
Many families he speaks to have a limited understanding of their portfolio’s contents and how these investments behave in challenging times. “The beauty and the curse of hedge funds is their investment flexibility,” believes Mr Whelan. “They can be a black box for some investors, which is why they bring in professionals to manage their money.”
Much allocation to alternative assets such as commodities is through more sophisticated instruments, of which clients typically have little knowledge. “The average client isn't going to physically buy a barrel of oil and keep it in their garden,” he says. “The private bank will do a lot of this through derivatives, sometimes with leverage, so they're introducing risks that underlying clients aren't always aware of.”
While those invested in oil’s rising price have done well in 2023, compatriots favouring natural gas have struggled, nursing 35 per cent losses, without truly appreciating associated risks. Similarly, clients managing their own private equity exposures have often floundered. Those putting their faith in Mirabaud’s $40bn private equity armoury, he suggests, get the benefit of the Geneva bank’s expertise.
“You’re not going to see that money for 10 years,” he says. “But we can look after it through a discretionary private equity offering, whereby you just give us the money and we manage it through all the capital calls and ladder it down. We can build that whole structure for the client.”
Hands-on investment
Most clients are currently concerned with three challenges to their portfolio, based around inflation, interest rates and geopolitics, particularly the war in Ukraine and what may happen in Taiwan, says Mr Whelan, summing up daily interactions with wealthy investors.
This means many are looking for a long-term home with steady growth, rather than liquidity, spurring the rising popularity of private equity.
But a frank conversation needs to be had with all clients about the nature of this asset class. “I think an allocation for most clients is appropriate,” he says. “But an adviser should ask them: ‘If you’re not going to see that money again, will you be comfortable with that?’”
Clients need to spread this alternative allocation across a variety of investments, he believes, often preferring the type of direct investments not necessarily favoured by other players. Mirabaud has been involved in refitting and resale of residential property blocks in Paris and “individual deals” in private companies. One of the most successful of these was an early stage investment in vaccine developer Moderna, which handsomely rewarded clients who “bought at the right price”.
Rather than investing in real estate investment trusts, Mirabaud prefers a hands-on purchase of assets such as warehouses, across the US, continental Europe and the UK. “We will literally say we're going to buy a warehouse, which Amazon have pre-agreed to take off us. Most clients don't want to buy a whole building by themselves, nor will they have the means to so,” he says, advocating “club deals” for those with $100,000 to invest. “We club together and then you get a yield of 8 per cent, which also gives you a diversification play.”
As he prepares to speak to more clients, the song playing in the café is ‘Message to you Rudy,’ from ska revival band The Specials, singing the lyrics: ‘Stop your fooling around/Time to straighten right out/Better think of your future.’ Bearing in mind Mr Whelan’s approach to portfolio management, this is music to his ears.
