The Rise of Active Investment in Wealth Management

The world is a nervous place at the moment – not least because of all the economic uncertainties and risks associated with US/China relations, subdued growth in parts of Europe and, of course, the Brexit impasse. Against this backdrop, one key trend in the wealth management sector is the growth of active investment as investors seek superior returns.

Despite the turmoil of the past few years, there has been a significant increase in the number of wealthy individuals. Witness the 2019 Wealth Report from the estate agent, Knight Frank, which points to an expected rise of 22% in Ultra High Net Worth (UHNW) people to a total of 43,000 between now and 2023. Meanwhile, the ranks of the broader High Net Worth (HNW) community are also growing. Or to put it another way, wealth is being created.

There is some optimism too, with around 80 per cent of US HNWs and 64 per cent of Europeans expecting to be better off over the next few years.  

But the report also captures something of a sea change in attitudes to wealth management.

In the face of a range of uncertainties, wealthy individuals look set to pursue much more active investment strategies. Superior returns are a priority.

Rising Asset Values

In the aftermath of the 2008 financial crisis, governments around the world – and particularly those whose economies were most affected by the subsequent recession – cut interest rates to historically low levels and introduced quantitative easing programmes. This created a new environment, in which asset values rose and investors saw higher returns from bonds and shares.

Today, with interest rates rising – although not quickly – and quantitative easing programmes being wound down, a new dynamic is coming to play. The Knight Frank report expects a much more active approach from High Net Worth investors.   

In Practice

What that means in practice will clearly depend on the objectives of each investor, but one thing is certain, new investment opportunities have opened up and will continue to do so.

Wealthy individuals – who might once have been content to focus on a mix of property, equities and bonds-  are now investing either directly or indirectly in startups and early-stage companies.

The potential for returns is clear.  A business at the beginning of its journey – if successful – is likely to grow at a faster rate than one that is well established and stable. But the risks are also apparent. Estimates vary, but it’s thought that 80 to 90 per cent of angel or Venture Capital-backed early stage businesses fail within five years.  

However, the risks can be reduced considerably, not only by careful, thorough due diligence and scrutiny, but also – here in the UK – by taking advantage of the various tax breaks that are available to investors.

There are three main schemes to consider – namely the Enterprise Investment Scheme (EIS); the Seed Enterprise Investment Scheme; and Venture Capital Trusts.  In all three cases, the tax treatment is designed to take some of the risk out of investment. For instance, in the case of EIS, 30% of the cost of buying shares can be offset against income tax in any given year – and there are also tax breaks when losses occur.   

These schemes have helped to nurture active investment in small companies in the UK and are set to continue to do so.

The Debt Market

In addition to taking equity, High Net Worth and sophisticated investors may also consider investing in small company debt. Over the past few years, we’ve seen an increase in the amount loaned to small- and medium-sized businesses through Private Debt Funds, a market that is now open to High Net Worth individuals. The allure of Private Debt is the fact that lending is often focused on ‘special situations’ offering higher rates of return.

How The Route Can Help

The Route – City wealth club understands the importance of an active approach to investing – one that takes account of life goals and circumstances that may change considerably over relatively short periods. Members of The Route are given two financial reviews a year, with the aim of ensuring the wealth management strategy of each individual continues to be aligned with key objectives.

With superior returns a priority, The Route provides opportunities to invest in a range of EIS, SEIS, and VCT funds. In addition, Members can invest in small- and medium-sized businesses through The Route’s innovative Private Debt Platform.  

The platform is focused on business projects – increasingly in the Property Development sector – which tie up capital for relatively short periods, typically of around a year. In terms of active investment, this provides a flexible solution, allowing investors to take returns and move on to other projects.  

Active investment is perhaps nothing more than a rational reaction to changing market dynamics. Through regular reviews, The Route – City wealth club provides the kind of responsive service that ensures Members’ wealth is managed as circumstances change.

To find out more about Membership, please call: 020 3141 9040