Despite the coronavirus lockdown, Nick Hutton (pictured), head of UK iShares and Wealth at fund management giant BlackRock, says he has never worked harder, spending 12 hours a day at his screen, with client activity levels higher than ever, albeit coming through the different media of a Webex call or mini-conference.
2019 saw BlackRock combine its iShares distribution with the wealth team to create a USD120 billion business in what Hutton describes as: “Recognition that the debate of active versus passive is really over.”
Hutton has spent 16 years with the firm, always on the active distribution sales side, latterly managing BlackRock’s products for wealth advisers. He cites an 83 per cent increase in client activity statistics year on year which he believes reflects the rich debate the wealth industry is experiencing at the moment, with Covid-19 still very much on everyone’s minds, and the first quarter volatility focusing investors on where to find returns.
“Crises accelerate change,” Hutton says. “We know that in every industry and this is no different – there is no doubt about that.”
Looking at the bigger picture, Hutton comments that the wealth industry has experienced a number of drivers for change post RDR, with big trends in terms of consolidation of businesses, the compression of margins and technology revolution.
“Portfolio construction has gone from a single line of product or security sale to holistic portfolio construction,” he says. “And all of those trends, following Covid-19, will go further.
Firms using BlackRock for asset management come from the financial adviser networks to wealth managers and private banks in the UK, and global private banks whose second headquarters are in London.
The volatility of quarter one had a strong effect on investors, but maybe not the one that could have been expected.
“We saw investors being very pragmatic in the UK, looking through the volatility and really trying to understand where to go next in terms of portfolio construction,” Hutton says.
The result is the three Rs – three ‘buckets’ of investor behaviour.
The first is Reset. “These are investors who are making no big strategic asset allocation calls through March and April, but are now at an interesting junction of assessing what the world looks like going forward and what that means for portfolio construction, especially when asset classes moved in parallel throughout March,” Hutton explains.
“Reset clients are those who think that their underlying views of the world haven’t changed and they will deliver as expected in the long run, so their original thesis of portfolio construction remains the same.”
One of the key parts here is that being a benchmark relative investor doesn’t mean being a static investor, Hutton says. “If you were running a 60/40 portfolio on 24th March – 60 per cent in equities and 40 per cent in bonds – that relationship moved 49 per cent bonds and 51 per cent equities – so there is a group of clients who are looking to see if they need to reset to the original benchmark.”
By the end of April, those figures could have been further distorted to 54 per cent equities and 46 per cent bonds. “You can’t remain static at the moment,” he says.
The really interesting part of this equation for investors is the volatility aspect, Hutton believes, asking if that earlier volatility of 2020 is going to come back or remain.
“Who knows with the economic numbers we are seeing,” he says. “It will take a long time to get back to the levels seen before the crisis and it puts the question on to investors who are managing a 60/40 portfolio of whether they want to manage their portfolios like that going forward.”
The second type of investor behaviour is the Rebound, Hutton says. “These are the investors who have looked to take advantage of value created through market dislocations within asset classes, who have seen an opportunity to try and regain losses and position themselves for the longer term.”
BlackRock has seen investors turn to US equities, US investment grade credit and high yield bonds.
Hutton comments that this time around, compared with 2008, government response has been so quick in the UK, US, Canada and by the ECB, that it gave investors’ confidence.
“There is a very clear group of investors focused on rebound and they are also allocating into thematics such as health care or technology funds,” he says.
Looking at cross border active industry mutual fund flow, Hutton sees that almost every asset class was in negative territory during that first quarter but in equities, thematics were strong, particularly in gold and with gold ETFs and in themes with ties to the current situation such as Healthcare and technological evolution.
“We might start to see thematic allocation starting to play a bigger role in portfolio construction.”
This brings us to the third R – Redesign. “This is the really interesting bucket for investors to think about how, fundamentally, the world has changed,” Hutton says. “This is about how our capital market assumptions have changed with increasing volatility and with lower returns here to stay.”
Within Redesign, Hutton finds a further three subsets.
Firstly, reassessment of forward-looking market assumptions, secondly portfolio objectives against allocation and what is needed to achieve them and thirdly, what investment products are needed to build those portfolios.
It is within the third bucket that he feels a bright light has been shone on fixed income exposure.
Another key factor for BlackRock is sustainability. The firm has just completed a research report on sustainable investing products and indices and how they held up over the market volatility.
“It’s always these key moments that accelerate change in behaviour,” Hutton says. Out of 57 Morningstar sustainable indices, 51 outperformed their broad market equivalent over the first quarter of 2020, while for MSCI, the numbers were similarly convincing, with 15 indices outperforming out of 17.
Part of this was down to the dramatic fall in the oil price hurting energy companies, but Hutton believes that is not the principal factor. “It’s not just energy-related companies, but also factors such as employee job satisfaction, customer relations or the effectiveness of boards that make companies sustainable. These key factors matter,” he says.
“All that research and data behind out performance reinforces our conviction in sustainable investing and we have increased our focus on the role of sustainable investing, with a focus on client portfolios and access to products.”
Globally in the first quarter of this year investor allocations to sustainable investing was up 41 per cent year on year.
Throughout March there was a huge rise in ETF asset flow into sustainable ETFs. iShares reported that it had seen positive flows every single week of the market sell-off between 21 February and 23 March, capturing USD1.6 billion in sustainable EMEA ETF flows.
“Choice is driving it,” Hutton says. “The market has the availability for investors to access ESG equivalent products through index and alpha funds and at the beginning of the year we committed to doubling our ESG ETF range from 75 to 150.”
The total is on its way to over 100 now, with recent launches and is set to reach its aspirational target.
“I also think that sustainability gives firms a great opportunity to engage with their clients on their portfolios even more,” Hutton says.
“It’s a huge shot in the arm for the savings and investment landscape generally. Something everybody and certainly the younger generation can relate to.”
Hutton believes that engagement with clients over sustainability is going to be one of the great forces for financial education as it means so much to so many people.
“There is lots of chat about wealth transfer to the next generation and we know that the generation coming through have a keener view and opinion on all matters to do with sustainability, particularly with the environment, but also with ‘social’, the social impact on how economies and governments and so on will come out of Covid-19. This is relatable in a world where potentially we have been an industry who describes what we do with the Greek alphabet – we make it complicated.”
iShares dominates the ETF industry globally but has seen slower take up of ETFs by financial advisers and wealth managers in the UK.
“One of the key trends that we see is that indexing is growing across all segments in the UK,” Hutton says. “Indexed mutual funds are the vehicle of choice for financial advisers who are using them as core building blocks for the low cost multi asset products they are launching for their clients.”
However, take up of ETFs by financial advisers and even by wealth managers has proved slower.
Before Hutton was involved in the iShares business, he found it hard so see why ETF adoption in Europe generally had been so slow.
“I think wealth managers viewed passive instruments as putting them out of a job,” he says. “But the role of portfolio construction has increased and accelerated over the last two years.”
The statistics are very telling: two years ago, no single wealth client in the UK had an iShares portfolio of over USD1 billion whereas now there are eight.
“The ETF ecosystem is growing and the understanding of ETFs is growing and the breadth and depth of the offering is growing,” Hutton says.
Wealth managers are spending more on risk systems and upgrading their technology and are paying heed to regulatory change such as RDR or MiFID II which require greater transparency and a greater value for money.
“If you are putting together a portfolio that cannot demonstrate better consistency of alpha than an index alternative, you might want to index more to reflect your investment ideas,” Hutton says.
However, he is also seeing added momentum on the alternatives options in the BlackRock offering. “Clients are adding in resilience to their portfolios using alternatives,” he says. “While the absolute return sector doesn’t have the best press because there are plenty of funds that haven’t delivered, if you have consistency of alpha, and you can demonstrate how your portfolio will behave in times of stress, you will capture money.”
In conclusion, Hutton observes that it is a fascinating time to be in wealth management.
“It’s really interesting seeing the questions that our clients are asking about asset allocation,” he says.