Crunch Time

It will take time to judge the effects of the recent global financial turmoil on the psyche of the average retail investor, but it would not be surprising if many investors are not reappraising their view of various asset classes.

Equities, for example, are usually seen as the best asset class to beat inflation and for long-term growth. But whereas advisers used to talk of equities as being an investment for at least five years, this time frame could now become 10 to 15 years.

After all, the recent plunge in the UK FTSE 100 index has wiped out the gains of the last five years. UK pension funds, under the advice of investment consultants have been reducing their reliance on equities for some time and moving towards multi-asset portfolios.

In the retail market, this type of investment strategy has been marketed under an ‘absolute return’ banner, yet the performance of such strategies so far has been mixed.

Perhaps more tweaks are needed, but funds offering diversified growth from a range of assets could prove more appetising than pure equity offerings.

The credit crunch has shown how much many investors hold in cash. If inflation stays high, this could be a short-sighted approach, but many investors are too worried to go back into the markets.

For those determined to stay in cash, the security of the institutions they invest with could be as important as the headline rate of interest.

Gold is traditionally seen as the safest of havens in times of market turbulence and one UK provider of exchange-traded notes investing in gold reported inflows of US$200m in two weeks in September.

In order to satisfy the security cravings of the ‘gold bugs’ it offers allocations of bullion, so investors know there are gold bars held in a vault to back their investment contract.

At present gold is seen as the refuge of the ultra-cautious, but after seeing major banks teetering on the brink of collapse, perhaps more investors will want to hold gold and other precious metals.

As well as altering views on certain assets, we can expect to see other changes. One possibility is the return of the partnership structure in areas such as investment banking.

Many trading firms moved away from this structure in order to access more capital, but with lower levels of leverage, this might be less important in the future.

There is also a very strong case for arguing that partners in a business had a greater interest in its long-term survival than executives in a listed company, who were more focussed on next year’s bonus payments.

It would be nice to think that mutuality could make a return, but it is extremely unlikely. Many building societies that operated for years as stable, long-term institutions have foundered in the wider market economy.

An important lesson could be that diversification should not just apply to investors’ portfolios, but also to the range of institutions and business models operating in the financial system itself.