Wealthy Russians seek safety
Russian HNW clients were once prepared to risk a lot in the search for hefty returns, but no longer, and now they are looking for capital protection instead.
When Simon Fentham-Fletcher (pictured) first came to the Russian market in 2007, as head of investment management at Raiffeisen Bank, wealth management clients were prepared to take on substantial risks for hefty returns. After some lost 80%-90% of their assets in the 2008 crisis, their attitudes changed dramatically.
“After 2008, their understanding of risk materialised,” says Fentham-Fletcher. Before the crisis he saw a great deal of demand for leveraged products and hedge funds. Much of the clients’ income came from private equity holdings, which could return 30%-40% per annum. As a consequence, they were looking for high double-digits gains.
Now, they go for much more conservative products. Fentham-Fletcher explains that “many [clients] still have high beta investments through their businesses; wealth management for them is now about capital preservation”.
This trend has been picked up by the country’s Institute of Financial Planning. Its recent poll revealed that capital preservation is the top objective for Russian retail clients using financial advisory services.
In Fentham-Fletcher’s understanding, capital preservation means not suffering losses during any 12-month period. At the same time, his goal is to achieve 10% annual returns, in dollar terms, without using highly volatile instruments.
Renaissance Asset Management, which Fentham-Fletcher joined last year as chief of staff in Moscow, has revamped the solutions it offers to fit this shift in demand. The new range of services is much more focused on lower volatility and less on high-yielding options.
That is not to say local investors will not take on volatility per se. They still have higher risk tolerance than investors in London or Switzerland, for example. But they are also prone to overstating their risk appetites. In reality, they have enough risk in other parts of their lives, so when it comes to investments they need to be shown they can have less risk.
The products with the biggest red flag are those that caused the greatest losses during the collapse of the market in 2008. Structured notes are particularly out of favour – investors got burned by improperly constructed barriers. Instead, there is now much more demand for the safer fixed income yield type products.
Fentham-Fletcher says wealth management in Russia before and after the crisis “are two completely different beasts”. Renaissance has had to adopt a client-driven business approach in order to succeed in the post-Lehman market.
“Russian business is very much client driven,” Fentham-Fletcher says. “Russians value trust more than any other nationality I have ever come across. It takes a long time to build, but once you have, it seems to last forever,” he adds.