For those who hadn’t noticed, we are in the midst of a massive intergenerational wealth shift.
Money changing hands between British family members sat at an all-time high of £69 billion last year, according to research at the time, and the sums were only set to increase by multiples from there. UK-wide inheritance payments and gift transfers were on track to more than double to £115 billion by 2027. Between now and 2055, an enormous £5.5 trillion was expected to change hands.
The reason was simple.
Until Covid-19 hit, Brits had been getting richer for years. In fact, UK wealth reached more than £10 trillion in 2016, almost quadrupling since 1995. Two contributing factors here were increasing property values and the cashing in of lucrative DB pension schemes. But perhaps the most critical driver was the unprecedented and all-encompassing 11-year post-Global Financial Crisis bull market.
In this environment, it would be unusual for wealth invested in savings portfolios and pension pots left untouched for long periods not to increase in value. Unfortunately, this all changed in March 2020 when the coronavirus pandemic hit.
In the face of lockdown, relentless economic uncertainty, and greatly reduced visibility, the long-feared market correction arrived in full force. This was not a crisis unique to the FTSE, either – indices around the world were shattered. Fixed income, equity and property investments were turned on their head, and hard-earned investment portfolios across Britain were decimated in a matter of weeks and the turmoil continues. This poses a catch-22 situation for UK intergenerational wealth transfer.
On the one hand, retirees looking to transfer wealth to their offspring are likely to be less wealthy now than they were pre-lockdown. Research from Moneyfacts estimates that the pots of as many as nine in ten Brits saving for their retirement suffered heavy losses in Q1 2020. As such, the record figures quoted at the start of this article would probably be revised down if calculated today.
On the other hand, younger generations are now more reliant than ever on inheritance and gift transfers because of widespread job losses and the likelihood of a long-lasting recession. Naturally, families are now looking at how to ensure as much wealth as possible can still be transferred despite Covid-19.
On the face of it, a logical solution for many may be to put more risk on the table. As we saw in 2008-09, when markets are on their knees, there are many opportunities to generate huge returns in a subsequent recovery rally. However, the problem today is that recovery is by no means guaranteed over the short-term.
The likelihood of a second lockdown increases with every day, and this could see markets sink lower still. Couple this with the added uncertainty Brexit poses to the UK economy, and “cheap” assets could very well prove to be enormous value traps rather than a means of recovering lost wealth. Add in the fact that losses suffered by retirees making regular income drawdowns are often amplified by the nasty effects of “pound-cost ravaging” and ascending the risk scale starts to look like a rather dicey strategy.
We believe it is much more prudent to shift the focus away from recovering what has been lost as quickly as possible, onto the avoidance of permanent capital loss along with steady returns with low volatility. Multi-asset funds can provide an excellent solution here by aiming to preserve as much of a portfolio’s value as possible throughout the entire market cycle, while also offering a consistent, modest income to replenish any regular drawdowns.
Many invest in near-cash or cash-plus instruments and whilst this obviously means they do not participate in all the upside on offer when equities are rallying, and fixed income assets are booming, it also means savers are not left holding the bag when the market crashes like it has this year. Rather, they stand a much better chance of maintaining some form of equilibrium while everything else is falling.
To be blatant, but by way of example, our own Tenax Absolute Return Strategies Fund delivered a 0.44% return against the FTSE 100’s decline in value by 11.85% in the year to 29 May 2020. That’s a huge difference on a pension pot originally worth hundreds of thousands of pounds.
Some way down the line, when things are clearer, risk assets like equities will again offer a great opportunity for savers to recover the losses caused by Covid-19 and pass down as much wealth as possible.
But the bottom line, for now, is that a multi-asset approach centred around capital preservation and smooth, less volatile returns provides unrivalled portfolio insulation in a time of unprecedented uncertainty. With intergenerational wealth transfer reaching record levels and becoming an increasingly important lifeline for beneficiaries, this cautious approach could prove critical.