By Sandra Platts, Managing Director of Kleinwort Benson in Guernsey
REGULATORY SOUNDNESS, EXCELLENT infrastructure and immediate access to a large range of innovative products make the island an ideal location for private banks aiming to provide bespoke wealth management solutions for sophisticated private investors.
Over the past four decades, Guernsey has established itself as a leading international finance centre for both institutional and private clients. High professional and regulatory standards and the excellent infrastructure put the island in the premier division of global finance hubs, attracting record levels of business from around the world. By the end of March 2007, total deposits held with Guernsey banks had reached a new all time high of £105.3 billion - up 14 per cent during the first three months of 2007 and a 23 per cent rise year on year.
As a centre of excellence for private banking, Guernsey attracts sophisticated investors seeking products that combine better capital protection with growth potential, using an absolute benchmark of positive returns to measure success. Guernsey's vibrant finance sector has steadily expanded and enhanced its service offering. The island's long-established fiduciary industry has provided corporate and trust services for more than 40 years. Private banks offer sophisticated wealth management solutions, while others specialise in providing banking services to the investment, fund administration and insurance sectors. Businesses are located so close to each other that a high volume and wide range of business can be carried out in a short space of time, making the island an ideal 'one-stop shop'.
Immediate access to a huge range of innovative products, combined with top-tier rankings for political stability and regulatory soundness, make Guernsey an ideal location for private banks aiming to provide bespoke wealth management programmes to high net worth individuals. Today's private banking clients are demanding and highly financially literate. Their requirements are increasingly diverse, and they look for a wealth solution that is tailored to their individual needs and can be easily adapted if professional or personal circumstances change.
While there is little debate amongst the investment community that diversification is of benefit to a portfolio, the recent market volatility has demonstrated that the traditional approach to asset management has not met the challenges of variable market conditions. Traditional diversification has been achieved through combining various proportions of well-established asset classes such as equities, bonds, cash and property, or by diversifying within asset classes. In equity portfolios, for instance, more stocks or new geographical regions have been added to the mix.
In an era of increasing globalisation, however, equity markets have become increasingly correlated, reducing the effectiveness of traditional diversification principles and increased the underlying risk. Bond and cash instruments have traditionally been a safer, less volatile asset class, but these investments carry their own risks: returns may not be high enough to counter the decaying effects of inflation on capital. "Our investment portfolios combine traditional asset classes, such as bonds and equities, with alternative asset classes such as UK property, commodities, funds of hedge funds and private equity. Due to little or no correlation of alternative asset classes with traditional asset classes, the volatility of the portfolio can be reduced without necessarily capping returns," explains Jim Gilligan, Head of Private Wealth Management in the Channel Islands. "We have recently seen substantial gains in commodities or private equity, for instance. Our diversified investment portfolios enable clients to benefit from these upswings, but also protect them from over-exposure to downswings in any particular sector."
Wealth management teams in Guernsey, Jersey and across the UK appreciate that each client has an individual appetite for risk and different personal and ethical preferences. For some investors, there may also be religious restrictions which require the selective picking of stocks, funds and other asset classes. Fund managers can create a diversified investment strategy for each client that aims to produce the best possible returns for their individual risk profile. Returns will usually be higher for each unit of volatility. A maximum total return strategy, for example, would target long term returns of cash+6 per cent with the volatility of a well-diversified equity portfolio. Risk-averse investors might opt for an absolute return solution which aims for returns of cash+2 per cent with the volatility of a short-to-medium term government bond. All portfolios are managed continuously. Each investment strategy is reviewed on a monthly basis and, if necessary, adapted. Guernsey's financial sector's specialist knowledge of investment products and markets enable them to offer a variety of wealth management options to meet the needs of high net worth clients. The ability to constantly create new and innovative solutions meeting the demands of increasingly sophisticated investors has made Guernsey a leading force in private banking in the world for many years.