A rise in the "risk-free rate" – defined by yield on government debt – has been sharp as the Bank of England hiked rates to fight inflation. As a result, equities have, relatively, lost their appeal. Reframing investors' expectations is a challenge that must be taken up, says the UK investment firm.

The UK’s investment industry faces the challenge of equity-shy investors who prefer to hold forms of debt – a result of rising interest rates that have taken the risk-free rate to just under 4 per cent in the UK. 

Aviva Investors, which had ÂŁ227 billion ($283.7 billion) in AuM as of December 2023, believes that investors need to be re-educated on the case for diverse portfolios and the place equities fill, one of its senior figures argues.

Rate rises towards the end of the pandemic to curb inflation jolted markets. “Retail flows [into equities] are extremely subdued,” Charles Jewkes, head of global wealth at Aviva Investors, told WealthBriefing in a recent interview. “For the first time, people could get a pretty good return on cash deposits or a money market fund,” he said. 

“We are coming to terms with the fact that we are in a very different macro-economic environment to what we have had in the past 15 years,” Jewkes said. 

That change has had an impact. According to LSEG Refinitiv there were nearly ÂŁ30 billion of redemptions from equities in 2023. 

“That presents a huge challenge to us and the industry. We are dealing with cohorts of people who have not seen a higher rate environment. People are being very conservative with what they are doing and that means that a lot of education is needed,” Jewkes said, speaking at Aviva’s modern offices in the City of London. 

The challenge of making the case for long-term saving is one that Jewkes, who joined Aviva Investors in 2018 (formerly at Schroders for 11 years), clearly relishes. 

Jewkes is a big part of how this large UK institution, with its historical roots in the insurance sector, is using its accumulated investment know-how for the wealth management market. Jewkes’ arrival pre-dated Aviva’s purchase in March 2022 of Succession Wealth (for ÂŁ385 million). When the deal was announced, Aviva noted that the UK wealth was likely to grow by about 7 per cent a year to ÂŁ2.1 trillion by 2024. In addition, by 2039 it is expected that one in four people in the UK would be over 65, increasing the demand for financial advice.

Aviva Investors sees a big opportunity in all this. Another force at work is how the distribution value chain of wealth advisory was shaken up in 2013 by the Retail Distribution Review reforms which encouraged a shift from trail commissions and towards more open architecture. The 2023 Consumer Duty regime enacted by the Financial Conduct Authority has also put pressure on advisors to use tried, tested and transparent ways of investing clients’ money.

“There has been lots of consolidation around platforms; the advisor landscape has changed dramatically…multi-asset [strategies] are very big, along with MPS [Model Portfolio Solutions],” he said. “And we have added financial planning on the front end of what we do.”

Jewkes isn’t shy of stressing the benefit Aviva Investors draws from being a large business with the benefit of a big insurers’ balance sheet. “This business is very deliberate and very sensible. We are steady and consistent,” he said. 

“We offer return streams significantly in excess of cash rates across multiple asset classes,” he said.

Widening access
WealthBriefing asked Jewkes about how the industry can widen access to retail/mass-affluent clients to private market areas that have grown rapidly recently. Ensuring that liquidity mis-matches are avoided is an important issue for regulators.

It is also important for the financial sector, policymakers and regulators to collaborate in building robust models to make such wider access happen, and in ways that the public will trust, he said. 

“The changing regulatory environment around private markets is something we are very much on the front foot with. This is still a nascent field for private investors and institutions in the UK. 

“The merits of private markets and alternative return streams have been known for some time. In the past, only the super-wealthy have had access,” Jewkes said. 

Aviva Investors is one of the largest private market players in the UK, in infrastructure for example. “We are very large and scalable,” he concluded.