Equities have been sidelined in high net worth clients’ portfolios as they have sought refuge from volatile markets but stocks do “remain on the horizon” for future investment, says a report on the UK wealth management sector by Scorpio Partnership, the consultancy.

“Cash and investment grade bonds dominate the current investment landscape for HNW clients,” Scorpio said of its report, which was based on fieldwork carried out in January, February and early March.

In recent weeks, however, there have been signs that some wealth management firms are starting to increase their risk appetite, moving into defensive equities, particularly as wafer-thin returns on cash make money market investments unattractive. Firms such as HSBC Private Bank, for example, have said they are increasing some exposure to equities.

Individuals and their private bankers are making more use of passive index funds and exchange traded funds, in a hunt for high liquidity and low costs. One potential drawback for some fund products is concern about whether the institutions that supply them are financially robust, the report said.

“The counterparty risks of passive vehicles and ETFs are high on the radar and many [wealth managers] are still wrestling with the lack of commission on these instruments. This is driving wealth managers toward active management,” the report said. The report was carried out in conjunction with Royal London Asset Management, drawing on interviews with 32 of the UK’s largest wealth management companies.

There has, meanwhile, been a retreat from the “satellite”, or alternative parts of portolios, such as hedge funds. Instead, while cash makes up the “core” of many portfolios, investors are using relatively risky corporate bonds to generate superior returns, the report said.

“The shift in construction of asset management models indicates a major change in investment philosophy,” said Graham Harvey, senior associate at Scorpio. “Wealth managers are increasingly keen to demonstrate their role in wealth re-creation for HNW clients. Also, the compression in margins from equities and alternatives to cash and bonds is changing the commerciality of the asset management model.”

The report also said – as has already been noted across the industry in recent months – that due diligence has become more vital than ever, as highlighted by the wealth destruction caused by the collapse of some funds and high-profile scandals such as the Ponzi scheme fraud of US investor Bernard Madoff.

Wealth destruction has also forced firms to re-examine their client segmentation and business models, the report said, arguing that in the long term, the industry will become “even less focused on the manufacturing element of the value chain”.