Not an investment market for the faint-hearted

Gavin Ralston is the global head of product at Schroders. Here, he talks about the challenges facing the region to develop leading financial hubs.

Q: Has it ever been more difficult to invest?

A:  The thing that is most disconcerting is almost the absence of a risk-free investment. Traditionally, you'd go to US treasuries or high-quality UK or German bonds. But given they are yielding so far below the expected rate of inflation, they may be risk-free in nominal terms but they are not in real terms. So even to achieve a return of between 3 and 5 per cent you have to take quite a lot of risk - that's the distinctive feature of the current market and something I haven't experienced in the past 25 years.

Q: What does that mean for people like me retiring 20 or 30 years from now?

A: It means you have to be prepared to take more risk with your investment portfolio. If you have a 20-year time horizon, at least you are in a better position to someone retiring in five years. There is a concern that the biggest issue for people making their own arrangements for retirement is that they don't take enough risk, they tend to put too much in cash and that's very expensive. So the message is that even though it means you'll be looking at some down years, you have to be prepared to take risk.

Q: What is your Black Swan, unexpected events, prediction for the year?

A: I think the biggest Black Swan is a much sharper rise in government bond yields than the markets are building in. When I talk to institutional investors they are all worried about the same thing. There must be a point when money starts to leave safe haven government bonds quite rapidly and you can see a vicious spiral beginning to emerge.

Q: Are you expecting to see an inflationary tailwind emerge from continued quantitative easing (QE)?

A: It will manifest itself. The question is how quickly. There's been a concern about inflation picking up for 18 months or so because of QE. It hasn't really happened. We've had some worse than expected numbers in the UK, but it's still within the margin of error. So I think it will happen. Will it happen in 2013? Probably not - I think it's more of a 2014 or 2015 issue.

Q: How has your Gulf operation performed in relation to other markets?

A: As a broad generalisation, the amount of money that has come from the Gulf either from the mass affluent or high net-worth has been disappointing. We had higher expectations when we set up our presence in Dubai as to what we'd win.

Q: Why has that been?

A: The timing has not been great as that period includes the financial crisis of 2008. The behaviour of investors in the region is a little bit like Asia in that it tends to be risk on or risk off. Whereas in the US or now in Europe there has been a gradual reassumption of risk, that isn't really happening to the same extent in a market like the UAE. The other factor is that a lot of risk that is being taken is in property or other forms of private market investment - so mutual funds don't play as big a part in the overall savings portfolio.

Q: Qatar is seeking to develop a thriving asset management industry. Would you consider setting up there?

A: We don't see the reason to have more than one office in the Gulf. Our judgement five years ago and still now is the Emirates is the place to be. It is still the financial capital. We have been lobbied by the Qataris and Bahrainis, to set up there, but we certainly don't see the business prospects are sufficiently big to warrant more than one office. We haven't really encountered barriers to using our presence in Dubai as the basis for doing business across the region. The other thing is that for the very big institutional clients, in many cases, they prefer to deal with London. So the really big pools of money will talk to us [there] rather than in the Gulf.