Private banking: Articles
Wealthy investors embrace alternative investments 25/01/2007
Author: Stuart Fieldhouse
Amid an uncertain economy and lacklustre stock market performance, a new study by Northern Trust, one the USA's largest private wealth managers, has revealed the asset allocation trends of high-net worth households, a leading indicator of stock market activity in 2006.
The landmark Northern Trust study called 'Wealth in America' of 1,014 high net worth households with $1 million or more of non-real estate liquid or investable assets, found that 70% in the study currently have some exposure to alternative asset classes, including hedge funds, private equity and real estate to diversify their portfolios and generate higher returns.
In particular, younger millionaires (age 35 and under) place greater weighting on alternative asset classes and less weighting on US equities and bonds. A sizeable 27% of their portfolios are currently allocated to private equity, hedge funds and real estate. Additionally, they currently hold 19% of their portfolios in cash, suggesting a wait-and-see attitude towards investing now in anticipation of a more positive market outlook.
"The survey results reflect cash balances higher than we are currently recommending which may be explained at least in part by seasonal factors such as upcoming income and property tax payment liabilities. On the other hand, the continuing interest in alternative asset class exposure is a logical response "to an otherwise persistently low, nominal yield environment," explained John D. Skjervem, Northern Trust Chief Investor Officer, Personal Financial Services.
Indicative of their interest in further growing their wealth in 2006, affluent investors with $5 million or more of investable wealth currently have the highest portfolio weightings in alternative assets (private equity, real estate and hedge funds) than the overall study group (26% vs. 18%), with less emphasis on US equities and bonds. Interestingly, wealthier households also have larger percentage allocations in cash compared with the overall group (16% vs. 13% portfolio allocation).
Anticipated Changes to High Net Worth Portfolios in 2006
According to the Northern Trust study, while affluent investors aren't planning on making any major structural changes to their portfolios in 2006, they do anticipate increasing allocations to specific asset classes. Twenty- two percent of affluent investors will likely increase their allocations to international equities and bonds, suggesting their belief that interest rates will not rise much further, and that international markets may afford attractive investment returns as they did in 2005. Further, a full 20% said they will likely increase their allocation to cash, perhaps signaling a shift to a more defensive strategy in 2006.
With the continued flurry of interest in alternative investments, 19% of millionaires in the study plan to increase their holdings of private equity, hedge funds and real estate in 2006, perhaps reacting to the huge surge of money being invested in these assets. Further, 26% of wealthier households ($5 million or more of investable assets) said they will likely allocate more to alternative investments this year and 25% reported they anticipate increasing their cash position this year, suggestive of a defensive strategy.
Explained Skjervem, "An asset allocation profile that combines high levels of alternative asset class exposure with a generous cash position is a 'barbell approach' to risk and return that may indeed be appropriate for certain types of investors, particularly those who do not depend on their investment portfolios for current income and lifestyle support."
Investors Put New Savings to Work in 2006
According to Northern's study, 34% of high-net worth investors in the study will likely allocate at least some new savings to alternative investments (hedge funds, private equity and real estate) in 2006. Reflecting a relative bullish attitude towards alternative investments, nearly half (48%) of those with greater wealth - $5 million or more of liquid wealth to invest - plan to put at least some new savings into real estate, private equity and hedge funds this year.
By comparison, younger millionaires in the study appear to be the most bullish about allocating new savings to alternative assets. Exactly two-thirds anticipate allocating at least some monies to these asset classes, perhaps indicative of their willingness to participate in the well documented growth of hedge funds, private equity and real estate investments. Yet, most (71%) anticipate putting at least some new savings into cash, suggesting there is an air of uncertainty about where the market is headed in 2006. Further, half will likely allocate at least some new money to bonds, perhaps because they anticipate that interest rates have leveled off. "With the Fed's current rate-raising campaign at or near completion, the outlook for fixed income securities is improving," explained Skjervem.
The nationwide study of households with self-stated $1 million or more in investable assets, conducted for Northern Trust by Phoenix Marketing, sought to highlight the issues of importance to affluent consumers. A total of 1,014 online questionnaires were completed among these households. The research, completed November 2005, has a margin of error of +/- 2.65 percentage points at a 95 percent level of confidence. Areas covered in the research included investment attitudes and behaviors, asset allocation, issues of retirement, philanthropy, use of advisors, and attitudes about success.
