The wealthy have turned their eyes to the future. And they’re not exactly happy with what they see.
In fact, there are several economic issues that are keeping high-net-worth (HNW) investors up at night. These worries have had a profound impact on their investment and asset allocation decisions over the past few months.
That said, wealthy investors are continuing to identify intriguing opportunities that are directly related to the issues and events that are causing them concern.
Given how the wealthy are often “ahead of the curve” when it comes to investing and risk management, I thought it would be interesting to highlight some of these concerns and opportunities.
(The following observations are taken from a recent survey of Tiger 21 members – a group of 150 wealthy entrepreneurs (most of them American), with an average net worth of $75 million. Download a summary of survey findings here: www.tiger21.com.)
The worry – double-dip recession: Many HNW investors worry the U.S. economy is on shaky ground. They wonder whether the U.S. government’s efforts to solve the financial crisis are enough to pull the world’s largest economy through the worst recession in nearly 80 years.
The response: The wealthy are cutting performance expectations for their U.S. holdings. They’re seeking opportunities in international markets (Canada among them); this is particularly true of new positions. They’re also exploring currency hedges and other forms of protection against a falling U.S. dollar.
The opportunity: HNW investors continue to be bullish on emerging markets. Most believe the opportunities in China, Brazil, India and other developing economies remain exceptionally attractive, particularly when compared with the U.S. and Europe.
The worry – another market crisis: Most wealthy investors surveyed (over 70%) believe markets will take a turn for the worse in the coming months. While there is a range of opinion as to how bad the pullback will be (most expect a 10% to 30% drop), respondents continue to worry that choppiness will make for a challenging investment climate in the months to come.
The response: HNW investors are keeping overall equity exposure flat, but trimming back speculative positions, because these are likely to experience the most volatility in the event of a market pullback. Many are keeping a fair bit of their portfolio in cash, clearly anticipating bargain-shopping opportunities in the months to come.
The opportunity: The wealthy have expressed significant interest in alternative investments over the past year or so. HNW investors are allocating more of their portfolio to hedge funds, managed futures and alternative asset managers who can not only protect them against expected volatility, but also use volatility to make money.
The worry – uncertainty over inflation / deflation: Analysts and economists are divided about whether the U.S. will suffer inflation or deflation in the months to come; so are the wealthy. Some HNW investors have adjusted their portfolios to defend against (and take advantage of) inflation; others are doing the same for deflation.
The response: those who believe inflation is more likely are buying commodities, precious metals and dividend-paying blue chip stocks, while cutting back the duration of their bond portfolios. Those who anticipate deflation have taken the opposite approach, beefing up cash or cash equivalents in their portfolios. A few are buying government bonds and gold and other precious metals.
The opportunity: Both camps have pursued income-producing real estate. This is particularly true in the U.S., where the real estate market has suffered for several years, and it’s possible to buy attractive revenue properties for a fraction of what they would have cost a few years ago.