Ultra-Wealthy Bullish on Equities, For Now



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June 9, 2014

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Ultra-Wealthy Bullish on Equities, For NowBy Tom StabileJanuary 30, 2013Ultra-high-net-worth investors were still favoring equities to kick off 2013, but that bullish approach may not last thewhole year. That’s according to new research from TIGER 21, a network of wealthy investors, and a report fromSpectrem Group, a research consultancy.TIGER 21 members lifted their equity allocations throughout 2012, in part riding the ongoing bull market in stocksby increasing their public equities exposure from 21% to 24% during the year, but also through a greater share ofprivate equity, which rose sharply from 13% to 19%. The data tracks the aggregate allocation of assets across thegroup’s membership.The group’s public equities exposure had been as high as 32% just before the 2008 crash, and the year-end 2012figure was the highest since its early 2010 low of 18%. The group, whose 200 members invest about $19 billion andeach have at least $10 million, also only had a 9% allocation to private equity in early 2010. The historical data isn’ta straight-line comparison, because the membership changes from year to year, which affects the group’s asset mix.”It’s a continuation of the trend that yields on fixed income and cash have been low and trending lower,” says ThaneStenner, managing director at TIGER 21. “High-net-worth and ultra-high-net-worth investors and entrepreneurs aretrying to reallocate into more efficient asset classes.”Part of the shift to equities in the allocation is because stock values have risen, but it also owes to investors stillseeing “fairly good values” in certain stocks, Stenner says.The private equity rise, meanwhile, is largely from confidence in the long-term strength of that asset class, andbecause these high-end investors prefer to have the lower volatility that comes from assets that aren’t marked tomarket, he says. The category includes both private equity funds and direct investments in members’ own companiesor other private firms.That overall equity bullishness might not keep pace throughout the year, however.”I wouldn’t be surprised if they started to increase their hedge fund weightings throughout 2013,” Stenner says. “Partof the reason is that the equity markets have doubled from their market lows. Members say they’re probably goingto take a slightly more defensive position later in the year and bank some profits.”Spectrem also found a tilt toward equities in its Wealth Management Series survey, with 71% of ultra-wealthyinvestors ‚Äì those with $5 million or more in net worth excluding their home ‚Äì planning to invest in the asset class.That’s up from only 52% saying they would invest in equities in a 2010 survey.The ultra-wealthy respondents chose equities ahead of all other asset classes. They cited cash-based investmentsas their second most-likely target in the survey, at 51%.Spectrem found slightly less enthusiasm for equities among those with $1 million to $5 million in net worth, with only55% of that group saying they would invest in stocks or mutual funds in 2013 ‚Äì behind cash investments at 56%.That’s still up from the 45% saying they would invest in equities in 2010.The stronger move to equities owes in part to the election season ending, says Tom Wynn, Spectrem’s director ofaffluent research.”The uncertainty that was associated with the election is kind of behind us now,” he says. “We’re seeing some moresolidified investments than we’ve seen in the recent past. A lot of people have been parking money in cash, notknowing what to do.”Wynn says he expects cash and fixed income holdings to drop a bit, with the money heading to the equity markets.For the TIGER 21 investors, the losing asset classes in 2012 were fixed income, cash, and hedge funds. Bondstumbled in the aggregate portfolio from around 20% at the start of 2011 to 16% a year later, and just 14% by the endof 2012. Cash slipped down two percentage points in the aggregate portfolio last year to 12%, as did hedge funds,dropping to 7%.”Hedge funds typically do better in a more range-bound market,” Stenner says.Fixed income captured the biggest downshift, however. “There’s a strong realization that the bond market is at thelater stages of a very long-term bull run that began 30 years ago,” he adds. “Our investors want to be out front iflong-term interest rates start to move up in the next year or two, because the bond markets would generate flat ornegative returns.”That phenomenon is sending “reluctant money” back into equities, real estate, and private equity, Stenner says,even as a lot of “scared money” from the broader investor universe has kept flowing into bonds in recent years.TIGER 21 investors are also slightly favoring international investing, with members saying they may “nibble a bitmore” into Europe and increase allocations to China and Japan, Stenner says. That’s following China’s relative tepidgrowth last year, with some investors expecting it to rebound, and Japan’s strong equity market performance to closeout 2012.”The focus on investing globally would be marginally higher,” he adds. “In 2013, I’d expect a slight increase in bothinternational equity and credit investing.”