Published On

February 18, 2016

Published In


Contributed to The Globe and Mail

February 14, 2016

Looking to become wealthy one day? Pay close attention to what high-net-worth (HNW) investors do with their money. By following the moves of people who have demonstrated the ability to create wealth, you stand a much better chance of creating some for yourself.

One useful tool for tracking how the wealthy are investing (and what they’re thinking about the market and the economy) is the quarterly member survey from TIGER 21, a North American peer-to-peer network for investors with a minimum net worth of $10-million.

The group conducts these surveys by giving members a detailed, confidential questionnaire asking how much of their portfolios are allocated to which investments, and how those allocations have changed over the past quarter.

Currently, the network has almost 400 members in Canada and the United States. All of them are highly successful investors, with substantial experience identifying both public and private investment opportunities. Collectively, they’ve thought a lot about wealth ‚Äì how to create it, but also how to protect it.

There’s been a significant increase in volatility throughout global equity markets; that volatility has resulted in subtle but meaningful changes in the portfolio allocation of the typical TIGER 21 member.

Continued move into uncorrelated assets

HNW investors know there is no way to eliminate market volatility, but the changes in their asset allocations show how they’ve tried hard to minimize its effect on their portfolios.

While the changes in allocations to equities (down 4 per cent from the previous quarter), fixed income (down 10 per cent), and real estate (down 3.5 per cent) may seem small, collectively they indicate how HNW individuals are adapting a defensive posture, seeking assets with performance uncorrelated to the broader market.

Unsurprisingly, private equity was the main beneficiary of these moves, with the typical allocation rising from 20 per cent to 22 per cent of the portfolio. Over the past six months, allocation to private equity has climbed by more than 20 per cent.

This is a clear indication that HNW investors continue to see private equity as an excellent place to both build and protect wealth.

Caution flag is up for public equity

The same cannot be said for public equities. The typical TIGER 21 member now has about 23 per cent of the portfolio allocated to publicly traded equities, a drop of about 4 per cent from the previous quarter. The allocation remains very low on the historical range (prior to the great recession of 2008, for example, allocation to public equities topped 31 per cent), and indicative of the general caution the wealthy feel about publicly traded stocks.

It’s interesting how low this allocation is compared to the traditional 60/40 equity/fixed-income model portfolio. Such an allocation is typically considered the starting point for most “balanced” portfolios, but it seems HNW individuals don’t buy into that mindset. Their allocation to equities is low even compared with the usual “defensive” posture of 40/60 equity/fixed-income that many investors default to in times of volatility.

Little love for fixed income

The third quarter of 2015 saw a fairly significant jump into fixed income; that jump was reversed in the fourth quarter, as allocations to fixed income dropped back to 10 per cent of the overall portfolio. This seems to be the opposite of what most investors do in times of volatility – at 10 per cent of the overall portfolio, the allocation to fixed income remains far, far below what would be considered a typical defensive portfolio.

The reason for a low fixed income allotment? Most HNW individuals continue to see traditional bonds as an unattractive risk/reward scenario. Historically low short-term yields, and widening credit spreads on the riskier side of the bond market, signal danger.

This is another explanation for the shift into private equity, as well as the sizable move to real estate, an allocation that has dropped over the past several quarters but remains substantial. Both assets offer tax-advantaged yield that’s often far superior to what’s currently offered by bonds.

Cash build-up continues

Several HNW individuals have expressed to me their intention to build up cash in anticipation of purchasing deeply discounted, distressed assets at some time during 2016. You can see this move at work this quarter, as the cash allocation increased from 9 per cent to 10 per cent of the overall portfolio. This is the same move that worked for many TIGER 21 members coming out of the great recession of 2008.

Concern over Canadian real estate, bank stocks

I learned some additional insight earlier this month at the TIGER 21 annual conference in Beverly Hills, Calif. HNW individuals were still raising cash into 2016 but were also now hunting for top opportunities in commodities – including energy – and in master limited partnerships. Due to concerns about valuations and credit markets, sentiment is starting to turn more cautious on both real estate and private equity.

Meanwhile, members are definitely getting more concerned about the risk of a pullback in Canadian real estate values, as well as bank stocks in Canada. More broadly, the feeling is that global credit markets are clearly pointing to some bigger problems ahead and global equity markets still have some more downside risk, even if there is a minor brief rally.

Over all, wealthy investors remain firmly focused on defence.

Thane Stenner is portfolio manager and director of wealth management of StennerZohny Investment Partners+ within Richardson GMP. He is a founding member and chairman emeritus of TIGER 21 Canada and author of True Wealth.