We’re all looking for a safe but adequate income stream, and that includes the very wealthy. Like most investors, they’re having a hard time finding it.
That’s clear in the latest portfolio update on the asset allocation of the “ultra-high-net-worth investors” that make up TIGER 21, a peer-to-peer learning network. They just can't find passive assets that produce enough income to let them put their portfolios on autopilot, said the group’s founder and chairman, Michael Sonnenfeldt.
This is hardly a tragedy; there is that big pile of principal they can dip into. The group’s 440 members, whose average age is 54, are managing more than $40 billion worth of personal investable assets. Still, many are lowering their annual portfolio withdrawal rates and trying to work their assets harder.
“Our members find they can’t contemplate a life of golf, where they are just investing in passive assets, unless they are willing to be incredibly disciplined on their expenses," Sonnenfeldt said. "Many say 'I’d rather sleep well than eat well, so I’ll cut back from living on 3 or 4 percent of net worth to 2 percent.''” Not that 2 percent of a multimillion-dollar portfolio is a bad number, he added.
That means holding fewer passive assets, such as bonds, and having the biggest chunk of their money in private equity since 2007.
“In a sustained low- or negative-interest-rate environment, if you’re standing still, you’re going backwards,” Sonnenfeldt said. “You need to reach for risk and manage it to generate any kind of performance in a portfolio.” The Tiger 21 graphic below shows the current asset allocation.
Real estate remains king. Many Tiger 21 members made their fortunes there. The allocation is currently 26 percent, down from 30 percent a year ago. The largest part of the real estate allocation is investment real estate, Sonnenfeldt reckons, and in this environment that’s largely income-producing assets in areas ranging “from apartment houses to rent collections on warehouses.”
The money that moved out of real estate over the past year seems to have migrated into private equity, which is now 23 percent of the Tiger 21 asset pool, up from 18 percent. That makes this quarter the first time that members had more assets in private equity than in public equity. Public equity, a shrinking part of allocations since the third quarter of 2015, is 21 percent of the asset allocation. The last time the allocation to public equities was this low came in the fourth quarter of 2011.
The minimum of 70 percent that members have in real estate and in private and public equity “is a staggeringly high number” for entrepreneurs who have, for the most part, sold their businesses and now focus on investing, Sonnenfeldt said.
A sustained low-interest-rate retirement could change how Americans structure their portfolios, Sonnenfeldt suggested. The general guide for a person around midlife has been a 60/40 proportion of stocks to bonds. Sonnenfeldt wonders whether instead of just debt and equity, people will start explicitly adding an income-producing real estate component.
“When you have debt producing so little income,” he figures, “having income-producing assets take the place of debt is perfectly reasonable.”