I've found high-net-worth (HNW) individuals to be generally ahead of the curve when it comes to investing. No, they don't have a crystal ball. But many of them have a keen sense of when things are changing. Most of them have been very successful "reading the tea leaves" when it comes to business and investing.
One particularly useful tool for tracking wealthy attitudes is the quarterly member surveys from TIGER 21. (TIGER 21 is a high net worth, peer-to-peer network for investors with over $10-million in investable assets.)
While the sample size of these surveys is small (the organization has just over 300 members spread across Canada and the U.S.), the surveys do represent a good cross-section of opinion.
Back in September, TIGER 21 asked members what changes they intend to make with their portfolios by the end of the year. The chart [below] provides a snapshot of intended increases or decreases in the allocation to eight specific asset classes.
As you can see, most members aren't planning to make big changes to most allocations. Rather, most are in a "steady as she goes" mindset about most assets.
But there are a couple of notable exceptions. You'll notice a fair percentage (46 per cent) are planning on increasing their cash allocation. And an almost equal amount (44 per cent) are planning on increasing their allocation to private equity investments.
There are a few things I take from these results. They seem to confirm what I've gleaned from my own discussions with HNW individuals over the past several months, and also a few market trends I've been thinking of lately.
Discomfort with current valuations
Perhaps the most obvious and important learning is the increase in allocation to cash. This seems to align with a sentiment I've heard over the past while, where HNW individuals feel increasingly worried about stock market valuations (and, increasingly, about geopolitical risks) so they're raising cash.
Simply put, the wealthy are looking for bargains, but they're finding very few today. So instead of jumping into mediocre opportunities, many feel that now is the time to be patient. They're building up their supply of "dry powder," and getting ready to allocate to any opportunities that arise from significant price dislocation or market volatility.
Increasing importance of private equity
The increase in private equity is no surprise either. Over the past several quarters, HNW individuals have been increasing their direct purchases of privately held businesses, as well as investing in specific private equity pooled funds.
I expect that private equity will remain a favoured asset class among the wealthy. HNW individuals certainly appreciate the strong returns, but more importantly, the non-correlated performance. And for many, the ability to directly control the direction of a given investment is an important plus.
Rotation out of bonds continues
On the fixed income side, the majority of members are staying put with their allocations. But the percentage planning to decrease their allocation to bonds (23 per cent) is quite a bit higher than those planning on increasing it (13 per cent).
This decrease represents the final movements of a trend that's been going on for some time now. Individuals I've spoken with (HNW individuals, but also professionals and analysts as well) are fairly confident that interest rates are about as low as they're likely to go. In addition, spreads between government bonds and investment-grade corporate bonds are extremely thin, as are spreads between investment-grade corporate bonds and high-yield bonds.
Simply put, many HNW individuals feel the bond market isn't adequately compensating them for the risks they're taking.
Getting comfortable with (U.S.) real estate
You'll notice the majority (51 per cent) of HNW individuals are standing pat with their real estate allocation. However, a sizable minority (36 per cent) intends to boost their holdings.
Such a call may seem counterintuitive to Canadians – our real estate market is arguably very stretched right now, particularly in major centres such as Vancouver, Calgary, and Toronto. Keep in mind, however, that the majority of TIGER 21 members are from south of the border, where the perspective on real estate is very different.
I've spoken to several U.S.-based HNW individuals who have expressed increasing confidence that the U.S. real estate market has turned the corner. This is after the significant crash from 2007-2010. They're getting more and more comfortable with this asset class, and they're starting to look for opportunities.
I wouldn't be surprised if this trend becomes more pronounced over the next year or so. It's certainly an interesting idea I'll be keeping my eyes on.
Thane Stenner is founder of StennerZohny Investment Partners within Richardson GMP Ltd., as well as Portfolio Manager and Director, Wealth Management. Thane is also Managing Director for TIGER 21 Canada. He is the bestselling author of ´True Wealth: an expert guide for high-net-worth individuals (and their advisors)'. (www.stennerinzohny.com) The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Richardson GMP Limited, Member Canadian Investor Protection Fund.