The "smart" money isn't so different from the rest of us.
Tiger 21 – an acronym for The Investment Group for Enhanced Results in the 21st Century – released its latest asset-allocation report last week, that compiles the aggregate asset allocation of its members.
According to its website, Tiger 21 has more than 500 members "who collectively manage more than $50-billion [U.S.] in personal assets." The group helps its members "improve their investment acumen" through access to "the best minds and resources in the world."
So how shrewd are Tiger's high-net-worth members?
Tiger began tracking its members' asset allocations in 2007. The largest investment that year was a 28-per-cent allocation to publicly traded stocks.
Then came the financial crisis.
The MSCI ACWI IMI index – a collection of large-, mid- and small-cap stocks in 47 countries – tumbled 42 per cent in 2008, including dividends.
Despite the heart-stopping declines in global stock markets that year, the Tigers kept their cool. Their allocation to stocks climbed to 31 per cent in 2008, which suggests that they bought – or at least held – stocks while other investors panicked.
But the calm was short-lived, and the Tigers capitulated a year later. They slashed their stock allocation to 19 per cent in 2009 and fled to all the predictable locales. Their allocation to bonds jumped to 23 per cent in 2009, from 16 per cent a year earlier. Their allocation to hedge funds – which held up far better than the stock market during the financial crisis – nearly doubled to 9 per cent from 5 per cent.
Those moves didn't turn out to be exceptionally savvy. The MSCI ACWI IMI index has returned 12.1 per cent annually since 2009 through June, while the Bloomberg Barclays U.S. aggregate bond index returned 4 per cent and the HFRI Fund weighted composite index – which tracks hedge funds – returned 5.8 per cent.
Watching stocks outpace bonds and hedge funds must have been irksome, and the Tigers backpedalled. Their allocation to bonds gradually shrank to 9 per cent as of June. Their allocation to hedge funds is now just 4 per cent.
The Tigers haven't gone back to stocks, however. Their current stock allocation of 21 per cent is only modestly higher than it was in 2009. Instead, they're betting on private equity and real estate. The allocation to private equity has nearly doubled to 21 per cent as of June from 13 per cent in 2009, while real estate has risen to 30 per cent from 19 per cent.
It's not surprising that the Tigers have been seduced by private equity. In recent years, it has managed to combine the best attributes of stocks and hedge funds: high returns with muted drawdowns. The Cambridge Associates U.S. private equity index returned 13.7 per cent annually from 2009 to 2016 – the most recent year for which numbers are available – while the MSCI ACWI IMI index returned 11.4 per cent. And private equity held its ground as well as hedge funds during the financial crisis. The private equity index was down 22.5 per cent in 2008, while the HFRI Fund weighted composite index was down 19 per cent.
Private real estate has also delivered high returns with muted downside. The NCREIF property index, which tracks a pool of commercial real estate properties, returned 11.5 per cent annually from 2010 through March. And it, too, held its ground during the financial crisis. The index was down a total of 22.2 per cent in 2008 and 2009. (The index is based on appraisals rather than transactions, so its returns tend to lag actual returns from real estate by several quarters.)
Michael Sonnenfeldt, founder of Tiger 21, explained its members' interest in private equity and real estate by saying that the Tigers "are most comfortable with assets they can have direct ownership of," and that "they can own a building or a part of a small company."
Maybe so. But it appears that the members of Tiger 21 are also most comfortable with investments that have performed the best most recently. Chasing returns rarely trumps disciplined investing. Something tells me that their latest foray into private equity and real estate will work out about as well as their previous pivot into bonds and hedge funds.
Nir Kaissar is a columnist with Bloomberg News.