Every quarter I review asset allocation updates from over 200 U.S. and Canadian Tiger 21 members. These reports outline how members' portfolios are allocated to broader market categories, and provide a high-level overview of what the wealthy are doing with their money right now.
(Tiger 21 is a high-net-worth, peer-to-peer network for investors interested in learning how to be better stewards of their capital, for the benefit of their families, and philanthropic communities.)
I admit, the sample size is on the small side, and the data tends to focus more on the "big picture" allocation decisions rather than specific breakdowns of asset classes. That said, I still think it's a good way to get a "sneak peak" into how the wealthy view certain assets, and how they're responding to broader economic and market trends.
Looking at one quarter isn't necessarily going to tell you much, because changes tend to be small. But when you look at changes over several quarters (or over five years), certain trends and ideas begin to emerge.
Now, there are some who may look at this and say "so what?" After all, what does it matter to the "Main Street" investor what a bunch of multi-millionaires do?
With respect, I disagree. Collectively, this is a bunch of very savvy, very successful investors. They often notice trends before the general population, and move in and out of particular assets before the crowd catches on. Do they sometimes make mistakes? Sure they do. Do they have perfect foresight? Of course not. But most of the time, they get it right. And they leave their footprints for others to track.
Here's a chart that details the current allocation of the average Tiger 21 member, and also how those allocations have changed since the fourth quarter of 2007.
Broadly speaking, looking back over several quarters, you can see a gradual shifting out of cash and fixed income and into equity. Specifically, a few thoughts come to my mind:
1. Steady as she goes on equities
HNW individuals seem to be mostly content with their equity exposure. Public equities currently comprise about 23 per cent of the HNW portfolio, down quite a bit from peak allocation of 30 per cent in 2008, but off the bottom of 18 per cent seen in 2010. Despite the run-up in North American equity prices, the overall allocation hasn't changed all that much this year, rising all of 2 per cent since the fourth quarter of 2012.
This echoes the sentiment I've heard from many HNW individuals I know. By and large, they're comfortable with their current holdings. They're not finding a lot of screaming bargains out there. But they don't seem to be paying all that much attention to those who are predicting a stock market collapse either.
2. Moving out of fixed income
Take a look at the allocation to fixed income – it's currently at 13 per cent of the total portfolio. That's the lowest since the start of the financial crisis back in 2007.
I think this is a very telling statistic. I don't think it's indicative of a "risk-on" / "risk-off" trade – as we discussed above, there hasn't really been a stampede into equities. Rather, I see this as an indication that HNW investors are preparing for the inevitable rise in interest rates. When rates rise, government bond holders are going to be hurting. It seems the wealthy are getting off the train before it goes over the cliff. I'd be interested in unpacking this allocation a bit. For example, I'd like to know the duration of these fixed income allocations, along with the split between government/investment-grade corporate/high-yield issues. It would also be interesting to know how much of the 13 per cent fixed income allocation has been steered to tax-free munis, inflation-protected bonds or even floating-rate senior secured loans.
3. Ongoing investment in private equity
One of the trends over the past several quarters is the ongoing investment in private equity – currently at 18 per cent of the portfolio, the highest it's been in five years.
The number includes investment in private equity funds; such funds have grown in popularity over the past couple of years. But it also includes ongoing investments in the businesses they own, as well as businesses owned by friends, family members and business associates.
On one level, this is hardly surprising. Most of the HNW individuals I know are strong, "type-A" personalities who like being in control of their own destinies. They often feel more comfortable with "operating business risk" than with "stock market risk" – despite the diversification benefits of a stock portfolio.
Reading into things a little deeper, however, I think the ongoing investment in private equity is in part a vote of confidence in the North American economy. The overwhelming majority of Tiger 21 members have made their money in North America; the fact they continue to invest and build their wealth at home should give us some level of comfort in the ongoing health of the economy.
Thane Stenner is founder of Stenner 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.stennerinvestmentpartners.com (Thane.Stenner@RichardsonGMP.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.