Every quarter Tiger 21 surveys its 185 U.S. and Canadian members about the composition of their portfolios. It's a small sample, but the data can give you a good idea of where high-net-worth investors are currently putting their money. (Tiger 21 is an exclusive peer-to-peer investing and wealth management network for individuals with investment capital of at least $10-million.)
The wealthy don't have perfect timing when it comes to investing—nobody does. But they do tend to be ahead of the curve when it comes to identifying investment trends and opportunities. This is how they created their wealth: by building businesses to capitalize on trends they've noticed, and by investing when they've seen intriguing opportunities develop in the public markets.
By looking closely at what the wealthy are doing with their portfolios (and just as importantly, what they're not doing) you can get a "sneak peak" as to where they might be seeing opportunity—and danger—in the market.
Here are the allocation data for the most recent quarter ending March 31. The second graph charts allocation data from as far back as the fourth quarter of 2007, to give you an idea of how that allocation has changed as we've moved through the financial meltdown and Great Recession of the past several years.
GRAPH 1: TIGER 21 Member Allocations (Time Period: Q2 2011 – Q1 2012)
GRAPH 2: TIGER 21 Member Average Allocations (Q4 2007 – Q1 2012)
( See infographic above left for a larger version of this graph)
Looking at the data (above), I can see three interesting trends. They're worth keeping in mind as you make your own allocation decisions over the next several months
Slow, steady confidence in equities Looking at how the equity allocation has changed over the past several quarters, you get the sense that the wealthy believe "slow recovery" scenario is for real. You can see it better when you look back at the equity allocation since the first quarter of 2010: from a low of 18 per cent, there's been a gradual building back of exposure.
It hasn't happened all in a rush. The wealthy remain cautious—they're "picking their spots" as it were. I believe this is likely to be the way the market progresses from here on in: slowly, cautiously, without the big run-up or surge that we typically see coming out of other recessions.
Perhaps even more intriguing is the allocation to "private equity." While the term encompasses a number of different investments — speculative plays, start-ups, angel investments — generally speaking, there's a lot more risk here than with publicly-traded equities. As you can see, the allocation to this asset class is at an all-time high. I think this is a real sign of confidence in the nascent economic recovery, and the opportunities created by it.
Now is not the time for fixed income There's been a lot of talk lately about interest rates: when they're going up; by how much; and what sort of implications that has on the broader economy, and the markets in general.
It seems the wealthy are taking this opportunity to trim back their exposure to fixed income, likely in anticipation of interest rates playing havoc with bonds. You can see current allocation is 15 per cent, close to the all-time low back in 2007.
I'm guessing this accounts for some of the shift toward equities as well, as historically low bond yields drive some investors to seek out the dividends offered by blue-chip equities as an alternative. This is a trend that's been going on for several months now among all segments of the investing public, not just the wealthy.
I want to be clear here: there will always be a place for bonds and other fixed-income investments in the portfolio. This is no different with the wealthy than with the overall population. But it seems the wealthy believe that this is not the time to go "all in" on fixed income.
Real estate: the wealthy still believe Real estate has long been a favourite asset class of the wealthy. Indeed, real estate remains one of the primary sources of wealth for many of the world's wealthiest families. There is no reason to believe this will change in the future.
Interesting that the latest data suggest that the belief in real estate hasn't changed all that much over the past several years, despite one of the most challenging real estate markets (particularly in the U.S.) in history: current allocation stands at 24 per cent, just 2 per cent lower than its high back in 2008.
Keep in mind that the data don't indicate what kind of real estate the wealthy are investing in (i.e., residential, recreational, commercial, industrial). Nor do they show which market(s) those investments have been made. So there might be a story there that the numbers don't really speak to. Even so, I think the data suggest that, if anything, the wealthy have viewed the great real estate shake-down of the past several years as a buying opportunity rather than a reason to sell everything and stuff the cash under the mattress.
Wealthy investors have built and protected their wealth by allocating capital well. They've been patient, and they've gotten their asset allocation decisions mostly right over the longer term. I think it makes a lot of sense for investors to consider these trends.
Thane Stenner is founder of Stenner Investment Partners within Richardson GMP Ltd., as well as Director, Wealth Management. Thane is also Managing Director for TIGER 21 Canada (www.tiger21.com/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.