How do the ultra-rich invest?

As director of wealth advisory at William Buck, I’m often asked how the rich invest. Part of the service offering of our private office team is to meet the specific needs of the ultra high net worth (UHNW) and high net worth (HNW) investors. In financial services, UHNW is a term used to describe people with investments of $10 million plus, whereas HNW is reserved for those with investments outside the family home valued at or above $1 million to $10 million. 
 
These investors are usually in their 50s and come from successful business backgrounds or established families. But we are increasingly seeing clients in their 30’s and 40’s who have built exceptional wealth through smart business decisions. 
 
While many people tend to think UHNW clients take on more risk than regular clients, my experience is that UHNW clients are more conservative than HNW clients, but they do invest differently. 
 
Our observation is that wealthy clients take similar risks in their overall asset allocation than less wealthy clients, however, they have a much larger level of diversification and invest in products that are not widely available to less wealthy clients. This results in portfolios that have significantly less deviation due to investments that are not marked to market on a daily basis. These include private equity, direct property, and fixed interest. We also tend to see UHNW and HNW individuals are often disinterested in taking large, speculative risks but rather, in growing their nest egg for future generations. 
 
Increasingly, our private office clients are involving family members in decision making and allocating them funds to invest themselves with guidance. The younger generation is largely focused on environmental issues as a starting point for their investments, but parents are quickly joining them in relation to allocating to assets that are sustainable, including social impact bonds.
 
We have based this observation on asset allocation of our non-private office clients (about $900 million across 500 clients that we refer to as wealth advisory clients) against our private office clients (about $650 million across 22 clients not including business or non-investment related property). 
 
Analysing the asset allocation of UHNW clients shows us that: 
  1. Property is the single-largest asset held by UHNW clients we see. This is via direct property or wholesale property trusts and represents 30% of all holdings. There is little residential property held and where it is, it tends to be in a development with friends of property-developer associates. Commercial building investment tends to be “rent and collect” and will often include business premises or former business premises held in the client’s superfund.  
  2. Bonds and/or bond funds is the second-largest asset held and represents almost 30% of holdings. 
  3. International shares and Australian shares combine to occupy about 15% of their portfolio. The weighting towards international is consistently increasing at the expense of Australian shares and the holdings tend to be all unhedged. There is a combination of wholesale managed funds in this area and direct investment through well-known international brokers.
  4. Alternative assets are held almost in equal weight to shares (about 15%) for UHNW clients. This includes predominately infrastructure, private equity and commodity exposure (only 1-2%). 
  5. Available cash tends to be around 5%, which is higher than wealth advisory clients who tend to hold more in term deposits. 
  6. Assets such as direct commercial property and full ownership or part stakes in family businesses are generally favoured by UHNW clients while cash is also popular. 
 
Almost no term deposits are held by UHNW clients, compared with wealth advisory or non-private office clients that hold about 15% as part of their portfolio. In addition, UHNW clients had little to no hybrid fixed interest allocation. 
 
The overall split of growth and defensive assets is about 60%/40%, depending on classification of alternative. We found this split to be very similar to our wealth advisory clients. 
 
The greatest difference occurred in the type of products invested across asset classes, which we have summarised below:
 
UHNW clients hold more property than their less wealthy counterparts and they tend to be holding it directly – either alone or through ‘club’ investments with friends, or wholesale property syndicates. They generally prefer commercial property over residential while our wealth advisory clients hold a larger number of property trusts. 
 
SHARES
 
The way Australian shares are held is also quite different, with private office clients using funds more than regular wealth advisory clients. There is also a much larger prevalence of index and exchange trade funds (ETFs), as in our experience, UHNW clients have less desire to be involved in the buy/sell decision making or manage their own share portfolio as well as less need to target an income return.  
 
International shares are held in a similar manner through wholesale funds for both wealth advisory and private office clients. However, private office clients use boutique fund managers more often than wealth advisory clients.  
 
FIXED INTEREST AND CASH INVESTMENTS
 
There is a significant departure when it comes to fixed interest and cash investments. Private office clients are using over-the-counter (OTC) bonds in several portfolios with a large concentration towards floating rate investments and supplementing that with specialist fixed income managers. Allocation towards fixed income tends to be at the expense of cash holdings. Wealth advisory clients have a much higher allocation towards cash and term deposits and much of this is around strategic advice to fund lifestyle payments. There is a small allocation toward hybrid securities and then fixed interest is a blend of fixed income managers. 
 
ALTERNATIVE INVESTMENTS
 
Alternative investments is quite a considerable difference again, given there are more options for private office clients within infrastructure, commodities, direct water entitlements, small direct private equity options and specific hedge fund strategies. For wealth advisory clients this is still a growing area, and while gaining access to quality products has traditionally been a problem, this is improving, with some clients allocating to invest in wholesale funds. 
 
While these observations reflect what we have seen from our own clients, Capgemini’s World Wealth Report 2019 explains that cash and cash equivalents are becoming more significant than equities and property as UHNW and HNW individuals become more risk-adverse in preparation for a potential market downturn. And unfavourable market conditions have triggered an increase in global alternative investments allocations. This is complemented by the large volume of startups and early-stage, fast-growing companies, particularly in Asia-Pacific. 
 
It is difficult to determine whether private office or non-private office clients are getting better returns as there are so many factors to consider in these investments, including drawdown for pension payments, distribution, various inheritances and the like. 
 
Over the past year, wealth advisory client returns have been propelled by share markets and listed property trust returns but the cash and term deposits tend to reduce this return. Private office returns look to be more consistent and certainly have delivered a much lower level of volatility. The one clear deduction that I make is that wealthier clients do not want greater returns, but they most definitely want greater diversification with less risk. In my opinion, the right financial advisers can greatly assist in this space, given they have the requisite skills in asset allocation.   
 
Adrian Frinsdorf is director for wealth advisory at William Buck. 



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Very interesting reading and thanks for publishing it.

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