Large allocations to alternative assets and cash are hallmarks of the investment portfolios of the ultra-wealthy

After a good year for investments in 2017, last year was ugly. And while the portfolios of the ultra-rich do not change significantly from year to year, what we have seen in 2018 is a growing bias towards cash and a continuation of the long-running trend away from bonds due to low interest rates.

It is too early to say what kinds of returns ultrahigh-net-worth individuals (UHNWIs) generated overall in 2018, but some public investment funds with similar allocations have earned low singledigit returns. The US$350 billion California Public Employees’ Retirement System, for example, generated 3.3 per cent on its investments, according to initial estimates—far below its 10-year average return of around 8 per cent.

Of course, investment decisions are not typically based on short-term outlooks and can be heavily influenced by the particular goals of the investor.

“The factors are widespread and quite individual,” says Adrian Zuercher, head of asset allocation for Asia Pacific at UBS Global Wealth Management Chief Investment Office. “The most common factors are legacy factors—leaving a financial legacy for the coming generations—and those require a longterm asset allocation. Other important factors are sustainability goals. Our UHNWIs are often heavily engaged in philanthropy and charity. Aligning their core values with their investment strategy is a major factor for many of our UHNWIs.”

The population of ultra-wealthy people—those with US$30 million or more, by some definitions—is growing quickly, with Asia generating new wealth more than any other region. According to Wealth-X, the collective net worth of Asia’s UHNWIs grew by more than a quarter in 2017 and the total global wealth of this group of super-rich folk is now around US$31.5 trillion.

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An informal survey of wealth managers suggests that the ultra-wealthy split their investments between equities (35 per cent), fixed income (20 per cent), alternative assets (18 per cent), cash (17 per cent) and real estate (10 per cent). 

The split between different asset classes does not typically change much from one year to the next, but that is changing as the sophisticated platforms at private banks are providing wealthy investors with access to more systematic investing, such as quantitative strategies that make use of big data. “This has become a very popular strategy as the allocation of the portfolio is dynamically adjusted to the economic and market cycle based on a proprietary indicator,” says Zuercher. Following are the main asset classes that make up the portfolios of the ultra-wealthy.

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Alternative assets

This is one area that sets ultrawealthy portfolios apart from those of regular investors. Access to private equity, venture capital, hedge funds, infrastructure and other alternative opportunities is typically restricted to sophisticated investors with deep pockets—and can offer significantly higher returns than conventional investments, at least in theory.

The richer you are, the bigger your allocation to these exclusive types of investments.

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Large cash piles are another hallmark of the ultra-wealthy. On the face of it, cash is a terrible investment—it earns close to zero interest these days—but it is not uncommon for wealthy investors to have as much as a quarter of their portfolio in cash (or cash-like instruments).

One advantage of keeping a large amount of cash to one side is the ability to exploit opportunities when they arise. The classic Hong Kong example is the crash in property prices during Sars, when those with cash on hand made out like bandits. While it’s true that stocks can be sold quickly and easily for cash, the Sars example is instructive— because stock prices (at least in Hong Kong) also crashed at the same time, meaning that selling would have entailed losses.

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Real estate

Sometimes classed as an alternative investment, but in Hong Kong and across Asia property is a staple of everyone’s investments. Indeed, real estate is typically the major source of wealth for Hong Kong’s rich, and their investments are focused on diversifying away from the sector.

But for those who are not real estate billionaires, investing in property around the world is an increasingly popular strategy, either through instruments such as real estate investment trusts or bespoke schemes arranged by private banks for their clients.

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The amount of money invested in stock markets has been rising in tandem with the growth of wealth in Asia, driven in part by the bigger risk appetite of wealthy people in this region, but also by the historically low interest rates that have persisted for more than a decade now.

But 2018 saw a dramatic reversal from the highs of 2017, with Hong Kong’s Hang Seng index down 14 per cent for the year. Globally, the tech-driven Nasdaq index was down 8.6 per cent in 2018 and the wider S&P 500 was down 8.6 per cent on the year.

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Fixed income

Once the bulk of traditional portfolios, fixed income investments such as bonds have given way to higher yielding asset classes such as, well, everything else listed here besides cash. The ultra-low interest rates that resulted from the financial crisis, which were a result of central bank policies designed to prevent deflation, have helped to prop up stock prices but have driven down the yields on bonds.

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One new area that has gained attention during the past few years is cryptocurrencies. According to Wealth-X, 29 per cent of HNWIs—individuals with assets of US$1 million and more available for investment—globally say they had a high degree of interest in buying or holding cryptocurrencies.

“Despite the growing fervour, wealth management firms have to date been ambivalent about offering guidance, with only 34.6 per cent of HNWIs globally saying they had received cryptocurrency information from their wealth managers,” says Wealth-X in its latest report.

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