7/8/2010
By Conley Turner, Research Analyst

The global financial crisis has been a watershed event on the investing psyche of high net worth individuals. As global Gross Domestic Product (GDP) contracted, this group which comprise of those with investable asset amounting to $1 million and above have made significant adjustments to their investment strategies. They have become very discriminating in their decision making and now require transparency on the part of their advisors.  By and large, there is a conscientious and ongoing effort for capital to be used more efficiently.

Direct Investments

At this juncture, it is very much conventional wisdom that the economy averted collapsing in to a 1930s style economic depression.  The current recovery, while fledgling, is a recovery nonetheless. It is against this backdrop that high net worth investors have been slowly redeveloping an appetite for risk and seeking out relevant alternative vehicles.

One emerging area of interest by those with a net worth of $100 million and over has been direct investments into companies. This breaks away from the traditional private equity route with the advantage that the investment can be held onto for as long as desired.  In that, there is no obligation to sell according to the mandates of a private equity fund.

During the crisis, a sizable number of investors were forced to sell their investments at inopportune times and this accounted for sizable losses.  This lack of autonomy and transparency has led to frustration and an erosion of trust.  As such, the option of direct investing serves to ally these concerns. An additional consideration is the benefit of branding and reputation building on the successful operation of these companies.

Hedge Funds

The past three years have been challenging for the hedge fund industry.  This view is highlighted by the industry's significant attrition compared to 2007 levels.  Nonetheless, over the past several months, the hedge fund universe has produced some of its best results ever as markets rebounded from distressed levels. As a result, hedge funds are once again finding favor among the ranks of the high net worth investing class.

There is now willingness by these investors to at least allocate a portion of their portfolios to fund managers.  To this end, the number of new funds launched in the past year, have outpaced the number that have been liquidated in order to keep up with demand.

Despite the interest in the funds however, investors are still more discerning and restrained in their involvement.  While it is was not unusual for a new fund to attract as much $500 million in funding three years ago, today one fifth of that amount would be considered a major achievement.

International Investing

Given that much of growth in global GDP growth is occurring outside the developed nations, many high net worth investors are turning their attention to emerging markets for returns.   Though not altogether abandoning the U.S. or any other mature economy, a growing percentage of these investors are increasing their exposure to the Asia-Pacific region and Latin America.  The catalyst for this being that the Asia-Pacific region was the only area in 2009 where there was an overall expansion in the drivers of wealth creation. That said the country specific investments are being channeled to India and China in Asia and Brazil in Latin America. This trend is likely to continue for the foreseeable future as more capital is predicted to flow into these regions.

Gold

Due to the outlook for an increase in inflation in much of the world an increasing number of wealthy investors are incorporating gold into their asset allocation.  Coupled with currency concerns including the longer term outlook for the value of the dollar and the viability of the euro, the appeal of gold as a store of value has increased exponentially.   Along with building positions in physical asset, these investors are also increasing their exposure to gold-centric vehicles such as mutual funds, exchange traded funds and hedge funds. While at this point there does appear to some degree of price inflation in the metal, its historical position as a haven in times of turmoil is undeniable.

Real Estate

The economic crisis has its origins in real estate which resulted in epic price distortions.  Even to this point with historically low interest rates, a near term recovery in real estate prices does not appear to be forthcoming at least in the near term.  Many high net worth investors are therefore being opportunistic and increasing their property holdings.  The key underpinning for strategy is the achievement of stability and long term capital appreciation. While financing does pose an impediment to the masses, those investors with sizable liquidity have a decided advantage.  In fact, by some estimates, the exposure to real estate among wealthy investors is likely approach 35 percent of the average portfolio for the next few years.  This compares to about 25 percent at present. With that, residential property appears to be favored due to the low valuations while commercial real estate is also earning strong consideration.

Conley Turner
Wall Street Strategies