How the Rich Stay That Way
NEW YORK (December 22, 2005) – Anyone looking for fresh insight into the mindset of the high net worth investor would do well to consult a new TIGER 21 Investment Allocation Index issued by New York-based Tiger 21, the nation’s premier peer-to-peer learning and investment group for high net worth investors.
Tiger 21 has just completed its first-ever survey of its membership who collectively control investable assets of more than $5 billion. The resulting Tiger 21 Investment Allocation Index shows how the organization’s top-bracket investors are currently apportioning their own portfolios across the full spectrum of asset classes, including cash, fixed income, and public equity, as well alternative asset classes such as private equity, real estate and hedge funds.
Some highlights of the first Target Allocation Index follow below. Note that Tiger 21 members include a cross-section of serial entrepreneurs, Wall Street professionals, money managers and corporate executives who have enjoyed the benefits of a major personal liquidity event. They come together through Tiger 21 for the purpose of sharing collective intelligence and personal experiences in order to enhance long-term investment returns.
1. The Price of Security – The most notable aspect of the asset allocation index is how much Tiger 21 members are holding in cash – 11% of the average member’s portfolio was in this most liquid of investments. “A more traditional rule of thumb is for investors to maintain 3-5% of total assets in cash reserves. This is based on our members living, on average, on 3-5% of their portfolio value per year. Traditionally, this would mean holding approx 1 year of living expenses in cash” explained Tiger 21 Founder Michael Sonnenfeldt. “The 11% figure tells us that our members, who represent some of the most sophisticated self-directed investors in the country, are in a conservative, security-conscious frame of mind right now. That six to eight per cent additional allocation to cash takes away considerable earning potential, but it appears to be the current price for peace of mind among a number of wealthy Americans.”
2. The Lure of the Land – A sizable portion of members’ holdings – nearly 22% – is in real estate, including 14% direct investments and another 8% in real estate partnerships. Even with mortgage costs potentially on the rise and the froth leaving the market in certain markets, Mr. Sonnenfeldt said he thought affluent investors are likely to maintain large stakes in real estate. Often, those percentages reflect multiple homes and land holdings, which the wealthy tend to hold onto. “Even those who’ve enjoyed considerable upside on real estate assets are likely to retain them as long-term, multi-generational investments,” said Mr. Sonnenfeldt, who was himself a successful commercial real estate developer. He noted that 10% of member assets are in their own personal real estate holdings. “Even when the stock markets seem to be under pressure, luxury properties tend to hold their value because many owners are under less pressure to sell. Today, with the volatility in the stock markets and the number of high profile scandals where investors equity has been destroyed, investors may be attracted to owning physical assets such as real estate, and therefore willing to pay a premium. When you realize that America is still the greatest melting pot in the world, and people from almost everywhere are welcomed like in no other country, many American real estate markets have become globally attractive, and this has added to the durability of these markets and the properties in them.
3. Skittish on Stocks – Another indication of Tiger 21 members’ conservative streak is the relatively small stake in public equities – just under 37% overall and well below classic brokers’ advice to keep closer to 60% in stocks to take advantage of long-term gains. In fact, only 27% of the average Tiger 21 portfolio was in U.S. public companies, the remaining 10% going toward international stocks and hedged instruments. “Many of our members are world-class stock pickers, with successful track records as equity investors. Some certainly have large stakes as individual shareholders. But the numbers indicate that as a group, our members are reducing their exposure to the public markets, from more traditional allocations,” Mr. Sonnenfeldt said.
4. Looking Abroad – One number that Mr. Sonnenfeldt expects to continue growing is the portion of member assets going to international investments. Currently at more than 7% overall, that percentage is likely to expand not only as the U.S. dollar weakens, but in light of the enormous opportunities in emerging markets, especially in China, India and elsewhere in Asia. “A nearly 7.5% total allocation to non-U.S. assets is itself impressive, but we think that figure will increase in future editions of our Allocation Index,” Mr. Sonnenfeldt said. “To the extent that our members may be showing their zeal in one particular area, this is probably it.”
5. Private Opportunities – Somewhat bearish right now on public stocks, Tiger 21 members are nonetheless active private equity investors, with more than 10% of their assets going to this class. Just last month, the group hosted David Rubenstein, co-founder and managing partner of the Carlyle Fund, to make a presentation to the membership on the risks and rewards of private equity. “Obviously, one advantage that wealthy investors have is access to private deals, whether through industry leading funds such as Carlyle or via discreet, individual opportunities,” Mr. Sonnenfeldt said. “The fact that our members include many entrepreneurs and owners of successful private companies surely drives their enthusiasm for private equity investing.”
6. Hedge and Venture Players – High net worth investors have another option to investing in public equity – namely alternative investments that include the full range of hedge funds, including so called “market neutral” or “low correlation” hedge funds. Tiger 21 members steer just over 4% of their assets into such market-neutral alternatives. “The take-away here seems to be that unless you’re a high-stakes shareholder activist like Carl Ichan, deep-pocket investors are not making significant bets on the public markets,” Mr. Sonnenfeldt said. “The fact that nearly 15% of our members’ holdings are in private equity and alternative vehicles is a probably a better indication of where they hope to see substantial upsides.”
7. Income Seekers – “By and large, the Target Allocation Index shows how the rich intend to stay that way, rather than a guide for getting there,” Mr. Sonnenfeldt said. He pointed to the members’ solid 15% allocation to fixed income instruments, including 9% in tax exempt securities. Of the rest, 2.5% is in U.S. treasuries; 1.5% in U.S. corporate issues; 2% in high-yield and loans; and a negligible 0.2% in taxable international bonds. “Here’s where our members are probably most like the average investor in that they want a steady, reliable income stream from their investments. The heavy reliance on tax-exempt bonds is one of the few things about the Index that would have conformed to expectations about high net worth types,” he added.
8. Staying Liquid, Going Long – Sizing up the time horizons of their holdings, the Tiger 21 members showed a fairly even temperament. On the one hand, they estimated that 25% of their assets were in shorter-term liquid investments, further proof of the security they seek for a rainy day. At the same time, they still keep nearly a full third – 32% – locked in long-term assets, which also reflects that Tiger 21’s 60-plus members range in age from their 30s to well into their 80s. “However, even our more senior members invest long as much for the next generation as they do for their own optimistic gains,” Mr. Sonnenfeldt commented. A healthy 43% portion of their portfolio is geared for medium-term investments.
“The Allocation Index offers a fair portrait of the sophisticated high net worth investor – well-diversified, looking outside the U.S. for opportunities, and taking advantage of access to alternatives outside the public market while still maximizing current income,” said Mr. Sonnenfeldt. “It will be instructive to see how future configurations of our members’ portfolios benchmark against this baseline, especially as we continue to bring in new members.”