Stock Market Whiplash? Not for the Super-Wealthy: New Asset Allocation Index by TIGER 21 Shows High Net Worth Investors Increasingly Shun Public Equities for Alternative Investments
NEW YORK (March 5, 2007) – With stock prices suddenly going from record highs into a nosedive this past week, one might assume that the nation’s most affluent investors especially have taken a hit, given their ability to plow more into the public markets during the recent steady run-up of the S&P 500.
Not necessarily so, at least judging from the latest Asset Allocation Index issued by leading high net worth investor learning group TIGER 21. With TIGER 21’s 115 members managing personal investments of over $7 billion, members report they actually reduced their exposure to public equities in the last year to 30%. That’s down from a 37% concentration reported in 2005, and well below the 50-60% that most financial advisors recommend for portfolio allocation.
Sensing the risks and volatility inherent in public stocks, many well-heeled investors in fact may have been waiting for the correction that appears to have overtaken the market.
Which is not to say that the wealthy don’t have a strong appetite for equity ownership, but of a different sort. In this year’s asset allocation survey, TIGER 21 members report having commitments of almost 10% to private equity vehicles, more than half of that in the form of direct investments in companies and the rest in managed funds.
TIGER 21 investors have also taken advantage of another key opportunity beyond standard equity and fixed-income offerings – namely, alternative investments, including hedge funds, funds of funds, derivatives and foreign exchange plays. In the past year, TIGER 21 members report more than doubling their holdings in alternatives to 9.5%, from only 4.5% at the end of 2005.
TIGER 21’s membership has doubled in the last year, so some of these reported differences could be a reflection of a changing mix of members, but the trends seem clear.
“Many top-tier investors – our members included – know the public markets are prone to rapid mood swings of the sort we’ve witnessed this past week, caused by geopolitical events or pronouncements by a former Federal Reserve chair,” explained TIGER 21 founder and chairman Michael Sonnenfeldt. “But generally our members are long-term investors and try to have the discipline of not getting overly excited by these shifts, because over the long haul they feel comfortable with their choices”.
“Our members are still committed to long-term wealth accumulation and preservation, but increasingly, they’re more apt to rely on investments outside traditional avenues such as mutual funds or even individual publicly traded stocks and bonds, for an important portion of their investment portfolio,” Mr. Sonnenfeldt said.
TIGER 21’s members in New York, California and South Florida are a cross-section of entrepreneurs and company owners, professional fund managers and private investors. Their focus on peer-based collective intelligence and shared investment opportunities make them an ideal proxy for how self made, wealthy, self-directed investors view the investment landscape at large. Here is a snapshot of TIGER 21’s most recent Asset Allocation Index, completed at the end of 2006:
1 Cash Ready – TIGER 21 members continue to hold high levels of cash and cash equivalent investments, approximately 9% in this category. That is far above the typical benchmark of 3-5% suggested by most advisors and financial planners. “Although the dark insecurity of 9/11 has lifted for most of us, many savvy investors retain a conservative streak, convinced that stocks prices have been propped up by artificial means and especially concerned about the effects of a likely downturn in the real estate market,” Mr. Sonnenfeldt said. “The relatively high cash concentration held by our members shows the premium that wealthy investors give to liquidity, even at the cost of potential gains in other sectors.”
2. Steady Returns – Another reflection of members’ security fix is their sizable allocation to fixed income investments – 15%, roughly consistent with last year’s allocation. The fixed portion includes income derived from U.S. treasuries, as well as corporate issues (including high-yield) and tax-exempt bonds, which are traditionally considered the refuge of the affluent. “Between cash and fixed income, our members, on average, devote a full quarter of their portfolios to reliable, income-generating securities – judging solely on that basis, TIGER 21 members may in fact appear more cautious than the average investor.”
3. Weighty Real Estate – Despite signs of potential declines in real estate valuations, TIGER 21 members allocated 28% of their assets to this class in the past year. Mr. Sonnenfeldt, himself a successful real estate investor and developer, noted that the ratio is not as steep as it sounds since approximately 12% represented the estimated value of personal residences. While the remaining 16% was earmarked for investment real estate such as direct property ownership and real estate investment trusts. “Our members feel comfortable with long-horizon, income- producing real estate investments, particularly where they know the individual property or the team behind the investment.”
4. Favoring Alternatives – If TIGER 21 members seem a tad stodgy with their heavy weighting in cash and fixed income, they show a much bolder side in their increasing appetite for alternative investments. Nearly two thirds of the group’s membership owns some type of alternatives, while members’ combined allocation to private equity, hedge funds, currency, real estate and a host of other alternative vehicles totals some 35% of their portfolios, surpassing the total given to public equities. “High net worth investors are looking for offerings that can perform independently of conventional market factors,” Mr. Sonnenfeldt explained. “The appeal of alternatives has 65% of our members allocating some assets to this class overall. That is not to say that alternatives don’t carry their own sets of risks, but rather, that their performance tends to be somewhat independent of the major equity and interest markets, and often with less volatility. And a number of these non-traditional classes have the ability to increase in value at times when the markets are heading south, which really stabilizes and enhances long term performance.”
5. Hands on the Wheel – One of the hallmarks of TIGER 21 is the portfolio defense, where members meet to candidly discuss their personal investment decisions. The newest Allocation Index appears to support that hands-on approach. Two thirds of members surveyed said they formally review their portfolios at least twice a year; 42% do an assessment four times or more; and 12% said they conduct a portfolio check-up at least six times annually. Only 15% said they undertook a review once a year or less. “Nearly all of our members created their own wealth, which tends to make them more closely engaged in their accounts – we like to say our members are active managers of passive investments. It is critical that they understand that they are now the CEO’s of their own personal investment company and fully responsible for the outcomes of their choices – even if delegated to others,” Mr. Sonnenfeldt explained.
6. Seeing Turbulence Ahead – TIGER 21’s member’s risk assessment may certainly change again in coming months as TIGER 21 members had already started to rethink their view of the current investment climate by Year End 2006. Fifty-five percent said they see 2007 trending toward the riskier side of the equation, while only 5% said they thought this year would see a reduction in investment risk. A solid 25% were neutral, seeing no real change over last year. Typically, members are no longer relying on their old salaries and compensation or their former company’s earnings to support their lifestyle. Members are generally dependent on passive investment income derived almost totally from their personal holdings. Over time and as a general rule, TIGER 21 members have learned that spending 3% of assets annually to live is the most one can live off of each year before stressing their portfolio and tilting it towards short term income over long term wealth appreciating gains. In that context, holding 9% of assets in cash allows members to withstand three years of market distress without having to liquidate long term holdings at unnecessary losses, and it indicates they remain on a “security footing”.
7. Hedge Fund Outlook – TIGER 21 members have been active hedge fund investors, so it would be instructive to see how the group might react to any blow-ups in that sector known for a wide range of strategies and high management fees. Only 10% of members felt that any recent hedge fund implosions would have a high likelihood of reducing their commitment to the asset class. “Despite the publicity surrounding failures such as Amaranth, these have been very few in a universe of more than 8,000 funds,” Mr. Sonnenfeldt said. “There are plenty of sharks and criminals in the public markets and yet people didn’t stop buying stocks after Enron and WorldCom collapsed. With the right due diligence and shared intelligence, hedge funds represent a viable vehicle for informed investors.” Overall, 32% of TIGER 21 members said recent individual hedge fund losses had no effect on their willingness to invest in the segment; however, 38% said such disasters could “somewhat” impact their appetite for future hedge fund investing.
8. What They Worry About – Armed with considerable group confidence, TIGER 21 members aren’t immune to doubt as individual investors. “Part of our mission is to create an environment where members can help each other cope with the various issues in their lives and help each other maximize returns and maintain their wealth for the next generation,” said Mr. Sonnenfeldt. When asked what particular pieces of their portfolios gave them pause for the most concern, TIGER 21 members shared a variety of responses, including “concentrated hedging,” real estate (particularly when under construction), “fixed income exposure to higher interest rates,” and “ oversized equity positions.” Members with the most direct and long term experience in the markets often cite the historically low credit spreads and growing convergence of returns between different asset classes as underlying concerns for the future. As for which elements of their portfolios gave them most comfort, there was little disagreement, with most members citing “fixed income”, “cash”, and thoughtful diversification. On that score, the wealthy may have something in common with the average investor.