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Wealthy return to global markets

Ultra-wealthy US investors appear to be exiting cash and fixed income assets in a big way and redeploying into global investments and opportunistic strategies as they search for returns.

That’s the upshot of responses to a recent Institute for Private Investors survey and the outlook of private client groups at outfits such as Citi Private Bank and BNY Mellon Wealth Management.

The survey, which polled more than a quarter of the IPI’s 345 member families, found the winds blowing away from conservative asset classes, says Charlotte Beyer, IPI chief executive. Nearly 80 per cent of the institute’s members have $50m or more in assets.

“They said they’re getting back into the markets with a strategy that is more global,” she adds. The members are also looking beyond “plain vanilla” long-only managers and instead seeking direct investment opportunities, as well as exchange traded funds and other passive vehicles. Even in hedge funds, more money is going to managers based in Asia or London.

“People are taking different approaches to get global exposure,” Ms Beyer says. “It’s not necessarily going back into the [investment type] it came out of.”

In many cases, the asset class losing ground is domestic US equities. Ms Beyer says many of her members left the asset class in 2007 and 2008 to build their cash holdings to 20 per cent on average. In the latest survey, however, 61 per cent said they expected to push into global equities, with only 17 per cent planning to restock their domestic equity holdings.

Clients at BNY Mellon are also not likely to fully replenish the domestic equity coffers, says Leo Grohowski, chief investment officer of the bank’s wealth management arm.

The IPI’s data show that its members have already lowered cash holdings to less than 9 per cent on average, alongside 9 per cent in non-taxable municipal bonds and 7 per cent in taxable bonds, but the survey respondents said they would be drawing down even more from all three asset classes this year. Nearly a quarter said they intend to drain their cash accounts, while 26 per cent planned to cut their exposure to taxable bonds and 28 per cent were expecting to pull money from munis.

In addition to the big plans to invest in global equities, 32 per cent of the respondents expected to add to their commodities holdings and a quarter planned to increase their exposure to hedge funds. Even these alternative asset classes are likely to take on an international hue, with 57 per cent saying they would seek global exposure through hedge funds.

Those broad trends are evident in the moves of many Citi Private Bank clients as well, says Alexander Godwin, global head of asset allocation. He says there are nuances, however, with clients on the one hand expressing concern about macroeconomic risks – such as the uneven US economy, Europe’s debt crisis, and the potential for a slowdown in China – and on the other saying they are hungry for returns beyond the low rates available from safer assets. That has fed targeted searches for investments with the promise of decent returns, rather than rigid asset allocation planning.

Mr Grohowski, too, says clients are more willing to exit safe assets and look for returns, with a view towards promising tactical opportunities.

Being bullish and skittish at once is leading investors to take action but move with caution, Ms Beyer says. One IPI member recently told her he believed that he was “managing the tails too much,” to avoid losses from catastrophic changes instead of being more strategic.

There is a wide range of starting points, however, Mr Grohowski says. “I’ve never seen balanced portfolios look so different from each other as they do today,” he adds. “People with fairly similar objectives have very different portfolios.”

The common theme appears to be a willingness to look beyond the traditional stock-and-bond investment set.

BNY Mellon clients, for instance, are expressing interest in “concentrated style-agnostic” strategies, such as all-cap or absolute return products that tap a manager’s best thinking, Mr Grohowski says. Long/short strategies and private equity also benefit from similarly inspired interest, he adds.

BNY Mellon also recently made a call in favour of municipal bonds to take advantage of depressed pricing that followed several months of negative commentary about the sector from analysts and sceptics. “We see municipals as a pretty good anchor over the long term,” he adds.

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