How the super-rich plan to invest in 2016

Many investors will remember 2015 for its volatility, with nerves frazzled by the lengthy build-up to this month’s Federal Reserve interest rate rise, crashing commodity prices, China slowdown fears and the Greek crisis over the summer.

Advisers and chief investment officers working for the world’s wealthiest investors forecast that volatility will remain a key theme in 2016. Here is a look at what they and their ultra-high-net-worth (UNHW) clients — those with investable assets in the region of $25 million to $30 million — expect for the year ahead and how they plan to invest.

Policy at the major central banks diverged in 2015 and this divergence will persist in 2016, global chief investment strategist at Citi Private Bank, Steven Wieting, told CNBC. He said that investors should look to take more “focused risks” as a result.

“Things that started in 2015, aren’t finished in 2015,” Wieting said.

Citi Private Bank deals with clients with at least $25 million in net worth and manages more than $300 billion in global assets.

While the U.S. Fed hiked interest rates off rock bottom lows in December, the European Central Bank has continued to loosen monetary policy. In December, the euro zone central bank decreased the rate on its deposit facility by a further 10 basis points to minus-0.3 percent and extended its asset-purchase program until March 2017 at the earliest. Meanwhile, the Bank of England is yet to raise rates off historic lows and the Bank of Japan continues to purchase huge amounts of Japanese government bonds, as well as other assets such as exchange-traded funds.

Citi Private Bank has cut its global equity overweight to 3.5 percent from 5.5 percent and reduced its cash and fixed income underweight. This cut to risk assets reflects the bank’s view that the U.S. recovery and the global bull market is in an advanced stage.

In particular, the bank has grown more positive on U.S. Treasury bonds, with the Fed forecast to slowly increase interest rates in the months ahead.

“We have been warming to U.S. Treasurys, nothing above a neutral allocation, but our underweights on Treasurys, we moved up there on expectations of the Fed,” Wieting said.

He added that UHNWs tended to have a longer time-horizons than other investors, although this does not leave them immune to the shocks that can hit the market.

“Our clients can take a somewhat longer point of view, not (just focusing on) quarterly performance. The euro I think fell 12 percent over the course of this year, but it was up 10 percent for a while. This does raise eyebrows, but the longer-term view is they don’t have to be forced to react to deviations,” Wieting told CNBC.

The heightened market volatility in 2015 means wealthy clients are now much more open to unusual hedging techniques, according to chief investment officer for UHNW at UBS Wealth Management, Simon Smiles.

While still not a huge part of investor portfolios, more sophisticated solutions using derivatives or the VIX volatility index are more common place, he said.

“We have an increasing interest from clients to find clever hedges. Some more sophisticated hedges, no client would have been interested in three or four years ago, but there is willingness to think about less mainstream ideas now,” Smiles told CNBC.

Real estate continues to be the asset class that investors ask about more than anything else, with almost every client making enquiries, Smiles said.

He said that popular ways for UHNWs to invest in real estate included property club deals where a group of investors pooled assets to make an acquisition, private equity structures and even real estate private debt funds.

“The very largest clients will buy the whole thing themselves. Large but not largest clients, tend to be more willing to do club deals. Smaller clients tend to be private equity and private debt approaches,” Smiles said.

“Our largest clients in Asia are asking for trophy assets in Europe – hard assets and hotel chains. Partly because there is often an interest in taking the brand back to China and utilising that locally,” he added.

Property services company Colliers International estimates that up to $400 billion of institutional funding could flow into real estate over the next three to five years, as investors look to diversify holdings and stabilise returns.

UHNW investors are more open to alternatives assets in general, including hedge funds and private equity and debt, according to Wieting.

“With the financial market investment cycle now in its later stages, the valuations of many asset classes are at or nearing all-time high levels amid a backdrop of increasing market volatility,” Wieting said, adding that this had increased the attractiveness of some alternative assets.

He said that investors had lots of questions about the tenure of the investment and how long they wanted to commit to it.

“I think the main issue here is, really consider these illiquid. If you are worried about the timing of liquefying the investment and getting out of it, you are not going to get the best return opportunity. For the portion of a portfolio where the duration of the investment is completely open-ended, you can in fact get better returns,” Wieting said.

Oil prices are down around 30 to 35 percent so far this year, while traditional safe-haven gold is down over 17 percent from its highs at the end of January this year.

UBS Wealth Management cut its strategic asset allocation to commodities to zero two years ago, so no clients have exposure to the asset class in the money managed for them by the bank.

Smiles said there was a lot of push back from clients at the time, particularly regarding gold, to which many investors had an emotional connection.

“Two years ago when we took it out, it was very contentious. There is a lot less push back now, because commodities have fallen so far,” he said.

“We had no idea that commodities would fall as much as they did over the last 2 years, but we didn’t see it as compelling. Going forward we continue to have zero,” he added.
[“source -cncb”]