This week the S&P 500 hit another all-time high, marking five straight weeks of gains.
Even with stock prices at all-time highs, why are the ultra-wealthy (ultra-high-net-worth investors with liquid investable assets of $5 million or more) selling off their stock and bond positions while mainstream investors are going the other way and rushing in?
It’s because the wealthy and institutions are gearing up for a recession in 2020.
A slew of traditional recession indicators has shown up this year that have given these sophisticated investors pause:
- Inverted yield curve
- Weakening of the manufacturing and housing sectors
- Record income inequality
Add to that list geopolitical unrest, impeachment, and trade wars, and the ultra-wealthy have good reason to be concerned and have already adjusted their investing habits to prepare for 2020.
If history has taught us anything, it’s that mainstream investors usually lag the ultra-wealthy in investment trends.
If we want to know what mainstream investors are going to do in 2020, we only need to look at what the wealthy are doing now in 2019.
Currently it’s no secret, that the wealthy are anticipating a recession in 2020. According to a Campden Wealth Research survey of 360 ultra-wealthy UBS clients, 55% of family offices anticipate a recession in 2020.
The members of exclusive investment club Tiger 21 have latched onto the recession sentiment and have already taken steps to prepare for 2020. For background, Tiger 21 includes the wealthiest of the ultra-wealthy and counts more than 700 members among its ranks worldwide. Each pays $30,000 per year and must have $10 million in liquid assets for access to this exclusive peer group. Collectively, they manage assets worth more than $70 billion.
So what steps have the members of Tiger 21 taken to prepare? According to Michael Sonnenfeldt, founder of Tiger 21, its members are increasing their cash holdings and reducing their equity exposure.
The question is:
- Why are the members of Tiger 21 shedding stocks?
- Where are they diverting funds?
- Why are they hoarding cash?
One obvious answer to why the ultra-wealthy are shedding stocks is volatility, but there are other reasons. The truth is they’ve been shedding stocks for some time now – preferring other vehicles for generating recession-proof above-market returns (so-called alpha).
Also, many of the ultra-wealthy don’t feel corporations have shareholders in their best interest any longer – supplanting priority of shareholder return with social causes.
To that point, in August of this year, the Business Roundtable, a group of chief executive officers from major U.S. corporations, issued a statement offering a new definition of the “purpose of a corporation.” According to the new definition of the “purpose of a corporation,” serving the shareholders and maximizing profits were no longer the top priorities. That age-old notion has now given way to more social-centric purposes.
So, where are the ultra-wealthy diverting their funds? Alternatives.
According to Mark Wiseman, the global head of equities at Blackrock, Inc., one of the world’s largest investment management firms with $6.9 trillion in assets under management, 50% of Blackrock institutional investors are actively reallocating their assets from public to private markets. “We’ve never seen numbers like these before,” said Wiseman.
The ultra-wealthy and institutions are turning to alternatives in the private markets.
This move is consistent with a recent survey of financial advisors to wealthy and institutional investors conducted for Blackstone by InvestmentNews Research. They found that 83% of their clients were interested in alternatives, with average allocations to alternatives expected to rise from 10% to 14% of client portfolios within the next three years.
Interestingly, the bigger the client’s portfolio, the higher their projected allocation to alternatives in 2020. Clients with $250 million and up in assets are expected to allocate 41.5% of their portfolio to alternatives in 2020, while those with $50 million or less are expected to allocate 32%.
It’s the chicken and egg scenario. What came first? Are these clients wealthy because they allocate a higher percentage of their portfolio to alternatives, or are they investing in alternatives after becoming wealthy? The answer doesn’t matter because the bottom line is alternatives are essential for maintaining and growing wealth.
What type of alternatives are the wealthy interested in?
In 2019, the wealthy have expanded their short-term investment timeframes to a 10- to 15-year timeframe. That means they’re interested in something with long-term growth with consistent cash flow backed by hard assets.
That’s why they’re interested in commercial real estate and, surprisingly, cannabis – specifically in the real estate side of cannabis. Explaining the wealthy’s interest in the real estate side of cannabis, Michael Sonnenfeldt reiterated, “sometimes it owns the land that cannabis is grown on, sometimes it owns the real estate where there are factories.
As to the final question as to why the wealthy are hoarding cash, it ties right in with where they’re diverting their assets. The wealthy are hoarding cash for bargain hunting. When you know what hits the fan, the wealthy will be there to scoop up bargains with a keen interest in recession-resistant, income-producing assets.
If the investing habits of the wealthy in 2019 are anything to go by – and they’ve been reliable indicators in the past- the investment trends in 2020 of the mainstream investor should look something like this:
- Sell off of stocks
- Sell off bonds
- Reallocation to alternatives in private markets
- Reallocation to stable, income investments with long-term appreciation backed by hard assets
Learn more about investing in Alternative Assets here.