Some may joke about how the wealthy have nothing to worry about, but honestly, the stress and responsibility that comes along with managing a lot of both your own and other people’s money can be a heavy burden on anyone. It is not a surprise then to see that the latest research finds wealthy investors shying away from traditionally risky investments, instead trying to opt for assets that are able to deliver a more stable income stream and tax benefits. These investors tend to be more sophisticated than others, investing a good portion of their assets, and the assets they control, into more complex securities, able to truly help increase their overall wealth.
Thanks to the third-quarter HNY Investment Sentiment Indicator from Westpac Private Bank, we are able to gain some insight into the investment inventions of wealthy Australians. As a group, they tend to be optimistic about international investing, with at least 42% of them expecting international investments to perform well for the remainder of 2014.
With high expectations, at least 21% expect to invest in this quarter, compared to 16% earlier this year. There is, however, more of a mixed sentiment, at least when it comes to fixed interest investments, with 21% expecting the fixed-interest market to perform worse over the next few months, while 19% expect it to improve. Credit spreads have tightened significantly in recent years, causing this split in ideology. Nearly half of all the respondents in this survey said they were much less likely to invest in fixed-interest over the next year, with only 6.5% being more likely to invest their money, or the money they manage.
This all seems to stem from an aversion to what are considered risky assets, more so now thanks to the financial crisis of 2007-2009. Nearly 58% of respondents are “just not interested” in high-risk investments, down from 61% last year.
Of course, there are exceptions to every rule, to every financial statistic. There are still many wealthy investors that seek opportunities in fixed-interest investments, specifically thing such as subordinated debt issues in domestic markets. Some are even interested in various global credit opportunities, being that their drivers are less dependent on the overall credit market, instead being more reliant on corporate restructuring.
This survey shows us that despite a flat cash rate, wealthy investors are comfortable with an exposure to cash assets, with the latest research showing 28% of these affluent investors want to invest in cash, compared to 17% just 3 months ago, despite the fact that only 19% of the respondents to the survey think that cash can deliver any kind of improved performance in the last quarter of 2014.
Regardless of some resurgence of fixed-interest as investment vehicles, most wealthy investors seem to be looking for the more appealing investments, specifically things like cash or cash-like investments, such as enhanced yield funds, rather than risking holding their money in cash or term deposits. The funds may be less liquid, but it seems that the investors are willing to take on a higher credit risk and some lower liquidity for enhanced returns. These same investors are also showing recent interest in more complex structures, one of which is a hybrid bond, offering a higher level of income as well as tax benefits via franking credits. Hybrid bonds can be quite complex, requiring investors to truly understand the vehicle, and the understanding that in certain circumstances, they could be converted into ordinary shares.
One more recent focus for recent investors in Australia is the strength of the Australian dollar, currently at a high, giving them exposure to offshore assets via managed funds and direct shares in overseas markets, specifically the United States and Europe, and even investing in emerging markets in Asia. Nonetheless, these same investors are still committed to other quality investments, including ASX 100 blue chips, as well as bespoke and good alternative investments.
Some investment advisors in Australia are now advising their clients to invest in what many consider alternative asset classes, private-market debt in particular, both in Australia and globally, offering attractive credit spreads which are in excess of domestic and private equity opportunities. The biggest drivers of returns right now is allocation of funds for the long term, more secure investments, rather than taking risky, short-term bets.
One final notable trend seen in this report is the tendency for these wealthy investors to hold assets directly, via ASX-listed equities. These investors like knowing precisely what they own, as well as the benefits that these direct shares can offer in the form of franking credits.
Any investor, large or small, can learn from the examples of the wealthier investors, specifically by taking a conservative approach to their wealth management, with a strong bias to cash, and a focus blue chip assets like ASX 100 shares. It’s also helpful to seek fixed-interest investment opportunities that stand out, as well as allocating a portion of your portfolio to non-traditional investments, to help drive returns.