In times of uncertainty even high-net worth individuals (HNWIs) are increasingly choosing to hold their wealth in cash based on safety considerations – but is this the best strategy or is diversifying their portfolio the better option?
Research conducted by ARQ has highlighted that, even in stable times, the top investment goal of HNWIs is ensuring that their money is not at risk and relatively safe. HNWIs are increasingly shying away from holding too much equities apportionment in their portfolio and are, on average, choosing to hold as much as 28% of their wealth in cash. In a world of negative interest rates, the fact that many clients believe cash is the best way to safeguard their money is revealing of an embedded nervousness since the financial crisis of 2008.
This blog post will address some alternatives to just holding cash and to seek higher returns without ratcheting up risk excessively.
1. Art and Collectibles
The global market of investments in art and other collectibles – such as wine, classic cars, jewellery, gem stones and watches – is expected to grow to an estimated USD 2.125 trillion by 2023, which is roughly 22%.
In the current climate of economic unpredictability, the appeal of this asset class rests in its low correlation with traditional asset classes, rendering it an ideal hedge against all assets moving in the same downward direction in a crisis.
Along with the unique emotional and social value of art and collectibles, they have the potential to outperform equity markets over the long-term, with the Artnet Index for the Top 100 Artists displaying a considerable positive return for art over the last two decades. The index produced an 8% compound annual growth rate (CAGR) over the last 18 years compared with 3% for the S&P 500.
However, many wealth managers unsurprisingly lack experience in this space, with only 54% of those surveyed by Deloitte describing themselves as “aware” or “very aware” of developments in relation to art as an asset class . Meanwhile, 81% of collectors said they wanted wealth managers to incorporate art and collectibles into their service offering.
ARQ’s "wealth all in one place" digital capability will offer financial advisors the transparency to note their client's holdings and to start managing their collectables either directly or through their networks. Wealth Management in the future is all about offering clients a full range of holistic wealth advice and creating a truly personalised experience.
2. Real Estate
Real estate has always been viewed as a long-term safe bet and does not have the volatility of other investment assets like equities.
According to investment property portal Sodichan, foreign buyers like the Chinese have been increasingly looking towards opportunities across the World - in some countries (e.g. Portugal and Cyprus) citizenship investment programmes has been an added inducement to make purchases. There are still pockets of opportunities in various locations. The Portuguese property market has been witnessing its second-best performance to date in the first quarter of 2020. London has always attracted buyers especially with a weak £ giving foreign purchasers more buying power with their money. The coronavirus pandemic has presented opportunities for HNWIs from developing markets such as Russia to invest in foreign real estate.
However, although residential and diversified real estate investments have averaged about a 10% return in the past 20 years, they carry more risk in the short term given the housing market’s susceptibility to economic downturns. Nonetheless, investors can also achieve a return through rental yields in addition to capital growth.
The Capgemini Global HNWI's Insights survey revealed that 15.8% of HNWI's assets were concentrated in real estate in 2019.
ARQ can also help you monitor your real estate and other assets to paint a picture of your overall ‘financial health’, providing clarity and reassurance during a time of economic uncertainty.
3. Business Interests
Often the larger the net worth of the individual, the larger the percentage of their wealth that is tied up in non-liquid assets, such as their own businesses or external companies that have a high growth potential. Often the safer bet is maintaining cash in one's own business where there is complete due diligence and greater knowledge of outcomes. In some circumstances, where HNWI's are involved in external businesses, the odds of a success without excessive risk can also be compelling.
ARQ’s "holistic wealth all in one place" digital capability will offer financial advisors the transparency to observe their client's holdings and to start managing any alternative assets either directly or through their networks. Wealth Management is evolving rapidly and advisors will undoubtedly have to offer their clients the full range of wealth advice thus creating a truly personalised experience.