|Summary: The world’s richest investors have a higher percentage of their assets in alternative areas, and have a very different perspective on time. While most of us focus on shorter-term returns to meet cash-flow needs, billionaires often take a multi-decade approach to wealth generation and preservation.|
|Key take-out: Cream may have a short shelf life, but as an investment it has the potential to deliver long-term returns. An Australian dairy farm fund, requiring a minimum investment of $1 million, is set to deliver returns of at least 4% to 5% annually over the next five to 10 years, and potentially in the mid-teens.|
|Key beneficiaries: General investors. Category: Investment Portfolio Construction.|
What are the world’s billionaires investing in these days? UBS and Campden Wealth recently conducted a survey analysing the portfolios of more than 100 billionaire family offices spread across Europe, Asia and the US.
The study captured a few key differences: US investors have a higher share of their wealth in equities and developed market fixed income. Asian investors keep 3% of their wealth in “wine, art and watches” and have a relatively small exposure to hedge funds and private equity. Europeans, meanwhile, hold 21% of their wealth in real estate, roughly the same as they have in stocks.
These regional differences aside, the research found that the super wealthy are loading their portfolios with between 45% and 62% in alternatives, while keeping 10% to 15% in cash (see table below). Simon Smiles is UBS Wealth Management’s chief investment officer for clients with at least 50 million Swiss francs ($US55 million), who have some 447 billion Swiss francs in assets with UBS. He says his wealthiest clients are underweight equities and recommends greater exposure to the US and Canadian stockmarkets in particular.
“Today, conversations about what is risky and what is less risky are radically different than in the past,” he says. They are, in fact, overweight cash, still wary of equities after weathering the 2008 collapse, and don’t like what the likelihood of rising interest rates will do to 10-plus year Treasury bonds. This is not an entirely new discovery.
But, more interestingly, Smiles believes a different perception of time is also a big factor in their unusual portfolio decisions. UBS Wealth Management’s smaller client accounts are comfortable planning for six months of immediate cash-flow needs, Smiles says, while his wealthiest clients take a “multi-decade approach” to meeting their financial needs. The conversation is radically different, in other words, with the super wealthy hyper-focused on wealth preservation over multiple generations.
“Because of that longer time horizon, these clients have a much greater willingness to get paid for taking on illiquidity,” he says. In other words, a wealthy family’s competitive advantage in the market is its ability to invest for the very long term – there is less competition in that space – and that explains why Smiles’ clients are overweight venture capital, private equity, and hedge funds, with longer lock-up periods but also higher potential returns.
To get such clients the investments they want, UBS rolled out its “professional client service” platform five years ago. This family office service continuously aims to bring eight to 10 customised investment opportunities to its wealthiest clients, and has constructed bespoke real estate funds, negotiated institutional-quality access to IPOs, and unusual private equity plays. UBS estimates that 1,500 to 2,000 of its clients currently qualify for this high-level family office service.
Want a piece? This service is only offered in booking centres in Switzerland, Europe and Asia. But Simon notes that US billionaires (and those from other countries including Australia) can still get exposure, because most of these sophisticated investors also have significant accounts in foreign countries, since their interests, investments, and homes are often spread across the globe.
The UBS division’s more popular investment opportunities leverage off the urbanisation and population growth in emerging markets; US energy independence; and global water scarcity. Smiles pitches these plays as “immutable trends,” the outcomes of which are “very forecast-able” over the coming five or 10 years. Smiles tells us UBS differentiates itself by developing a number of unconventional alternative funds playing off these “immutable trends”.
One that caught our eye is an Australian dairy farm fund. The underlying thesis: As developing countries continue to grow, so too will the growth in demand for protein. Take China, for instance, where protein consumption was up 380% from 1961 to 2008. Off of that trend comes a private equity-type industry consolidation play. Australian farmland is 20% to 30% cheaper than in the US, according to UBS research, while the land is also predominantly held by family-owned farms soon to be passed to a younger generation, many of whom do not want to stay in the business.
Consolidating these farms would give buyers greater buying and selling power in the industry. UBS thinks these trends, taken together, justify rising farm prices and an increasing demand for Australian milk. The bank is eyeing returns of at least 4% to 5% annually over the next five to 10 years, but, if all goes according to plan, the fund could even produce returns in the mid-teens. The Australian dairy fund minimum investment is $1 million.
UBS, in short, uses its reach and clout to offer its billionaire clients some of the world’s richest cream.
This article was first published in Barron’s, and is reproduced with permission.