|Summary: Morgan Stanley survey finds that direct real estate ownership remains the most popular alternative investment strategy for millionaires. The findings suggest that high net worth clients are ignoring advise to buy into hedge funds and private equity when allocating a portion of their portfolios to alternative.|
|Key take-out: Bricks and mortar remain the conventional “alternative” choice.|
|Key beneficiaries: General investors. Category: Investment portfolio construction.|
Morgan Stanley surveyed 300 millionaires about alternative investments, and found 77% owned real estate directly, while 35% also owned REITs. Most affluent folks own homes and are comfortable with real estate investments, so no surprise bricks-and-mortar in some shape or form took the number one and two alternative investment spots. In third position, collectibles – another asset that you can hold in your hand and study – were owned by 34%, followed by precious metals, at 28%. Private equity was owned by only 27%, and hedge funds, owned by 16%, was second to last out of nine asset classes.
Interesting, particularly when you put this data together with Penta‘s current asset allocation cover story, “Treasure Hunt.” In that story, we noted that wealth managers are telling their clients to park more money in hedge funds and private equity vehicles, citing everything from increased volatility in the stock markets to bond portfolio rate-risks as reasons to bump allocations into alternative investments. Last year our 40 leading wealth advisors increased allocations in hedge funds and private equity from 12.5% to 14.1%.
But Morgan Stanley’s survey of millionaire investors suggests that while financial advisors are making a lot of noise about investing more in alternatives, a good portion of that advice remains unheeded by the clients.
And with good reason. It wasn’t just the 2% and 20% in fees; nor the lock-ins and illiquidity that proved disastrous in the financial crisis. Even post-financial crisis, avoiding hedge funds and private equity vehicles proved profitable. You wanted to be in equities and let them run.
“In the past few years, the last thing you wanted to do was hedge yourself,” agrees Morgan Stanley’s Chief Investment Officer Mike Wilson. But starting with the January selloff and now the Ukrainian crisis roiling markets, hedged alternatives and non-correlated private equity funds should better manage the gyrations. Or that’s the theory. “Now is the time to think about downside protection,” Wilson says. “As interest rates normalize, investors who diversify will be rewarded.”
With private equity and hedge fund vehicles relatively low on the wish-list of ownership, it would seem wealthy folks are being overly cautious and are waging yesterday’s battle – not tomorrow’s. That was confirmed by another survey of 800 millionaire investors, this one conducted by the mutual fund company MainStay Investments.
That survey revealed that half of the wealthy investors do not own alternatives because they are considered too risky. Moreover, 61% say there is not enough information available to evaluate their benefits as part of a portfolio. Morgan Stanley’s Wilson can relate. “When you start talking about private equity and mezzanine debt people’s eyes tend to glaze over,” he says. In an effort to make its clients more aware, Wilson and his team put Morgan Stanley advisors through a “long education process” to teach them how to talk to clients about alternatives.
Still, the general trend is for clear-cut investment strategies that wealthy folks can get their heads around. The old maxim– only invest in deals you understand– proved its merit during the crisis, and continues to rule sentiment today. The MainStay survey discovered, for instance, that the most common method for investing in alternatives is through mutual funds, at 65%; followed by ETFs, 40%; and managed funds, 38%. That partially explains why REITs, commodities, and precious metals are so prominently fixed atop Morgan Stanley’s list, since it’s easy to find an ETF or mutual fund invested in those sectors. It all sounds terribly comfortable – which should perhaps give investors reason to pause and think deeper.
Sticking with what you know is wise, but there are also times in history when the greatest risk of all is doing nothing. Sometimes we need to force ourselves out of our comfort zones.
This article was first published in Barron’s, and is reproduced with permission.