Do more people need to take notice of HNW asset allocation?

At Forza Capital, one of the things we spend a lot of time doing is speaking to both real estate agents and investors. There is no substitute for being at the “coal face” for eliciting information that often precedes cycles or opportunities (or both). For some time, these discussions have been uncovering a subtle pivot in asset allocation, in particular an increasing allocation to cash and a reduction in assets that are seen to have reached their cyclical peak.

After doing some research, we found a very interesting report, the Capgemini Asia Pacific Wealth Report 2017. For us, the most interesting insight was the comparison of the asset allocation of Australian High Net Wealth (HNW) investors to that in their previous years’ report, as illustrated in figure one.

Figure one: HNW investor asset allocation

  2017 2016 Change
Equities 32.0% 27.9% +4.1%
Property 22.7% 25.6% -2.9%
Cash 23.8% 19.0% +4.8%
Australian bonds 9.9% 14.6% -4.7%
Alternative investments 11.6% 12.9% -1.3%

 

While we are not suggesting a correction in property or bonds near term, there is a distinct investment link between the two. Given upwards pressure on bond yields, it is natural to see investors dialling back risk in both sectors. We have seen a number of clients exit investments where they feel the value adding has been completed. The general investor feedback has been that holding the investment for an extended period exposed them to greater risk than the future return profile would support and hence they were better to convert to cash and sit tight and wait for future opportunities.

Broadly, we tend to share the view of investors as detailed above and are keeping an eye on bond pricing and property capitalisation rates in certain parts of the market. Debt can’t be priced at these levels forever and any mean reversion will hurt assets on very tight capitalisation rates. Notwithstanding this commentary, there are a few areas where we do see opportunity, although it’s necessary to be prudent to ensure than any acquisition is robust enough to withstand any market shocks.

The above HNW asset allocation data was also interesting given traditional asset allocation for retail clients, as illustrated in figure two.

Figure two: traditional retail asset allocation

  Allocation Range
Australian shares 35.0% 25% to 45%
International shares 25.0% 15% to 35%
Australian property 10.0% 5% to 20%
Cash 5.0% 0% to 10%
Australian bonds 15.0% 10% to 25%
International bonds 10.0% 5% to 20%
Overall growth assets 70.0% 50% to 80%

 

Clearly, HNW investors have a much higher allocation to property and cash, which is consistent with our experience. This is further supported by the BRW Rich 200 List where asset allocation to property featured heavily; of the list, 80 people (40%) either made their wealth in property or use it as a major store of their wealth. On the same basis, property was a primary asset class for 47.55% of the Rich List wealth.

This demarcation between the investment allocation of the wealthy and that applied to retail investors has always interested us. We often wonder why retail investment allocation is not more closely aligned to those who have had immense investment success.

HNW investors have a high cash weighting at the moment and are more comfortable with less liquid investments than retail investors. This liquidity element is interesting to us, as when we speak to people about the need for it, it is safety mechanism allowing them to exit an investment if they need to. If you drill down further, most have no intention to liquidate, and if they did so, it would likely be at an inopportune time as they respond to market cues.

Interestingly, for a traditional retail investor portfolio, 90% of their portfolio volatility comes from their 60% allocation to equities. It is no wonder then that HNW investors favour more illiquid assets, property in particular, to mitigate portfolio fluctuations and risk.

We only wonder my more people in the investment sector don’t take notice.