The rich are different: habits of Ultra High-Net-Worth investors

A recent Globe and Mail article on the investment practices of Ultra High-Net-Worth investors caught our eye. The piece was based on global investment firm, KKR & Co.’s survey of investors with US$30 million or more in net assets.

Since we have long modeled our investment approach on philosophies and best practices of Ultra High-Net-Worth investors and adapted them for High-Net-Worth Canadians, we were curious to see what KKR’s analysis had to say.

Newport clients will recognize similarities between the investment methodologies and asset classes used in your portfolio and those of some of the world’s wealthiest investors. You can download a copy of the full report from KKR’s website but here are some highlights:

Flexibility, nimbleness and opportunism keys to success

KKR reinforces what we believe and practice to the best of our ability: that “private and public markets are increasingly rewarding allocators that have dynamic capital, can move fast and are willing to try new things.” We agree!

The Ultra High-Net-Worth investors surveyed, like Newport, are large, yet nimble enough to exploit unique investment strategies that behemoth and lumbering institutional investors and banks cannot because of their size.

Process is another factor. Ultra High-Net-Worth investment teams tend not to be shackled by many of the constraints that impede traditional institutional managers, such as index comparisons and relative returns, tracking error, etc. – factors that often drive their compensation plans.

Focus on absolute returns

Without such constraints, Ultra High-Net-Worth investment teams can afford to be more opportunistic and solely focused on earning a good rate of return at an acceptable level of risk. Meaning they, also like Newport, are “much more focused on absolute return performance… a notable point of differentiation relative to the more traditional pension managers,” says KKR.

Reduced allocations to stocks and bonds

For a number of reasons, Ultra High-Net-Worth investors have eschewed the retail investor model of buying and holding blue-chip stocks and bonds. Just ~29% of their assets are in public equities, with 15% allocated to fixed income. More typical weightings for traditional wealth managers would see equity weightings above 50% and 33% in fixed income, according to the KKR report. Instead, they are putting their money to work in alternative strategies based on a broader investment universe. Mostly because they can.

Opportunistic investing in private credit
Private Credit (also known as private debt) was singled out as an alternative strategy that has captured the attention of Ultra High-Net-Worth investors, accounting for 6% of their fixed income allocation. The KKR report noted that because these investors are “opportunistic, and given their high cash balances and flexible mandates, they were early to take advantage of macro trends” that are making private credit attractive.

If that theme sounds familiar, it’s been part of our refrain for the past several years as we’ve been building up private debt in our client portfolios. It’s a competitive advantage we enjoy based on the commercial lending experience of several members of our investment team.

Keeping cash on the sidelines
Also interesting was the high level of cash held by Ultra High-Net-Worth investors. On average, they hold 10% cash in their portfolios, while 20% of them have more than 20% in cash. At Newport, we’re currently holding 18% in a balanced portfolio. This is compared to 2% cash for traditional wealth management models according to KKR.

The alternative difference
While there are many similarities to Newport’s investment approach, there are also some significant differences. The Ultra High-Net-Worth investors in the KKR survey display a huge appetite for alternative investments (46% of asset mix), far exceeding what we would consider appropriate for a conservative investor who wants income and/or liquidity from their portfolio. There are several reasons for this:

First, since many own a private business, its value would be included as private equity in their portfolios, contributing to their overweighting in alternatives.

Second, Ultra High-Net-Worth investors are generally more comfortable with illiquid assets and their risk profile. Perhaps because they have diversified sources of cash flow and are not as concerned about whether their capital will provide enough income to fund their lifestyle or whether they will run out of money during their lifetime.

Finally, according to KKR, “a significant and growing number are focused on social change” like the Bill and Melinda Gates Foundation for example. By definition, this approach leads them to impact investments that are private and alternative.

In summary, KKR reports that the world’s wealthiest investors “seek out pockets of alpha, align with the best managers and cultivate relationships that allow them to drive better investment processes.” Sound familiar? It isn’t easy but in our view, it is well worth the effort.