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High-net-worth individuals are moving offshore: Why?

Many investors are overweight in cash allocations given greater market volatility and uncertain times ahead, and high-net-worth (HNW) individuals are no different.

But lately a greater number of HNW investors have been using their cash to buy offshore equities, where we believe the opportunities for growth are greater.

A recent survey of Crestone Wealth Management clients, who are predominantly high- and ultra-high-net-worth individuals or family offices, reveal many have used their overweight cash balances to fund higher positions in international equities and alternative assets.

The analysis of our clients’ portfolio allocations reveals that clients hold more cash at 11 per cent than our recommended strategic asset allocation (SAA) of 5 per cent; that they hold 62 per cent of their assets in equities, which is in line with our SAA for growth rather than balanced investors; and that they hold significantly fewer alternative investments than our recommended SAA across both balanced and growth model portfolios.

Crestone’s clients’ asset allocations have a correlation of about 87 per cent to our growth model portfolio, which is up from less than 80 per cent a year ago. That also compares with a 51 per cent correlation to our balanced SAA portfolio. So despite their relatively high cash holdings, it seems that HNW and UHNW investors still have a good appetite for risk.

This tilt towards a growth strategy highlights that our clients are seeking long-term, through-the-cycle investment returns and that makes good sense.

The analysis of our clients’ portfolios also reveals another important trend: diversification into global equities, which we believe currently present a greater opportunity to grow wealth than Australian equities.

Crestone’s funds under advice (FUA) in international equities rose to 30 per cent in the March 2018 quarter, up from 29 per cent in the December 2017 quarter and compared with a holding of 33 per cent in Australian equities. This move was broadly consistent with our tactical overweight position to international equities.

New data from the Australian Bureau of Statistics (ABS) highlights this move into offshore assets across the managed funds industry. As at 31 March 2018, the consolidated assets of managed funds institutions were $2.76 trillion, an increase of $8.5 billion or 0.3 per cent on the December quarter 2017 figure of $2.75 trillion, according to managed funds data from the ABS. 

The data revealed a shift towards offshore overseas assets, which rose by $21.2 billion or 4.7 per cent to $468.6 billion. However, investment in local shares dropped by $18.4 billion or 3.6 per cent to $486.3 billion.

According to ABS data, which goes back to June 1998, this is the first time the value of investments in offshore assets has exceeded the value of Australian share investments. So Australians’ bias to local investing is diminishing.

We view global equities as presenting more opportunities for HNW investors to access some of our more favoured sector themes, such as technology, energy and financials, stronger emerging market population growth and markets less dominated by bond-sensitive businesses like banks.

The recent pick-up in Australian economic growth to about trend still compares poorly to above-trend growth in Europe and the US. This is also reflected in 2019 corporate earnings, where UBS puts consensus growth for global markets at around 10 per cent, twice the 5 per cent forecast for Australia.

But volatility will still continue be a feature of all global markets this year as higher interest rates will inevitably rattle stock markets. We expect a further rise in clients’ allocations to alternative assets, broadly consistent with our recent move to tactically overweight this asset class.

One of the key benefits of investing in alternatives is that they exhibit a low correlation to traditional asset classes such as equities and bonds. That is, they tend not to move in the same direction, so they can earn a positive return when equity or bond markets are falling.

So far this year, equities have risen. There have been modest gains for emerging markets where we held a neutral position, as well as Australia where our client portfolios were slightly underweight. There have been strong gains for the US, where we were neutral, and solid gains in Europe, which was our strongest overweight.

We expect our HNW client base to continue their preference for global equities given the growth outlook for these markets, with an increasing focus on other uncorrelated asset classes to protect against rising volatility.

Scott Haslem is chief investment officer at Crestone Wealth Management.

High-net-worth individuals are moving offshore: Why?
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