Alternatives meeting HNWs evolving needs
In addition to concerns about economic and geopolitical uncertainty, Australia’s wealthy are becoming increasingly worried about the impact of inflation on their investment portfolios. The latest Investment Trends HNW Investor Survey 2023 showed 60% of High-Net-Worth (HNW) investors noted this as a concern, up from 48% in 2022.
With rising costs of living, the proportion of HNW investors looking to primarily target a sustainable income stream has also surged in the past year (38%, up from 33% in 2022). The mindset shift towards income generation is consistent across all wealth brackets but most markedly in Ultra-High-Net-Worths (UHNWs) - those with $10m+ in investable assets - who have significantly downgraded their ambitions to maximise capital growth compared to two years ago (8% in 2023, down from 20% in 2021).
The key drivers of their investment decisions were portfolio returns, diversification and risk. Couple this with a focus on income generation and inflation protection, it is not surprising the UHNWs have increased their portfolio diversification over the last year, most notably to alternative assets with 15% of their total portfolio allocated to this asset class (up 4% from 2022).
This allocation strategy meets several key needs for UHNWs:
Diversification: Alternative assets have low correlations with traditional asset classes like stocks and bonds. This diversification can help spread risk and potentially improve risk-adjusted returns, making portfolios more resilient to market volatility.
Inflation Hedge: Many alternative assets, such as agriculture, real estate, commodities, and inflation-linked bonds, have historically demonstrated the ability to perform well during inflationary periods. This provides a crucial hedge against the eroding effects of rising prices.
Steady Income Streams: Some alternative investments often offer income streams that are less dependent on interest rates and market fluctuations. Assets like rental income from real estate, dividends from dividend-paying stocks or royalties , which is particularly valuable for income-oriented investors.
Risk Management: Some alternative assets, like hedge funds and managed futures, employ sophisticated strategies to manage risk and generate returns in particular market regimes. These strategies can potentially reduce overall portfolio risk and enhance long-term performance.
Unique opportunities: Alternatives allow investors to take advantage of investment opportunities that may not be available on the public market, which may have the potential for higher returns. UHNWs are sophisticated investors who thrive on complexity and enjoy actively managing their portfolios, alternative assets can provide an exciting investment opportunity.
This increased allocation to alternatives is one we have seen mirrored across the Praemium platform. Currently Praemium reports and administers on just under $6BN, an increase of almost $500m in the last year. This is invested across more than 1600 alternative and unlisted assets. Allocation to structured products held in custody has more than doubled in the last year and we’re seeing greater interest in:
- private equity
- private debt
- agricultural assets
- royalties
- catastrophe bonds
- unlisted infrastructure with particular interest in renewable energy and social infrastructure
This shift presents a golden opportunity for financial advisers to deepen their expertise, offer tailored solutions, and ultimately expand their HNW client base. By understanding the diverse needs of these investors and navigating the complex landscape of alternative assets, advisers can position themselves as indispensable partners in preserving and growing their clients' wealth in the face of economic uncertainty.
One of the key challenges for advisers servicing these increasingly sophisticated portfolios is reporting, pricing and monitoring complex assets. Few platforms are able to accurately facilitate this, yet providing an accurate picture of an investor’s total wealth will be a significant value add for these clients. Administering and reporting on complex assets is what Praemium does best. We have a large private wealth client base and offer a breadth of alternative asset options within an IDPS investment structure to help advisers confidently include these in a portfolio and provide the comprehensive reporting that your clients will value.