By Iain McLeod, head of private client consultancy at St James’s Place
In these ever-evolving global markets, 2024 is set to be a year abundant with many unique challenges and opportunities for investors.
The temptation to withdraw investments during an economic downturn is understandable, but time proves repeatedly that remaining invested is the most sensible option for the long term.
Perhaps this is why ultra-high-net-worth individuals (UHNWI), who stand to lose the most during market downturns, paradoxically exhibit the most resilience.
They remain steadfast and stay invested, often adding to their risk assets during periods of volatility. Forging discipline in the face of uncertainty is the best way to insulate family wealth from external events and from costly behavioural mistakes. It is therefore worth exploring the UHNW investment trends driving markets.
Alternative assets – especially private equity
Over the past 10 years, UHNWIs have increasingly invested in alternative assets – particularly private equity – as a distinctive addition to their investment portfolios, reflecting a broader market trend towards this asset class.
The allure of these assets is that they offer returns that do not directly correlate with public markets, generating a differentiated source of return, with potential added compensation for the illiquidity of such investments.
While barriers to entry remain high, an increasing number of wealth managers are facilitating access, proving the importance of diversification in an era of concentrated public returns.
Due to their illiquid nature, UHNWIs must determine they have an appropriate allocation to this area of the market. Direct investments into private equity and venture capital also require significant administrative oversight to help keep track of their valuation, risk, and potential exit options.
Fixed income
Also gaining traction among UHNWIs are fixed income investments. As yields have risen, these investments provide a reliable and consistent annual return.
Within government debt, there has been an increasing drive to purchase sovereign debt (such as UK gilts) directly, often driven by the tax benefits available. Gilts are free from capital gains tax (CGT), meaning there is no tax to pay on the profit made by individual investors – only the income arising from the coupon is taxable to income tax.
Many gilts issued in the era of ultra-low interest rates carry an extremely low coupon. This means that most of the return is likely to come from the uplift in the value of the security to its ‘par’ value at maturity, which will be tax free. This compares favourably against a high interest savings account where all the return will be in the form of interest, and taxable at the highest marginal rate of income tax.
Nonetheless, sometimes short-term opportunities that are attractive from a tax planning perspective are not as attractive when viewed over the longer term – especially when it might eschew your long-term asset allocation.
Chattels
In the world of high-value assets, chattels are increasingly regarded as a complementary investment alternative to stocks and shares due to their tremendous investment potential.
From luxurious watches and fine art pieces to coveted designer handbags, the allure of these tangible pieces is obvious. But beyond this, these chattels provide a unique avenue for diversification and offer a wealth of investment potential, from utility to scarcity value, capital gains, and inheritance tax (IHT) benefits.
They offer diversification, acting as a potential hedge against market volatility because the returns generated by these assets and the factors that drive their value often behave differently compared to traditional investments, offering an additional layer of risk mitigation.
Whatever the structure – whether it be trusts, family investment companies or family partnerships – the key is to ensure a seamless transition of cherished assets whilst also addressing potential tax implications. It is important to have a nuanced understanding of inheritance tax implications to optimise wealth transfer across generations.
Diversifying exposure across active and passive strategies
The narrow nature of recent returns has led many UHNWIs to favour a passive approach, particularly in US equities.
Active investors baulk at allocating disproportionately to so few companies, where emerging technologies such as AI remain at a nascent stage. In many cases, the winners of the race are not fathomable at such an early stage and the stakes are too great.
What is increasingly lost in the debate is the value of diversification. While some commentators may favour a ‘one size fits all’ approach, a re-emergent theme for among UHNW investors in the last year has been greater diversification across investment styles across the board.
Many are adopting a contrarian approach by increasing their allocation to active styles such as hedge funds in areas such as emerging markets and corporate debt where managers can have an informational edge.
Underpinning this is the ability to forge a disciplined long-term view, an awareness that no single style provides a complete panacea, and an acceptance that voiding temptation and remaining diversified will provide the greatest reward in the long term.
Adopting a holistic approach
UHNWs are taking a holistic approach to wealth management and seeking adjacent services that provide a comprehensive view of their financial landscape in an integrated solution, extending beyond traditional investment strategies services.
A recent High Net Worth Investor survey by PWC found that many investors felt that they had unmet needs – a key reason why many investors switched wealth management and investment services.
This trend reflects a broader movement towards a more strategic and interconnected wealth management approach, where the entire financial picture is considered, encompassing not just investments but also comprehensive financial planning and advisory services.
In the complex world of UHNWI investments, the overarching themes in 2024 are remaining invested, diversification and a holistic approach to wealth management.
UHNW status or not, adopting a long-term, holistic approach to your investment decisions is key when it comes to fluctuating markets and riding the tides of 2024.
