A high-net-worth client of Peter S. Izzo, a wealth adviser with Merrill Lynch, recently came to him seeking to allocate a small percentage of his portfolio to emerging markets. The client, a retiree in his fifties who once ran a public company, wanted to select four or five countries with the best potential return.
Izzo turned to Merrill's research department to select countries it thought would be the best performers over the next 12 months. "After the Asian crisis of 1998, people would think you were crazy" to consider emerging markets, Izzo said. "But in today's global environment, for a client who is more aggressive in terms of risk tolerance, that makes sense."
Though many high-net-worth clients continue to look to their advisers to keep their wealth intact, others have an appetite for risk and are seeking bigger investment payoffs.
Joe Montgomery an adviser in Wachovia Securities' optimal service group in Williamsburg, Va., said his clients are waking up to the need to have global investments in their portfolios. Though financial publications have been buzzing about globalization for a decade, the message has penetrated the mindsets of the rich only recently, Montgomery said. And one area that's triggering a great deal of interest is China.
Izzo agreed that more clients are looking overseas in search of a better return. "That goes hand-in-hand with globalization in general," he said. "People want to at least have the discussion about where it makes sense in their portfolio."
Rather than make specific stock picks for clients who want to invest in emerging markets, Izzo analyzes stock markets and prefers to invest in exchange-traded funds. Nonetheless, while many of Izzo's high-net-worth clients have plenty of discretionary income, he prefers to keep the core of their portfolios diversified among multiple asset classes in moderately conservative funds.
Dean Braun, a financial adviser with Smith Barney's Nelson Braun Oliger Group in Seattle, is finding that his wealthy and ultra-wealthy clients are becoming slightly more open to exposure to nontraditional asset classes. These include private equity, leveraged buyouts, venture capital and certain types of higher beta hedge funds, such as distressed debt and event-driven strategies.
Many of the high-net-worth families that Braun deals with are first-generation wealth. A younger demographic group, these investors tend to carry risky portfolios, often with heavy concentrations in public or private equity, and they do not realize the inherent danger in their concentrated investment positions.
Consequently, Braun tries to help his clients identify and quantify their risks in relation to their life goals. As a result, one client recently instructed him: "I don't expect you to make me exponentially richer, but I expect you to keep me rich."
Frequently, he said, many clients realize they don't actually have the tolerance for high risk, but they still do want to have at least a small portion of their portfolio exposed to asset classes that are not correlated with the stock market, such as private equity, leveraged buyouts, venture capital and real estate. Recently, however, Braun and his team have had a difficult time finding good value in real estate, given the sector's tremendous returns in recent years.
This exposure typically does not exceed 10% to 15% of a client's portfolio but can sometimes run as high as 25%. But even when structuring this part of a client's portfolio, Braun aims for diversification between moderate and aggressive risk. A leveraged buyout fund or an international venture capital fund would qualify as more aggressive choices because they have limited liquidity and a long time horizon during which money is locked up. These choices, however, offer the potential for better returns than the U.S. equity market.
Erman Civelek, an investment strategist with MDE Group in Parsippany, N.J., also sees continued demand for alternative investments. But he also says that many investors are demanding more transparency, full liquidity and a lower fee structure than the standard hedge fund fees.
In MDE's case, the firm negotiates down the fees paid to the managers it hires. It looks for managers in niche strategies not correlated with equity markets and allows these managers a lot of latitude in executing the favored global macro and market-neutral fund strategies.
However, even for clients who are risk-takers, there are limits. Izzo plans to have his client who put some of his money into emerging markets revisit his global lineup annually. "We decided that we would formally review our country allocations annually and move into or out of areas the Merrill research team identified as favorable or unfavorable," he said.
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