THE UHNWI IS YOUR CANARY IN THE COAL MINE

Display As: Michael Foley

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In the past, miners used to carry caged canaries to measure the levels of methane or carbon monoxide in mines. The canary would die before the levels of the gas reached those hazardous to humans.

Like canaries in a coal mine, ultra HNW investors give off investing signals when they sense trouble.

Follow the allocation trends of the ultra HNW investor to stay ahead of the curve. They can often signal dangerous conditions such as market corrections well before the average investor on the street even considers reallocating their portfolio for market protection.

On CNBC.com, the headline reads…
“These Wealthy Investors Are Trimming their Stock Holdings” by Mercado, Darla

“These Wealthy Investors” that were the subject of the article are members of an exclusive investment club, Tiger 21, consisting of 500+ members in 29 cities in the United States, Canada, and United Kingdom.

These members, who collectively manage approximately $50 billion in investable assets, pay annual membership dues of $30,000.  Broken down by member, each manages an average of more than $100 million of investable assets – that’s investable assets, not net worth.

Tiger 21’s, founder Michael Sonnenfeldt, is frequently interviewed in the financial press.  So why the media attention surrounding such a relatively small group of wealthy investors?

That’s because these investors have proven time and again to be ahead of the curve when it comes to anticipating shifts in the broader economy and markets – much like a canary in a coal mine for the rest of the investing public.  Case in point, the article reported that members of Tiger 21 had reduced their stock allocation to 21% from 22% during the second quarter, according to the group’s quarterly report.

Not surprisingly, soon after members of Tiger 21 reduced their stock allocations during the period from May 1st to June 30th – perhaps anticipating turmoil in the equities markets – the stock market plunged 800 points on August 15th in reaction to troubling trends in the treasury indices.  In the words of Michael Sonnenfeldt on August 6th, a full nine days before the market’s belly flop on August 15th, referring to his members,

“They are concerned about the fact that the markets were priced to perfection; they thought they reached real highs.  At the same time there are these looming black swans, this China situation, Russia and North Korea, the political instability in Washington,” he said. “When you add them up, they’ve been feeling increasingly nervous.”

So where did the members of Tiger 21 shift their assets from stocks?

To real estate – stepping up in this asset class to 28% of their holdings, up from 26% in the first quarter.  However, don’t be mistaken.  It’s not as if the members of Tiger 21 are suddenly discovering real estate and are suddenly shifting more of their investable assets to real estate.  They have always invested a quarter or more of their investable assets in real estate.

Real estate investing, primarily commercial real estate (e.g., office, industrial, retail, multifamily, hotel, vacation rentals) has long been used effectively by ultra-high-net worth investors (“UHNWIs”) like the members of Tiger 21 and family offices to generate passive income essential for building and sustaining generational wealth.

It’s not just individuals abandoning equities for alternative assets like commercial real estate to generate recession-resistant returns.  Institutional investors like university endowments and private foundations have been shifting assets away from equities to alternative investments for years, spurred – in large part – by one person, David Swensen, who has been the chief investment officer at Yale University since 1985.

Swensen’s Yale Model has been steadily reallocating a majority of Yale’s endowment portfolio from majority equity to majority alternative assets.  The results speak for themselves.  Under Swensen’s guidance, the Yale Endowment saw an average annual return of 11.8% between 1998 and 2018.  During this same time, the S&P averaged an annual increase of just 6.16%.

Among the alternative investments favored by the Yale Model, commercial real estate is consistently at the top of the list with an allocation typically above 12%.

he ultra-wealthy and institutions have long loved real estate for a variety of reasons.  For above-market returns and a hedge against recession, commercial real estate offers the best of both worlds.

The 20-year return on real estate has averaged 10.6% while a 60/40 mix of stocks and bonds during this same time returned an average of 7.32%.  Throw in the added bonus of low correlation to Wall Street and the broader markets and commercial real estate becomes that much more superior to Wall Street offerings for building true wealth.

If the reliable members of Tiger 21 – the canaries in the investing coal mine – are signaling a market correction and shifting assets away from public equities to an even higher allocation towards real estate, then others should pay attention.

It’s no surprise that as we creep up on another recession (we’re currently in the midst of the longest expansion in US history), the super-rich investors are turning away from equities and turning to income-generating alternatives like commercial real estate.

Protect yourself from the next downturn, follow the example of the members of Tiger 21 and look to the real estate asset class, whether through direct investment or indirect investment in a private fund.

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