How high-net-worth investing has changed

Finding lower-risk investments that provided a reasonable return in a zero-interest rate world was challenging enough. When a pandemic was added to the mix, high-net-worth investors (HNWIs) had to profoundly rethink their investment strategies.

Their responses to the economic changes wrought by Covid-19 were both expected and less easily foreseeable.

Nandita D’Souza, head of investment specialists at Citi Australia says the investment decisions made by HNWI clients since early 2020 reflect a preference for safe haven assets that can withstand volatility.

“Investors flee to safe havens when economic turbulence arises or seems imminent,” agrees Dr Lurion De Mello, senior lecturer in finance at Macquarie Business School. “I would assume that post-pandemic those investors primarily focused on wealth preservation would have been leaving lots of their money parked in bank accounts. They will be using the rest to buy gold, greenbacks [US dollars], corporate bonds and shares in companies selling non-discretionary goods and services. I suspect they will also have been increasing their exposure to infrastructure assets and possibly to companies that have been laid low by the pandemic but which are set to roar back to life once things get back to normal.”

So far, so predictable. But what asset classes have fallen in and out of favour as a result of the world-changing impact of Covid-19?

Bonds, greenbacks and e-payment companies

Longevity and stability have been key drivers of HNWI investment strategies.

“Our clients have demonstrated a keen interest in bonds,” D’Souza says. “They have also been willing to look outside vanilla investment grade bonds and consider hybrids, and also companies where perhaps an equity investment just didn’t make sense in the current market.”

D’Souza notes there was high interest in the bonds of major supermarket chain Coles in March at the height of the pandemic. “There was a realisation that pandemic or no pandemic, people still had to buy groceries, which made the bond attractive from a risk perspective.”

There was also lots of interest when Qantas issued $500 million of bonds priced at 5.25% in early September. “Investors may have been wary of taking an equity stake in a company that was strongly impacted by the pandemic.”

However, D’Souza says, “clients who were willing to take on airline exposure and diversify their holdings typically believe Australia’s national carrier will return to profitability once people start flying again, and are comfortable that its balance sheet will allow it to manage through current difficulties.”

Nonetheless, D’Souza points out that Australian HNWIs have been wary of placing too many eggs in local baskets. “Echoing what happened during the global financial crisis, after Covid-19 spread across the globe, in March, the Australian equity market fell about 35% while the US dollar went up by around 15%. [Investors] rushed to buy US dollars and, to a lesser extent, other safe-haven currencies. There was a 77% increase in foreign exchange transactions in Q1 this year compared to Q1 last year.”

Citi’s clients have also invested into gold to help shelter their portfolios from market shocks. “As would be expected, our clients have been keen to hedge their portfolios by buying gold since Covid-19 emerged,” D’Souza. “But rather than just buying gold, a lot of them have been using structured investments to get access to gold. That means they get to participate in any upside positive movement in gold while having their downside risk capped.”

When it comes to equities, D’Souza says Citi’s clients have been seeking exposure to recession-proof companies as well as ones likely to experience long-term stability “regardless of what happens with Covid-19 going forward.”

As with the interest in Coles’ bonds, “people are always going to need to visit medical professionals, so it’s not surprising HNWIs have been seeking an equity exposure to supermarket chains and pharmaceuticals,” D’Souza says. “At Citi we use structured investments to get that exposure, produce an income stream, and provide some form of risk management on the downside. HNWIs have also warmed to parts of the tech sector, such as the larger e-commerce and e-payment companies and any well-established SaaS (software as a service) companies.”

Decarbonisation and digital transformation

“A decade’s worth of digital transformation has been shoehorned into six months,” De Mello observes. “So, investors of all kinds will be continuing to see the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) and other well-established ‘information age’ businesses as a good bet. Many investors will also be looking to get in on the ground floor with the next generation of digital businesses.”

De Mello believes HNWIs will continue to invest in real estate, but it will be different types of real estate. “Rather than CBD office towers or shopping malls, they will be putting their money into warehouses,” he says.

De Mello is upbeat about ESG (environmental, social and governance) investments in general and green ones in particular. “My hunch is that [Covid-19] will increase people’s desire to put their money in investments [they feel will] make the world a better place,” he says. “Given the [likely] roll out of large-scale renewable energy projects, I’d expect HNWIs would want to invest accordingly for both for noble and more pragmatic reasons.”

Where theory and practice diverge

As Einstein famously observed, while in theory, theory and practice are the same, in practice they are not. D’Souza notes that HNWIs haven’t yet shown any great enthusiasm for cash, ESG investments or unconventional real-estate plays and have been circumspect about investing in the traditionally high risk-high return tech sector.

“HNWIs may have a lot of money in the bank at any one time, but my impression is that they prefer not to keep it there for too long,” D’Souza says. “The average deposit rate in Australia is about 0.7%, which effectively means a negative real return after taxes and inflation are factored in.”

Nor has D’Souza witnessed any significant change in the way her clients invest in real estate. “Property is illiquid,” she says. “Even if it wasn’t, clients are waiting to see whether the pandemic will result in permanent changes to people’s working and living arrangements before selling or buying real estate.”

HNWIs also seem to be waiting before making any significant green-tech commitments.

“ESG investments have long been becoming more popular, and the bushfires at the start of 2020 reminded everybody of the [potential] consequences of climate change,” D’Souza says. “Citi as a franchise is on board with this trend, including globally committing to driving sustainable operations and being entirely powered by renewable electricity by the end of 2020. But, all that noted, our HNWI clients have not so far upped their exposure to ESG investments in general or renewable energy businesses in a meaningful way.”

D’Souza also reports that HNWIs haven’t been in a hurry to sell off their bank stocks. “I presume that’s because clients see financials as a safe bet over the longer term,” she says.

Digital advice, downward hedges

Looking at the most significant changes she and her clients have experienced because of the pandemic, D’Souza nominates digital interactions and an even greater focus on capping downside risk.

“Citi had digitally transformed before the pandemic hit. That meant my colleagues and I could shift from face-to-face to digital interactions with clients seamlessly,” she says. “But it was an adjustment going from chatting with clients over lunch to video-conferencing with them. But we tried to make those interactions special by, for example, having a [hamper] delivered to clients that they could sample while attending webinars with their relationship manager.”

Citibank’s relationship managers soon discovered their clients were even more interested than usual in downward hedges during these epicurean video conferences.

“There’s been a lot of interest in structured products and tailored investments,” D’Souza says. “My colleagues and I have spent a lot of time liaising with investment banks and designing products that allow our clients to get – barring exceptional events – a fixed return without having to worry about incurring significant losses.”

Information is general and does not take into account your objectives, financial situation or needs. You should consider whether it is appropriate for you.

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