Seeking Alpha

How The Wealthy Invest

by: Rob Marstrand
Rob Marstrand
Deep Value, value, growth at reasonable price, medium-term horizon

Investors in North America hold more in stocks, Western European investors are relatively balanced, and investors in Asia and emerging markets hold more in cash.

We look at UBS clients as a model of how the rich invest.

Given the firm's client make-up, loads of clients' bond holdings are likely to be in European or Japanese government bonds, which have pathetic yields.

All investors can learn from what the wealthiest are up to. Whatever the size of your investments, the basic strategies should be similar. One way to get insight into the wealthiest comes from the people that manage their money. UBS Group is the world’s biggest wealth manager. Today I’ll look at how UBS’s clients are invested, and how the allocation compares with OfWealth’s recommended portfolio.

Credit Suisse, UBS’s biggest Swiss rival, publishes a report each year called the Global Wealth Report. It provides interesting details about how much private wealth there is in the world, how much of it is financial or non-financial (e.g. physical real estate or private businesses), and where the owners are from.

In the latest edition, published in October, it’s estimated that global wealth amounted to $317 trillion in mid-2018. Of that, 53% or $168 trillion is reckoned to be financial wealth. That’s held in cash deposits, stocks, bonds, funds, or other investment products.

Meanwhile, at the end of December, UBS reported it managed $2.3 trillion of client “invested assets” in its wealth management division. That’s 1.4% global market share of the total financial assets estimated by Credit Suisse.

But UBS’s wealth management division doesn’t target everyone. There’s no global retail banking operation. Instead, it mainly targets “high net worth individuals” (HNWIs) – with total wealth above $1 million – and “ultra high net worths individuals” – with total wealth above $50 million.

Many of UBS’s clients are billionaires, or multi-hundred millionaires. UHNWI clients make up $608 billion of the invested assets, which is over one quarter of the total managed.

Wealth market data is patchy at the top end. For example, wealthier people tend to have more wealth in financial assets than the overall average, but precise figures are hard to come by. But I estimate that UBS has market share between 2% and 2.5% of its wealthy target market.

This means knowing something about how the bank’s wealthy clients invest is useful information. Of course, there are big differences between individuals and even between regional averages (see here for more).

In broad terms, investors in North America hold more in stocks, Western European investors are relatively balanced, and investors in Asia and emerging markets hold more in cash. I remember a private banker from UBS once complaining that his Latin American clients were mostly happy to sit on cash or US treasury bonds. These were viewed as insurance policies against volatile politics and economics in their home countries, rather than seen as sources of profit.

But, despite the ranges of behaviour, it’s still interesting to look at the averages for an outfit like UBS. Below is a chart that looks at the regional split of clients, according to their invested assets. The “Americas” category includes Canada and Latin America, but is dominated by the US.

UBS wealth management invested assets by client location December 2018

Sources: UBS Group, OfWealth

That’s where the clients are from. What about how they’re invested? Below is a chart from UBS that shows some details.

“Equities” are stocks. “MM” is short for money market. Within mutual funds, “other funds” include asset allocation funds and exchange-traded funds (ETFs) of all kinds. The Other category includes “mainly alternative investments and other products”, which I take to mean things like hedge funds, private equity, currency funds, commodities and precious metals.

Source: UBS Group

This is already interesting, but some of the categories are mixed up. For example, the 9% in equity mutual funds would be better included within Equities as a whole (stocks). Fixed Income funds would be better within Bonds. Money Market funds within Cash & MM. UBS is giving more of a product category view than an asset allocation view.

A tricky category is “Other funds”. It’s reasonable to assume the asset allocation funds are more or less 60/40 stocks versus bonds, which is typical. But we don’t know anything about the split of the ETFs, between stock and bond funds. Overall, I’ve assumed slightly more weighting to the equity category, meaning the total “Other funds” category is split 70/30 between stocks and bonds.

I’ve reallocated the categories to get closer to an asset allocation view. This groups everything under stocks, bonds, cash (or similar) and other. Below is a chart that summarises that split, also comparing it with my own recommended portfolio allocation.

UBS client asset allocation compared with OfWealth recommendation

Sources: UBS Group, OfWealth

Remember that my own “Other” category consists only of gold, preferably of the physical kind. UBS clients will own some gold too, but we don’t know how much (or whether it’s held at UBS).

You can see that the average, wealthy UBS client has a little more in stocks than my current recommendation. There’s also much more in bonds, much less in cash, and a little less in “Other” (a mix for them, only gold for OfWealth).

In other words, they actually look fairly similar. Especially taking cash and bonds together. Those add up to 42% for UBS clients and 45% in the OfWealth recommendation (note that my recommended 10% in bonds relates only to long-dated US treasury bonds).

I’d bet that loads of those UBS client bonds are in short-dated bills, which are really equivalent to cash. Also, given plenty of clients in Europe and Japan, loads are likely to be in European or Japanese government bonds, which have pathetic yields.

Some examples of anaemic, current 10-year government bond yields are: Germany 0.17%, Japan 0%, Switzerland -0.30%, UK 1.29%. And remember, those are nominal yields, before deducting inflation. In all cases, real yields are negative, which is nuts.

No one would ever convince me it’s worth owning bonds with such low yields. It can only make sense if there’s a massive and prolonged episode of deflation around the corner. That seems like a slim possibility in a world where central bankers are quick to print money in a crisis.

Which is why I recommend a big allocation to cash instead. It acts as portfolio ballast in a stock market crash, steadying the ship. It can then be used as ammo to scoop up bargains in the aftermath, and make loads of money coming out the other side. In the meantime, the gold allocation provides the inflation hedge against that cash losing its value.

I’ve looked at how UBS’s wealthy clients invest their money, on average around the world. It includes both millionaires and billionaires, and everything in between. Then I’ve compared it to my own recommended asset allocation. There are significant similarities between them.

But the main thing to remember is this. Whether you’re a billionaire or just starting out with investing…whether you act like the typical UBS client, or follow my recommendation, or do something else…always make sure you invest across a wide range of investments.

Also, make sure you know why you own each investment that you choose. That means each one must be attractive in its own right, for one or more reasons. Put another way, don’t just diversify for the sake of it, such as buying government bonds with negative yields. Be selective.

The world’s rich spread their money around. All investors should do the same, whether they’re already wealthy or not.

OfWealth expressly prohibits its writers from having a financial interest in any individual securities they recommend to their readers, other than collective investments such as exchange traded funds.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.