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High cash allocations dampening ultra high net worth investment performance, new UBS analysis finds
Report highlights the advantages that UHNW investors have when constructing portfolios
Zurich/London, 6 July 2017 – Ultra high net worth (UHNW) investors could be losing out on significant investment returns by maintaining a high allocation to cash within their portfolios, UBS, the world's largest wealth manager, warned today.
Analysis carried out by UBS on the average self-managed portfolio found that, despite having access to considerable investment advantages, many UHNW investors maintain high allocations to cash, often in the region of 35 percent of their total portfolio.
Over the past decade, cash has returned 1.1 percent on an annualized basis, which UBS argues is creating a significant drag on the performance of UHNW investment portfolios. By comparison, an even split of private equity and hedge fund investments would have returned 3.8 percent on an annualized basis, and 45.1 percent over the decade (compared to 11.1 percent from cash). In 2016 the same combination returned 9.3 percent while cash stood at 0.8 percent.
The analysis has prompted UBS to today launch The Great Opportunity, its inaugural report focused on the unique investment advantages and opportunities available to UHNW investors. The report argues that UHNWs have the resources and autonomy to pursue an investment strategy that is free from the usual constraints faced by other kinds of investor. It highlights five specific advantages that UHNW investors should consider when creating their investment portfolios. These include:
- Private capital’s untapped potential: Ownership of capital is a major advantage for UHNWs, but similar investors - such as university endowment funds - make better use of this advantage by taking on more risk through private market investments and having a longer-term investment approach
- Harvesting the value of peer networks: UHNWs’ peer networks can provide increasingly valuable insight and information beyond the reach of professional investors’ research capabilities
- Taking advantage of illiquidity: UHNW investors should exploit their ability to make illiquid investments and take advantage of the illiquidity premium available to them
- Opportunities created by bank regulations: Regulation has increased both investment and trading constraints on banks relative to other investors. This, in turn, provides an opportunity for UHNWs to step in and capitalize on these dislocations.
- Harnessing behavioral biases: UHNW investors are less likely to suffer from behavioral biases than other types of investors. There are clear, systematic ways to turn these biases into profit opportunities.
Commenting on the report, Simon Smiles, Chief Investment Officer UHNW, UBS Wealth Management, said: “Different rules apply when investing great wealth. Ultra high net worth investors can be long-term and unconstrained in their approach, taking advantage of the risk-aversion and behavioral biases of ordinary investors. Those with great wealth are often the very best in their field, and we believe this should be reflected in an investment strategy which is innovative, proud to be bold, and that takes advantage of the significant opportunities available to them. Whether that is using liquidity to their advantage, capitalizing on the dislocations created by increasing regulation or tapping into their unique information network, with the right mindset and the right vision, the opportunities are there."
UBS Grooup AG