If we are right about the macroeconomic backdrop that we laid out in our 2017 Outlook: Paradigm Shift, then Ultra High Net Worth investors, particularly those with large sums of patient capital, are in an excellent position. The investing world is becoming more, not less, complex, and we believe that they will be able to leverage their skill sets to seek out differentiated opportunities across both public and private markets. However, such investors could face increasing return and volatility headwinds; we also see potential shortcomings in processes around hedging strategies and concentration risks. Maybe more important, though, is that the CIOs who run these programs likely need more flexibility than in the past to adjust their asset allocation game plans as well as additional time to allow their convictions to play out, even if it may be potentially at odds with certain ideas or preferences of the individuals they serve.
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Alice’s Adventures in Wonderland & Through the Looking-Glass
From our perch at KKR, we definitely have seen a major upward step function in demand for our asset allocation offering of late. It really started with the shift by global central banks towards negative interest rates, but it accelerated through Brexit into the election of Donald J. Trump in the United States. “Do I have enough cash? Are bonds mispriced at current levels? What is the right amount of equities at this point in the cycle? How should I think about my portfolio in an increasingly protectionist world?”
Importantly, when we originally began to disseminate our “target asset allocation” views via our Insights notes to clients and prospects back in 2012, we utilized a benchmark that we built during an earlier period in our career when we actively managed large swaths of money for a handful of sophisticated U.S. pension clients.
Our hope at the time – and it remains our primary goal today – was to find an efficient vehicle for synthesizing our core global macro beliefs into an easy to understand, top-down asset allocation framework that could serve as a guide for investors to generate solid risk-adjusted returns on their own portfolios.
To help measure our conviction levels about different asset classes, we consistently use quantifiable overweight and underweight positions relative to the aforementioned diversified, global, multi-asset class benchmark. Our suggested weightings, we believe, allow us to articulate effectively where we see both opportunities and risks across the global capital markets at any point in the cycle.
However, as our readership has grown and our client base has diversified, we are not only engaging more with allocators who serve as fiduciaries for large pensions but also with sophisticated individual investors, many of whom have or run large family offices. Not surprisingly, the investment objectives of KKR’s average Ultra High Net Worth investor can be quite different from the objectives of the traditional pension, endowment, or foundation. So, in an effort to better understand the changing dynamics of the Ultra High Net Worth market, we recently worked with our Individual Investor team, led by Jim Burns, to compare asset allocation preferences within this unique subset of individual investor clients that KKR now serves on a global basis. As part of the exercise, Jim and his team surveyed over 50 of our Ultra High Net Worth clients, including several family offices. We define Ultra High Net Worth as an investor with $30 million or more in investable assets, compared to $10-$30 million for the typical HNW investor. In addition to the formal survey, we followed up with a series of customized interviews to delve deeper into key opportunities and challenges that the high net worth market now faces. What we uncovered during the process were the following facts/trends:
- The average KKR Ultra HNW investor that we surveyed has a much different profile than the typical High Net Worth investor represented by traditional private wealth managers and independent advisers. Indeed, according to our proprietary survey, most Ultra High Net Worth investors operate in a formalized family office format, with an average net worth well north of one billion dollars, a sum that is – as we detail below – many multiples of what most consider when they think of an average high net worth account. Both segments of the market (Ultra High Net Worth and High Net Worth) are extremely attractive parts of the markets, we believe, but they do operate with a much greater degree of differentiation than one might think.
- Consistent with Ultra HNW accounts of such size – not surprisingly – comes a sophisticated approach to global asset allocation that tends to include a diversified, multi-asset class portfolio, with a heavy weighting to Alternatives. Many have broad sourcing networks and are comfortable embracing illiquidity. All told, our survey work shows that the average KKR Ultra HNW investor has 46% of his or her assets in Alternatives. This total compares to 24% for the typical global pension plan and a suggested 22% for the typical HNW account at a private wealth management firm. One can see the overall allocations in Exhibit 1, which compares KKR’s average Ultra HNW client to the average private wealth management firm’s target allocation as well as to a traditional pension allocation. [Continue reading]