LONDON - While the richest people on the planet tend to stick to their investment preferences, their next big move could be into real assets.
Maximilian Kunkel, CIO for UHNW (ultra-high net worth) at UBS Wealth Management, said that, historically, wealthy individuals had a relatively high allocation to nominal assets such as cash or government bonds. This would earn them something slightly above inflation without too much risk.
However, Kunkel told Citywire, this is changing.
‘Family offices have understood that for the minimum goal of real wealth preservation, a higher allocation to real assets is necessary,’ he said. ‘Central bankers have made clear that we are not going to go back to a normal interest rate environment anytime soon.’
Moving from cash
Hesitant to make specific allocation predictions, Kunkel referred to the UBS’ Global Family report, which indicated that 121 of the largest family offices in the world allocate an average of 29% to equities, 16% to private equity, 14% to real estate, 17% to fixed income, 13% to cash and 3% to gold.
‘If we talk about where the next move is going to be, it’s not necessarily a huge reduction in all parts of fixed income, but it is a reduction in the strategic allocation to cash in favour of real assets,’ said Kunkel. ‘That could be gold, and public or private equities.
‘The one thing that the situation in March and April has shown to many, is that because of the low interest rates, government bonds still provide at least some diversification in the midst of crisis, while cash does not.’
Kunkel added that there are allocation themes that he foresees taking centre stage. These are education, healthcare, and changing consumer preferences.
Focusing on education, Kunkel said technology will change what, when and how we learn. Knowledge will get outdated more quickly, and we will have to re-skill more often.
At the same time, we are also moving further away from the traditional way of classroom teaching, towards digital personalised learning.
‘The important thing here is, we are at the very early stages of this revolution,’ said Kunkel. ‘Less than 3% of the roughly $6tn that is spent globally on education annually is dedicated to edtech. In our view, that is a huge opportunity.’
Kunkel said that the pandemic has clearly placed focus on the healthcare sector. However opportunities lie beyond a Covid-19 vaccine. For example, he anticipates that the trend of rising healthcare costs will continue.
‘In 2017, healthcare costs were about 10% of global GDP, while in the US, for example, it is 17% of GDP. But the allocation of those costs is not necessarily very efficient, for example in the US, 25% of the money that is spent on health is wasted,’ said Kunkel.
He added that these trends cannot be maintained in a more indebted world. A greater integration of technology and healthcare will therefore become imperative.
‘The investment opportunity here is very substantial, because healthcare so far has focused more on generating data than using it,’ said Kunkel. ‘Five percent of all the data at the moment is generated by the sector, but it’s one of the most analogue industries.’
He highlighted that digitalisation of healthcare is a big opportunity, with telemedicine having trebled in the US from a very low base of 1% of the annual physician visits pre-Covid.
ESG and generational wealth transfer
UBS’s wealth management team has spoken several times in recent past about being on the cusp of the greatest generational wealth transfer. With millennials set to assume more power, this will result in a greater allocation towards green assets.
‘We know millennials are digitally savvy, they are socially and environmentally conscious, and generally tend to value experiences over material ownership,’ said Kunkel. ‘That has consequences for asset allocation.’
He added that family offices have been open to sustainable investing, but many also find it difficult to move beyond an exclusionary approach.
‘The one thing that we’ve always been advising clients is to go beyond that, and also look into an integrated approach where you are increasing your investment universe and, at the same time, you are really making a difference also with the assets that you are investing,’ said Kunkel.
Fixed income conundrum
Kunkel said that the approach to fixed income is changing dramatically, as investors are moving away from a buy-and-hold strategy.
‘Before, you kept the bond, clipped the coupon and it was happily ever after,’ he said. ‘Now you have to be way more active during various times of the year, not only from a top-down approach, but also from a bottom-up perspective.’
Kunkel said, now more than ever, is the time to be selective in the riskier bond sectors. He added that during the pandemic, high yield in the US, for example, experienced significant dislocation and his team advised clients to buy it.
However, they have recently neutralised their preference for the sector, as valuations at the moment reflect a deteriorating balance sheet outlook for many of the companies in the space. In addition, he sees the default cycle starting to increase.
‘Therefore, we see better opportunities in emerging market hard currency debt, in particular sovereigns,’ said Kunkel. ‘You still get a decent pick-up in terms of yield without necessarily overexposing yourself too much in terms of risk.’
Kunkel said investment grade credit also remains relatively appealing because of the implicit and explicit central bank support, as many companies have moved from shareholder-friendly to more bondholder-friendly measures.
‘In addition, green bonds are an alternative because the segment is less cyclical.’