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Where will the rich invest?

By Judy Martel · Bankrate.com
Friday, January 14, 2011
Posted: 4 pm ET

The wealthy will be emerging from safe investment havens this year, and stretching their risk tolerance levels globally, according to a survey conducted in December.

The Institute for Private Investors (IPI), a membership organization for ultra high-net-worth individuals, surveyed 72 of its members, most of whom have more than $50 million in investable assets. Two-thirds of the respondents indicated they plan to reallocate lower-yielding assets like cash and bonds into higher-yielding investments, with global long-only equities leading the way. The survey also says 38 percent intend to increase their hedge fund allocation, and 33 percent plan to increase their exposure to commodities.

Brent Fykes, senior investment partner at GenSpring, a multifamily office catering to families with more than $20 million to invest, says the survey shows the wealthy are tired of earning low yields while watching the stock market go up. "People by nature become more risk-taking when the economy improves. Obviously, they’re feeling more comfortable with risk and want to avoid low yields."

Concern about inflation is likely one of the reasons for the move toward commodities, he adds. And investors are also responding favorably to better transparency and liquidity in hedge funds.

Cash is being reallocated into global stocks.

Fykes says Genspring's largest long-only allocation for the past year has been to emerging markets, and he suspects the enthusiasm for global equity in the survey includes emerging markets. "I would bet Europe is way down on the list, with their debt problems," he says, while higher on the list would be more developed Asia regions and emerging countries.

Why not a charge to domestic stocks? Fykes thinks that many of the wealthy who are operating businesses are hesitant to go gung-ho into U.S. equities because they're not seeing the demand in their own companies that would cause them to be fully confident in an economic recovery. Many also believe that the economy's recent improvement is only a tenuous result of the Federal Reserve's quantitative easing.

The IPI survey also notes that although it appears the wealthy are again seeking higher returns, investors expect, on average, a gross return of 9.6 percent for 2010. That's compared to the S&P's return of 15 percent for the same year, and compared to their own actual gross return of 20 percent in 2009.

The lower return expectation is not so surprising to Fykes. Wealthy families generally have more reason to seek long-term preservation of assets if they want the money to last for generations, and GenSpring's mission is to help clients stay focused on the ultimate family objectives. "It becomes less about benchmarking funds and more about their own targets to achieve a goal," Fykes says. So for that reason, most of the rich don't expect to keep up with the stock market in bullish years, though they want to participate in returns .

Are you planning to change your investment allocations in 2011 to include more global equities?

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