HNWs have increased their cash holdings from an average of 2 per cent to around 11 per cent, as investors begin to recession-proof their portfolios.
Cash is now the fourth largest asset class in the average HNW portfolio behind private equity (24 per cent), real estate (25 per cent), and public equities (27 per cent), according to Tiger 21, a group of more than 1,100 individuals managing about $150 billion of their own capital.
'On average we think our members live on around one or two per cent of their net worth,’ says Tiger 21 founder, Michael Sonnendfeldt. ‘In that context, having 11 per cent cash suggests that members now have over five years of living expenses.’
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As HNWs build up their cash reserves, only 6 per cent of Tiger 21 members expect the global economy to avoid recession, according to a recent survey. 80 per cent expect a recession lasting longer than six months while 30 per cent predict it will last longer than a year.
‘If there is a recession and it takes three or four years for the markets to recover, HNWs won't be forced to liquidate their assets,’ says Sonnendfeldt, who suggests that members also need cash to maintain their private equity commitments, which can require continued investment.
Private equity allocations have grown significantly over the last decade, according to Sonnendfeldt. 'About 13-or-so years ago, private equity made up about 10 per cent of the average [HNW] portfolio', he says. 'But that's grown to around 24 per cent today.'
Historically real estate has accounted for the greatest proportion of HNW portfolios, he adds. Only in the last couple of quarters has public equity begun to see a larger proportion of inflows.
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The prospect of a recession may have changed this, however. Only 15 per cent of Tiger 21 members are investing in public equities to address the market downturn, compared to 23 per cent who are putting their money into real estate.
Public equities were also the most likely asset to be sold by HNW's in order to address the market downturn. 24 per cent of Tiger 21 members stated that they were selling shares in public companies to protect against recession, compared to just 13 per cent selling real estate.
But if HNWs are so keen to sell public equities why do they account for the largest proportion of their portfolios (27 per cent)? Sonnendfeldt believes the discrepency is a result of investors 'tweaking at the margins'.
'So take me, for example, I'm a climate investor,' he says. 'So if you asked me where am I investing to address the market downturn, my answer would be climate.'
'But that doesn't mean it's my largest allocation, because I have a diversified portfolio.'
It does mean, however, that HNWs are looking for value as investors exit positions in the wake of a recession. This is another reason Sonnendfeldt believes Tiger 21 members are building up their cash holdings: 'to pounce on an opportunity'.
‘When you’ve sold your business, your assets both are your job and your nest egg,’ explains Sonnendfeldt. ‘This means you need to be on the lookout for opportunities, and you're going to need the capital.’
