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UHNW inflation: the future of investments and philanthropic efforts

19 October 2022

Silvia Ricciardi

Citywealth interviewed experts on UHNW inflation and what can be envisaged for the future of investments and philanthropic efforts.

How is inflation impacting the life of UHNW individuals? Consequences on life balance are just the tip of the iceberg as other factors come into play. UHNWIs want to look at alternative investment opportunities which could generate profit and philanthropic efforts are still priority.

Looking at the long-term investments currently available and advisable for personal growth, but also showing how charitable efforts have not been put aside, Citywealth interviewed experts on UHNW inflation and what can be envisaged for the future.

 

Inflation impacting (UHNW) individuals

According to the 2022 Credit Suisse Global Wealth Report, “wealth grew at a strong pace in 2021 and by year-end, global wealth at prevailing exchange rates totalled USD 463.6 trillion, a gain of 9.8%. Wealth per adult rose 8.4% to USD 87,489. Setting aside exchange rate movements, aggregate global wealth grew by 12.7% in 2021, which is the fastest annual rate ever recorded. However, factors such as inflation could reverse last year’s impressive growth in 2022.”

Inflation has been negatively affecting all sectors, but there are opportunities ultra-high-net-worth individuals could benefit from to tackle inflation. Diversification as a way to focus on alternative assets is fundamental, as explained by Steve Sokic, Group Head of Private and Institutional at IQ-EQ, based in Jersey, Channel Islands: “As the public markets take a battering from a range of macroeconomic factors, diversification for UHNW will be key. The move from public to private markets is a trend that we have already seen, and we expect it to continue. Alternative assets, such as private equity are becoming ever increasingly more important for UHNWIs, as they provide them with structural advantages relative to the public markets, and offer a way to hedge against and even benefit from higher inflation.”

Diversified investments are of primary importance also for David Henry, Investment manager at Quilter Cheviot, based in London: “Generally speaking, high-net-worth individuals will be in a reasonable position to negotiate the current inflationary period. If their investments are well diversified, they will likely have some assets which are performing particularly well at the moment.”

Again from Jersey, Peter Musker, Client Development Director at Rathbone Investment Management thinks that the rate of growth for UHNW wealth will slow down due to the impact of inflation, together with other factors, but it will still continue to grow, in fact “ultra-low interest rates, rising asset prices and a continued real estate boom were some of the many factors driving the growth of the UHNW sector. Cheap borrowing costs have given the ultra-wealthy the means to leverage their wealth relatively cheaply to further accumulate assets, both physical and financial.

It seems likely that higher inflation, rapidly rising interest rates to combat it, risks to the global economy (exacerbated by the crisis in Ukraine) – all contributing to financial market turmoil – will slow the rate of growth of UHNW wealth. However, while the rate will slow, it will continue to grow – and with uncertainty also comes potential opportunity.”

Also Robert Young, Partner, Director Hanover Financial Management, Ince, who is in pensions and employee benefits, says on the impact of rising interest rates especially on the property market: “Inflation impacts everyone and although those at the wealthy end of the spectrum will not struggle with the daily necessities, it is likely to impact their wealth. The impressive growth in wealth per adult in 2021 is unlikely to be maintained and may well be reversed. Rising interest rates and hence the increased cost of mortgages has had a significant impact on the property market, with property prices starting to fall. However there remains demand for high value London properties from wealthy overseas buyers as if they are holding US dollars, the fall in value of Sterling has given them an excellent opportunity to acquire such assets at a significantly reduced price.”

Changes are also envisaged by both Drew Nutsford, Director and Chartered Financial Planner who is Edinburgh based, and Peter Grant, Portfolio Manager at Waverton: “Those who are already considered as UHNW individuals are unlikely to see their living standards change dramatically since their living expenses form a comparatively small part of their wealth. They will however see large swings in the paper value of their wealth as they own the largest number of financial assets. Unless they happen to have a concentrated amount of wealth in a company that goes bankrupt, then they are unlikely to see major changes. It may be that going forward there is a shift that sees the return on capital fall and the return on labour rise, which would proportionally benefit the workers more than the shareholders, but that is likely to be a slow process.”

 

Long-term investments: the need for diversification and ‘conscious capitalism’

“We all like to buy things at a discount. If your favourite shop was offering 20% or more off a jacket you’ve had your eye on, chances are you would be buying it,” says Peter Musker, adding how investments work in a different way. “People tend to prefer investing when stocks are rising in price, even if they are offering less and less value as they climb. Much like institutional investors, long-term financial stability is foundational for an UHNW individual’s investment success. When making decisions they need to consider multigenerational needs and, whilst it’s tempting to react to the latest headlines, keep their focus on a longer timeframe than the average investor.

But the very need for this financial longevity does mean that outpacing inflation is critical, so completely avoiding higher risk assets like equities generally isn’t an option. For any UHNW client in a position to invest new money after equity valuations have fallen significantly, the recent falls could actually be quite propitious. Valuations have fallen back to historically quite low levels, particularly outside of the US. If you are investing for the long-term, equity valuations are quite interesting.

In volatile conditions when the risk of further short-term falls is higher than usual, investing a fixed amount at regular intervals can be the optimal strategy (‘averaging in’). Another important way to make your journey as an investor less bumpy is to diversify. Not putting all your eggs in one basket, but identifying and diligently monitoring investments that demonstrate a low correlation with both bonds and equities. This could be particularly important for achieving long-term financial stability as we move into an era of more volatile inflation.”

Diversification is key also for Robert Young, who specifies that: “Any investment professional will tell you that the key to long-term success is diversification. There are a wide range of alternative investments available outside of bonds, shares, property and cash and these alternative investments can be overlooked. Alternatives include things such as investment in commodities such as gold, investment in tangible assets such as art, wine, whisky or antiques and investment in private markets such as venture capital and private equity.”

Steve Sokic stresses the impact of conscious capitalism, especially among millennials: “The failure and shortcomings of capitalism in its current form has prompted UHNWIs to do business differently and the concept of ‘conscious capitalism’ has emerged as a solution to the pressing macro-economic, societal, and climate issues that we are currently facing. We are seeing more and more clients increasingly putting their money to work for businesses that strive to make the world a better place.

This change is being powered by the millennial generation, which believes in the ideology of Conscious Capitalism. Considering that we are in the midst of the largest intergenerational wealth transfer in history which will pass down over $30 trillion in inheritance from baby boomers to millennials and Generation X across the next few decades, increasing millennial earning power by almost 75% across the next few years, values-based investing by millennials holds the potential to transform the financial world.”

With short-term liabilities not being an issue, UHNWIs should consider the most reliable public or private companies as a point of reference, as pointed out by Drew Nutsford and Peter Grant: “UNHW individuals tend to have a very far-reaching investment horizon, since they are able to afford any realistic short-term liabilities. Given their ability to look through short term market volatility, the recent falls in asset values has presented some attractive valuations across asset classes. These are not universal however, and one must still be careful. In the shorter term, it is important for UHNW, as with everyone, to invest in well managed companies (be those public or private) that will still be there in a few years.”

David Henry believes that “most high-net-worth individuals should have a good proportion of their wealth in equities, commodities and property already – assets which have historically done well during inflationary periods. Within equity exposures, our focus at the moment is on businesses with pricing power who look to be able to pass on higher input costs to their customers and protect margins. If the cost of reducing inflation proves to be a recession, then these higher quality companies should see greater earnings resilience, and therefore outperform the broad market as the quality factor has done in previous cycles.”

 

Effects of inflation on philanthropic efforts

Despite inflation, UHNWIs tend not to give up on charitable donations and conversely want to increase their support, especially during an uncertain economic climate. Steve Sokic comments: “I think we are still months away from seeing the real or net impact of inflation on charities and philanthropic efforts. Charitable giving doesn't respond negatively to inflation per se, but of course the value of a dollar/pound/euro etc given to charity is inherently less times of inflation. This is partial offset by a tendency for UHNWIs to increase donations during uncertain economic conditions.

Overall, I’d say that most costs for the UHNW are going up (like for everyone else) and they too, either themselves or via their family offices, are watching costs very closely and managing where they can.  That said, there is much more empathy in the UHNW world towards increasing donations to charities (in line with inflation) rather than increasing services that they pay for, and versus other advisors. This is a psychological advantage that charities could leverage in the months to come.”

Drew and Peter mention that “although it might be expected that philanthropy may suffer as UNHW individuals seek to curb discretionary spending, that does not seem to be the case. If anything, it might be that philanthropy has increased slightly as there are more people in need.”

Robert Young agrees and ‘invites’ UHNWIs to step up: “Many charities, which undertake great work supporting those really struggling in these challenging times, are also struggling themselves. It therefore falls on those who are more fortunate to step up and really consider how they can use some of their wealth to support others who are less fortunate. It can be quite surprising the small amounts that can make a large difference to many if targeted correctly.”

 

Inflation and other significant risks to the personal finances of UHNW individuals. Our experts think that…

… the age-old saying “riches to rags in three generations” still holds true today. One of the biggest risks to personal finances of UHNW individuals is the great wealth transfer. The main reason why there is such a loss in wealth over several generations is that the third generation may be unprepared to manage what is handed to them, but this is not insurmountable. There’s no substitute for preparing beneficiaries ahead of time and teaching future stewards how their wealth could be preserved and grow. This includes both financial education and a financial plan based on solid long-term goals, which requires a portfolio that will outpace inflation.

Peter Musker, Rathbone Investment Management

… as UHNWIs are moving into the private capital sphere, it is essential for them to have the right structures in place. They are becoming increasingly sophisticated and operating more like institutional investors, which brings additional complexities that they need to take into account. Now, not only must they have an understanding of where to invest in the private markets, but family offices need to take into account specific tax rules, regulatory and compliance obligations, and succession laws, to mitigate risks, help ensure appropriate returns and the longevity of the family office and indeed the family wealth.

Steve Sokic, IQ-EQ

… one major risk to UNHW individuals is the prospect of an unexpected change in government policy. UHNW individuals are able to relocate offshore far easier than most, but that is not always an option, and may not be realistic in a given time frame.

Other risks include the management of any companies that they are closely involved in. If their wealth is largely accrued thanks to their involvement in the founding, or the growth of a company, then it is likely that their wealth could be still closely tied to the fate of that business.

Drew Nutsford and Peter Grant, Waverton

… UK stocks have historically outperformed international stocks during past inflationary periods. Reflecting on the period dating back to the beginning of 1970, we found that during past periods of rising inflation, UK large cap stocks have generated an annualised return of 12.9% on average, while global markets returned 7.7%. We suspect that this is due to the UK market’s long standing high exposure to energy and commodity sectors. If you believe that inflation is going to continue to rise, then the UK market has offered a reasonable hedge against this in the past.

David Henry, Quilter Cheviot

… many UHNW individuals hold a reasonable portion of their assets in cash and short- term bonds. With rising inflation the value of short- term bonds has fallen and even though the interest rate paid on cash accounts is rising, the rates remain below inflation so the value of this “money” is falling in real terms.

Robert Young, Hanover Financial Management, Ince (pensions and employee benefits)

 

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