Fearing U.S. Inflation, Wealthy Investors Go Global
With U.S. inflation racing at its quickest annual pace in two and a half years-reaching 3.2% mid-May due to higher energy and food prices-some ultra-high-net-worth investors are investing nearly a third of their portfolios outside of their home market, hedging currency risk, but otherwise holding steady in terms of hedge fund and alternatives portfolio allocations, according to a recent report.

Conducted by the Institute for Private Investors, which provides educational and networking resources for ultra-high-net-worth investors and operates as an independent U.S. subsidiary of Campden Media, the IPI Annual Family Performance Tracking Survey shows that while IPI member families-about 340 have investable assets of at least $30 million-have reaped the benefits of a more global portfolio since 2009, they are investing 28% of their portfolio outside of their domestic market; one in five of those surveyed invested 50% or more of their overall portfolio internationally.

To gain global exposure, 67% reported they are investing in international equities only; 57% are also investing in hedge funds and 49% in private equity.

Citing concerns regarding "the potential of inflation" and "the devaluation of the U.S. dollar," 23% of those surveyed said that they do manage currencies or hedge currency risk-of these 53% report using a currency overlay strategy or manager/. Twenty-four percent are using derivatives, and 18% are using ETFs.

While survey respondents' global long-only equity allocation rose from 11% in 2009 to 14% in 2010, the average asset allocation of investor portfolios remained similar to the average allocation reported last year. Also similar to last year, alternatives comprised just under half (42%) of the investor portfolio; hedge funds held steady at 19%, down from a high of 24% in 2006; and fixed income (cash, taxable bonds and municipals) fell slightly from 27% to 25%-attributable in large measure to investors pulling out of municipals (down 4% this year).

As investors, the ultra-wealthy are often seen as trendsetters, and therefore leading indicators of the broader market, according to Charlotte Beyer, IPI's CEO, who noted that IPI members led the move into hedge funds in the early 1990s. "What we've seen over the years is that sophisticated private investors are essentially early adopters," she said. "Their investment strategies are harbingers of what becomes reflected in the overall market, in terms of both institutional and individual investors."

Of the 1,100 individual ultra-high-net-worth investors who comprise IPI's membership (89% reside in the U.S.), 79 families participated in the April survey-IPI's twelfth-which is designed to track members' expectations, returns, and asset allocations. According to the survey, IPI members realized a 11.26% return for 2010. While shy of the 15% S&P return, IPI said its members' ten-year average return of 6% does beat the S&P's 3.6%. Go to www.memberlink.net for further information.

In other news ...

Luxury home values dropped in Los Angeles, San Diego and San Francisco in the first quarter compared to the fourth quarter of 2010, according to the First Republic Prestige Home Index compiled by First Republic Bank, a provider of private banking, private business banking and wealth management services. San Francisco Bay Area values, for example, lost 4.3% from the fourth quarter and were 1.9% lower compared to a year ago. Go to www.firstrepublic.com for further information.

Fewer executives are reporting a pay freeze in 2011 than in 2010, according to the fifth annual Financial Executive Compensation Survey, conducted by the Financial Executives Research Foundation. Those in the finance profession also report a boost in their average salary increases over 2010's reported low, while they continue to take on a vast amount of responsibilities in their roles. Go to www.financialexecutives.org for further information.

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