A high-net-worth client of Peter S. Izzo, a Merrill Lynch & Co. wealth adviser, recently came to him seeking to allocate a small percentage of his portfolio to emerging markets. The client, a 50-something retiree who once ran a public company and now spends his time on for-profit and not-for-profit ventures, wanted to select four or five countries with the best potential return.
As a sophisticated investor, Mr. Izzo's client did not want simply to buy a mutual fund or managed account exposed to those countries' markets.
Mr. Izzo's response was to work with Merrill research to choose countries it thought would be the best performers during the next 12 months. "After the Asian crisis of 1998, people would think you were crazy" to consider emerging markets, he said. "But in today's global environment, for a client who is more aggressive in terms of risk tolerance, that makes sense."
Though many high-net-worth clients are looking to advisers for help in keeping their wealth intact, others in this demographic group have a greater appetite for risk and are seeking bigger investment payoffs. Here are a few glimpses into recent strategies used by high-net-worth clients with a higher-than-average risk tolerance.
Joe Montgomery, an adviser at Wachovia Securities' optimal service group in Williamsburg, Va., said his clients are waking up to the need to have global investments in their portfolios. Though the financial media have been buzzing about globalization for most of a decade, the message has penetrated only recently for some customers.
China has triggered the latest wave of overseas interest. "You'd have to be Rip Van Winkle not to realize China is getting to be an interesting part of the world," he said.
Mr. Izzo agreed that more clients are looking overseas. "Where can we be investing outside the [United States] that will give us a better return?" is a question many clients have asked. "That goes hand-in-hand with globalization in general," he said. "People want to at least have the discussion about where it makes sense in their portfolio."
Rather than make specific stock picks for clients who want to invest in emerging markets, he passively tracks the entire stock market for the chosen countries. Exchange-traded funds are a handy tool for the job, giving investors simple and quick exposure to an entire market in one product. They have the breadth of an indexed mutual fund but can be traded on an exchange, like a stock.
Like many high-net-worth investors, Mr. Izzo's retiree client with an appetite for emerging countries has plenty of discretionary money. Still, in keeping with the near-universal counsel of financial advisers, the core of his portfolio is moderately conservative and diversified among multiple asset classes.
Dean Braun, a financial adviser in the Nelson Braun Oliger Group at Citigroup's Smith Barney, is finding that the wealthy and ultra-wealthy are becoming slightly more open to exposure to nontraditional asset classes. These include private equity, leveraged buyouts, venture capital, and certain types of higher beta hedge funds, such as distressed debt and event-driven strategies.
In his Seattle-based practice, he deals with ultra-high-net-worth families - typically first-generation wealth. A younger demographic group, these investors tend to be technocentric clients carrying already risky portfolios - thanks to heavy concentrations in public or private equity. These clients often do not recognize the danger inherent in their concentrated investment positions.
Consequently, the ability to identify and quantify their risks in relation to their life goals is crucial to Mr. Braun. An instruction from one client, he said, sums up their thinking: "I don't expect you to make me exponentially richer, but I expect you to keep me rich."
This stance does not usually translate into a high risk tolerance. But neither does it preclude investing a small portion of the portfolio in higher-risk vehicles that offer a tradeoff of higher potential return. Mr. Braun typically creates more exposure to asset classes that are not correlated with the stock market, such as private equity, leveraged buyouts, venture capital, and real estate. (He pointed out, however, that given the healthy run real estate has had his team struggles to find compelling opportunities there.) This exposure typically does not exceed 10% to 15% of a client's portfolio but sometimes can run as high as 25%.
Yet even risk can be incurred cautiously. Of a 25% portfolio exposure to higher-risk investments, one component could be moderately risky and another more aggressively so. A leveraged buyout fund or an international venture capital fund would qualify as more aggressive choices because they have limited liquidity and a long time horizon during which money is locked up. These choices, however, offer the potential for better returns than the U.S. equity market.
Erman Civelek, an investment strategist at MDE Group in Parsippany, N.J., which manages portfolio managers for institutional clients, also sees continued demand for alternative investments. But he also says that many investors are demanding more transparency, full liquidity, and a lower fee structure than the standard hedge fund fees of 2% for management and 20% of profit.
In MDE's case, the firm negotiates down the fees paid to the managers it hires. It looks for managers in niche strategies that are not correlated with equity markets. The firm allows its chosen managers a lot of latitude in executing the favored global macro and market-neutral fund strategies.
Even for clients who are risk-takers, there are limits. In Mr. Izzo's case, the client that he put into emerging markets will revisit his global lineup annually. "We decided that we would formally review our country allocations annually and move into or out of areas the Merrill research team identified as favorable or unfavorable," he said.
Ms. Wine is a freelance contributor to On Wall Street, a SourceMedia magazine, which published this article in a longer form in its April issue.
