- Anticipating an impending disaster, high-net worth investors in TIGER 21 held up to 12% of their portfolios in cash through the first quarter of 2020.
- Due to low interest rates, they’ve cut back on their fixed income allocation.
- Private equity and venture capital have caught investors' attention, and that's where they are directing their resources.
The disaster some wealthy investors have been preparing for has finally arrived.
Since the coronavirus pandemic struck, market volatility has become a regular theme for investors. On March 23, the S&P 500 index plummeted to 2,191.86 – an intraday low – but since then, it's risen by close to 40%.
In anticipation of a market downturn, members of an investment club for high-net worth people have spent the last year squirreling away cash.
TIGER 21, with a membership of about 770 people with at least $10 million to invest, stands for The Investment Group for Enhanced Results in the 21st Century.
During the first quarter of 2020, members kept 12% of their portfolios invested in cash and other equivalents.
They've maintained that cash allocation since the beginning of 2019 and that's highest it's been in seven years.
Investors seem to be fattening that cushion even more, said Michael Sonnenfeldt, the founder of TIGER 21.
"The preliminary indications, because we're now tracking it closer, is that cash allocations have gone up, even from the 12%," he said. In fact, cash allocations now are tracking closer to 18%, Sonnenfeldt added.
"Over the last three months, as members have tried to make sense of the pandemic and the economic crisis, they want to not simply batten down the hatches, but be in a position where they never have to liquidate their best assets at a ridiculously low price," he said.
"They want money for an opportunity if it comes along."
Downturns can present an opportunity if you know where to look.
In the first quarter of 2020, members of TIGER 21 boosted their allocation in private equity.
The asset class accounted for 26% of their holdings, up from 24% in the fourth quarter of 2019 – the highest allocation to private equity ever recorded, the group found.
Venture capital accounts for a portion of those private equity investments, said Sonnenfeldt. Technology, medical and pharmaceutical firms also are catching investors' attention, he said.
"Private equity isn't just a reflection of putting money into big funds, but rather rolling up your shirtsleeves and investing in small businesses, where they can have a big impact and lever the skills they've developed over their career," Sonnenfeldt said.
Interest rates have fallen this spring. Accordingly, investors have dropped their fixed income allocation, lowering it to 8% in the first quarter. That's down from 10% in the fourth quarter of 2019.
Real estate continues to be a big chunk of members' portfolios, holding steady at 28%, according to TIGER 21.
Shares of publically traded companies remained flat at 21%, as members sought more hands-on opportunities in the private sector.
"When you're an owner or an investor in a small business, you can help solve a problem," said Sonnenfeldt.
"But if you're the owner of a stock, you're the last to hear about a problem," he said. "By the time you hear about it, it's too late."