Taking their pulse: The mood of the HNW market

The economy continues to bounce back, and while wealthy investors aren’t exactly taking the bull fully by the horns, experts say they certainly appear willing to chase after it.

Top Canadian investment advisors suggest greater recent investor activity, particularly within high-risk investments, shows the market is feeling positive and optimistic. Despite the downturn, Canada had more than 550,000 high net worth (HNW) households at the end of 2009, and 2010 has been a relatively positive year, says Investor Economics director Keith Sjögren.

Total assets under management belonging to HNW individuals across the country totalled $1.68 trillion in 2007, and held at $1.7 trillion in 2009, showing that the shift from growth strategies to capital preservation strategies after the crash worked. Sjögren observes that investors are moving into the broader market again in noticeably greater numbers.

“I think high-net-worth investors remain cautiously optimistic. There has been a change—it seems as though the wealth has been recovered and so they’re willing to assume some more risk. It appears the worst is over,” he said.

Andrew Marsh, president and CEO of Richardson GMP, says the panic of 2008 has been replaced with a sense of realism and positive ambition among investors, particularly when it comes to higher-risk investments previously left abandoned.

“There’s a mood of optimism mixed with cynicism. I think high-net-worth families have gone from extremely risk averse to being more comfortable with equities as an asset class because they see some positive movement in our economy. Since 2008 we’ve really learned what risk means,” Marsh said.

He says investors appear to be more open to stretching themselves now that they’ve seen some stability and are feeling underwhelmed by safe returns.

“People reacted to the meltdown by bailing from equities and they went to fixed income products. As confidence comes back, people are starting to feel the guaranteed rates they wanted so badly three years ago are disappointing after they see the returns. As a result they’re starting to see the potential value of stocks again,” Marsh said.

Sam Sivarajan, head of private wealth management at UBS, says the first quarter of 2011 has been a good indicator that people are getting active in the market again. But many are hedging their exposure to the U.S. dollar and looking at emerging markets more closely, particularly since many of those markets—like Turkey and Indonesia—did better than the larger markets over the past 24 months.

“Generally people are tired of the low yields, tired of sitting on the sidelines in cash, especially as they’re now seeing the economic recovery. People are looking to get back into the market in a protected way. There’s an interest in investing globally and looking outside the big economies for growth and stability,” Sivarajan said.

Even as the market recovers and high-net-worth investors restart their engines, there is still a profound sense of caution among investors that cannot be understated, says Mike Newton, senior vice president of Macquarie Private Wealth Canada. “These are low-conviction optimists, they’re optimistic but not overly so. People have very strong memories of what happened in 2008. Despite what’s happened in the last 18 to 29 months in stocks, I still think most high-net-worth investors are reluctant to take on more risk. I don’t think that with dips in the market, investors are looking at it as a buying opportunity yet,” Newton said.

He points to the shuffling and uncertainty in the U.S. economy as a prime factor in keeping investors meek, and suggests perceptions of a recent surge in investor courage could simply be a sign that traditionally high-risk investors are dusting off their boots to get back into the rodeo.

“Some people who had very concentrated portfolios really got hurt—these types of people have an appetite for risk. They were sick to their stomachs for about a year but many of them are back, and they’re even more trigger-happy now. When they have a win they take their profits earlier and when they lose they take that loss and move on quicker, too,” Newton said.

Still, the effects of the meltdown are likely to be felt for a long time and the real challenge is just beginning for high-net-worth advisors, who will have to rebuild trust with clients and should expect tougher questions and more footwork going forward, Sjögren says. “The damage that was done was not just done to portfolios but people’s comfort levels as well, both with their comfort with the market and with their advisors. It’s getting harder to please a high-net-worth investor,” he explains.

Newton warns high-net-worth investors against feeling too comfortable with the economic rebound and instead suggests now is the right time to think about their next contingency plan.

“The most interesting thing to me is the people I met in December of 2008, whose portfolios dropped 40%. Now that we’ve had a good rally and their portfolios have recovered to where they were, they feel like they got away with something, but I don’t feel they learned anything. I think people need to develop a contingency plan for when this happens again,” Newton said.