From the June 2008 issue of Wealth Manager Web • Subscribe!

Where High-Net-Worth Money Is Headed

Conventional wisdom dictates against market timing, while historical data demonstrates unequivocally that investors who maintain their asset allocations and investment strategies fare better than those who attempt to pull back in times of trouble.

But are things different this time around? We looked at data from the Advisor Perspectives (AP) Universe of about $50 billion of assets managed by RIAs who serve high-net-worth and ultra-high-net-worth clients. The data is gathered electronically from custodians by a third party. What we found suggests that many wealth managers believe the situation is different this time, and they are taking a more conservative stance in their asset allocations.

Over the past year, these RIAs have increased their cash allocation from 8.1 percent to 11.7 percent--nearly a 50 percent increase. Equity allocations have been trimmed from 63.3 percent to 60.8 percent, while fixed income allocations have gone from 27.5 percent to 25.5 percent. It should be pointed out that more than 90 percent of the assets in the AP Universe are in accounts with an average size of approximately $900,000, so the data is highly indicative of the preferences of advisors to wealthy investors.

Furthermore, these RIAs are shifting equities out of U.S. markets. Over the one-year period, U.S. equities declined from 76.0 percent to 72.9 percent of equity assets, while non-U.S. equities increased from 17.7 percent to 20.3 percent.

The subprime crisis began to permeate the markets during the summer of 2007 and since then has grown to become the main suspect of the recession many economists believe we are--or soon will be--in. In recent history, recessions have lasted approximately eight months. The data shows a majority of RIAs agree that the current recession--if there is one--may have started four or more months ago.

But many experts take a different view. A study by Harvard economist Kenneth Rogoff and University of Maryland professor Carmen Reinhart studied a group of economic crises resembling the subprime, in that they were triggered by the bursting of a housing bubble and accompanied by current account deficits and inflationary trends. Those crises lasted two or three years. Reinhart also warns that experience with prior crises in the U.S. markets offers limited guidance. For example, the current crisis bears "no comparison to the S&L crisis," primarily because the prior event occurred during a period of robust economic expansion.

At the beginning of this year, Vanguard founder John Bogle warned that "2008 will be a year for investors to be especially careful." When we spoke with Peter Bernstein in late January, he offered a forecast even more dire:

"It is more than a recession; the whole financial system is trembling. Banks have seized up. The issuance of financial engineering paper will shrink, and will take a long time to regenerate the appetite for risk we have seen in last five years, with lots of credit. The opportunity for growth is real scarce. The household sector debt hanging over us is scary. I don't know how bad it is, but it isn't going to be good for a while, until we work out of this."

With the economy clearly in trouble, the question is whether markets have already discounted a prolonged slowdown into current valuations. On this score, the evidence is mixed. Current P/E ratios on the S&P 500 are approximately 17--not terribly high by historical standards. But Yale economist Robert Shiller argues that current P/E ratios place too much emphasis on short-term results and, after adjusting by using a 10-year average of earnings data, the results are modestly predictive of future market levels over a one year time horizon. Mark Hulbert, of Hulbert's Financial Digest, says "the scary thing is, at the bottom of that bear market [in 2001 and 2002], valuations were still higher than at the high of other bull markets. This suggests the subsequent bull market in this decade was cyclical, and not a major bull market starting with a low valuation." P/E ratios, once they are "normalized" over a 10-year period, indicate current valuations are inflated.

The key question in today's market remains whether this time is different. The largest number of subprime ARM resets occurred in the first quarter of 2008, and delinquencies and defaults stemming from them will surface over the next 15 months. With more bad news still to come, advisors must decide whether the U.S. equity markets offer attractive valuations, or whether they should make dramatic changes in their asset allocation strategy.

Robert Huebscher is CEO of Advisor Perspectives (, a free online database and weekly newsletter for wealth managers and financial advisors. He can be reached at

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