November 15, 2010

Tiger 21 Investors Voice Investment Concerns

Members cite 'political risk, inflation, deflation' as important risks

Members of the ultra-high-net-worth (UHNW) peer group Tiger 21 are “concerned about the economy/investment climate” according to an announcement from the group.

Tiger 21 members are known for their active efforts to share with each other, in small group, peer-to-peer discussions, their thoughts on investing as well as other issues outside of finance and investing that affect wealthy families and individual investors. The investor education-focused group brings in outside experts frequently to speak with these investors, as well.

For the privilege of belonging to the group, the 140 members, who include successful business executives, inventors and entrepreneurs pay a membership fee, participate in learning groups and defend their portfolio strategies in small group settings. These investors collectively have $10 billion to invest.

Members participating in the survey, conducted during Q3 2010, are thinking about risk in a new way, according to the group’s founder, Michael Sonnenfeldt, who is also its chairman. “In today’s market assessing risk is an entirely new exercise. Previously, investors looked at past volatility as the determining factor on how to allocate assets, when in fact the only risk that matters is future risk. Risks abound in the current marketplace – in the economy, with government actions or inaction, in the financial markets and even in society with fear of terrorist attacks. Yet our members have not been paralyzed into inactivity,” he stated in the release Tuesday.

‘Political Risk’ a Top Concern

Members pegged “political risk,” 13.5 %, as their top concern for investing, with “credit risk on a global level” next, 11.43%, followed by risk of a “terrorist attack,” 11.2%. Of participants, “nearly 37.9% believe we will experience a terrorist attack on U.S. soil between one and three years time,” the release said.

Domestic risks were also high on the list for members, with members ranking those concerns this way:

  • “Too much government spending,” 17.3%
  • “Increase in personal income taxes,” 16.9%
  • “Increase in government intervention in the private sector,” 16.9%
  • “Lack of clear leadership,” 14.5%
  • “Increasing business taxes,” 13.2%
  • “Political gridlock,” 12.1%

Should We Worry About Inflation or Deflation?

As it happens, an equal number of members are wary about both economic situations. “The lack of clarity on whether we will experience inflation or deflation and the government’s lack of action on the issue is troubling to a majority of members,” the survey release reported. While most members, 43.3%, are not repositioning their portfolios to hedge for either scenario, an interesting finding emerged.

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Of those who are repositioning for deflation or inflation, the percentage of members hedging for inflation is exactly the same as the percentage hedging for deflation—28.3% are preparing for each scenario. 

Those concerned with inflation are buying real estate that produces income, and high quality, large cap, dividend-paying equities, foreign equities and the tech and energy sectors. They are also investing in precious metals, including gold, and natural resources, oil and master limited partnerships (MLPs). Alternative energy and short-term fixed income were also mentioned in the release as favorites. They are divesting low-quality, longer maturity fixed income.

Those concerned about deflation are holding cash as their “largest position,” with the allocation to cash running much higher for many members than the “3%-5% of their assets” range that had been typical up to a few years ago: 63% of members had 11% or more in cash, the announcement said.

Allocation to Cash:

  • Between 1 % and 10%, indicated by 35% of members
  • Between 11% and 20%, indicated by 27.6% of members
  • Between 21% and 30%, indicated by 17.2% of members

The majority preparing for deflation, 56%, allocate some assets to gold “for stability.” They are also buying bonds—especially government bonds, the release notes, as well as equities that pay dividends.

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