KKR, an investment firm, released a report on Wednesday that outlines trends in the ultra-high-net-worth market, which it considers a unique subset of individual investor clients it serves globally.

Henry McVey, KKR’s head of global macro and asset allocation, in collaboration with Jim Burns, head of the firm’s individual investor business, surveyed some 50 of their ultra-high-net-worth clients, including several family offices.

For purposes of the report, ultra-high-net-worth investors had $30 million or more in investable assets, compared with $10 million to $30 million for the typical high-net-worth investor.

McVey and Burns found that the average KKR ultra-high-net-worth investor surveyed has a much different profile than the average high-net-worth individual or institutional investor. Most operated in a formalized family office format, with an average net worth well upward of $1 billion.

Many were running large businesses, viewed investing more on an absolute return basis and valued deal sourcing.

They found that these investors’ accounts maintained a sophisticated approach to global asset allocation that tended to include a diversified, multi-asset class portfolio with a heavy weighting in alternatives.

Following is a comparison of surveyed investors’ allocations with those of pensions and high-net-worth individuals:

  • Domestic equities: UHNW, 20%; pensions, 20%; HNW, 28%

  • International equities: UHNW, 9%; pensions, 26%; HNW, 15%

  • Fixed income: UHNW, 15%; pensions, 28%; HNW, 33%

  • Alternatives: UHNW, 46%; pensions, 24%; HNW, 22%

  • Cash: UHNW, 10%; pensions, 3%; HNW, 2%

The research showed that ultra-high-net-worth accounts have been earning strong returns in recent years, harnessing structural themes to their benefit.

Ultra-wealthy investors have embraced capital markets dislocation, such as the threat of a Greek default, and have taken early advantage of shifts in the banking system, deploying billions of dollars into areas such as private credit and asset-based lending when traditional financial intermediaries pulled back.

They have also taken advantage of the illiquidity premium in private credit and private equity to earn strong absolute returns.

‘Storm Clouds’

However, McVey and Burns foresee some potential asset allocation “storm clouds” ahead. Their analysis suggests current ultra-high-net-worth asset allocation positioning makes more sense for the environment just left than for the one that may lie ahead.

They estimate that the return for those portfolios could fall to 5.3% from 9.3% unless they are repositioned for the environment they think is opening up.

As well, the Sharpe ratio, or return per unit of risk, could be poised to fall, they say.

Finally, they say many ultra-rich investors appear over-indexed to their local markets, the U.S. in particular.

Nonetheless, McVey and Burns conclude that the high end of the high-net-worth market, including the family office market, has come of age.

“These investors are using increasingly sophisticated products, becoming more global, and learning to leverage their competitive advantages in the marketplace. Coupled with strong growth, this market should remain a dynamic one for the coming years.

“And if we are right about the macroeconomic backdrop that we laid out in our Outlook for 2017: Paradigm Shift, then ultra-high-net-worth individuals and family offices are in an excellent position for the paradigm shift we are envisioning.”

— Check out UBS Launches Toolkit to Facilitate UHNW Wealth Transfer on ThinkAdvisor.