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Wealthy Gravitating to Alternative Investments


Driven by the desire to further grow their wealth, investors with portfolios of $1 million or more are increasingly turning to alternative asset classes, including private equity, hedge funds and real estate, a survey of high-net-worth investors by Northern Trust of Chicago reveals.

Seventy percent of the 1,014 households with investable assets of $1 million or more that Northern Trust polled have some exposure to alternative asset classes. In particular, younger millionaires, those age 35 or younger, are placing greater emphasis on alternative investments than on U.S. equities and bonds, with 27% of their portfolios allocated to an alternative investment class. In addition, 19% of their portfolios are in cash, indicating a cautionary approach to investing.

"While interest in cash-based investments is running high, there are indications that affluent investors are feeling bolder and looking for opportunities to venture into alternative asset classes in hopes of earning greater returns on their money," said John D. Skjervem, chief investment officer, personal financial services, at Northern Trust.

The interest in alternative investments becomes even greater among pentamillionaires, or those with $5 million or more. They have 26% of their portfolios dedicated to this asset class, versus 18% among the overall survey group. Likewise, they also have more of their portfolios in cash (16%) than the overall group (13%).

As far as new investments in 2006 are concerned, many wealthy investors plan to continue to look to alternative investments, with 34% saying they will probably put at least some of their new investments this year in alternatives, and 48% of the pentamillionaires saying so. Among younger investors, interest in alternative investments is even higher, with 66% planning to shoot at least some of their investments in 2006 that way.

As to why wealthy investors are looking less to the stock market and more to private equity, hedge fund and real estate choices, many believe the Federal budget deficit and energy prices will negatively impact stocks this year. Forty-three percent of these wealthy investors said they are very concerned about the deficit and 42% said they are very concerned about further spikes in energy prices.

Another 32% said they are very concerned over terrorism in the U.S. and abroad. Other worries included rising consumer price inflation (26%) and deterioration in U.S. relations with other nations (26%).

As a result of these anxieties, 68% of the high-net-worth investors said they are more interested in preserving wealth than in growing it further.

And as to their investing goals, affluent investors are very much focused on saving for their retirement, with 47% citing this as their most important goal. This was followed by 32% citing taking care of and providing for their family as their most important goal.

Nonetheless, in spite of the increased interest in alternative assets among wealthy investors, they are not planning major structural changes to their portfolios, the survey showed. In 2005, they were most heavily weighted in U.S. equities, with 41% of their portfolios invested in domestic stocks, followed by 15% in bonds, 13% in cash, 11% in real estate, 8% in international equities, 4% in private equity, 1% in hedge funds and 4% in other types of investment choices.

This year, their largest anticipated increase will be in bonds and international equities, with 22% saying they plan to increase their holdings in each. That was followed by 20% saying they plan to increase the amount of cash in their portfolio, 19% saying they plan to increase their exposure to U.S. equities, 15% citing real estate, 8% private equity, 5% hedge funds and 7% other.

As far as new investments are concerned, 20% said they would put most of any new money in U.S. equities, followed by 15% citing cash, 9% bonds, 6% each to real estate and to international equities, 4% private equity, 2% hedge funds and 4% other.

Pentamillionaire investors have lower exposure to U.S. equities and bonds than their millionaire counterparts. Among pentamillionaires, 33% of their portfolios are invested in U.S. equities and 11% in bonds. They also have a heavier weighing in real estate (18%), private equity (7%) and hedge funds (3%).

However, pentamillionaires plan to reallocate most of their portfolios this year toward U.S. equities, with 26% saying they plan to increase this exposure in 2006, followed by 25% citing cash, 23% each to bonds and to international equities, 22% real estate, 15% private equity, 10% hedge funds and 14% other. As far as pentamillionaires' new investments are concerned, 23% plan to put most of any new money in U.S. equities, 17% in real estate, 15% cash, 11% bonds, 8% international equities, 7% private equity, 6% hedge funds and 9% other.

Interestingly, the study also showed that despite their complex financial needs, high-net-worth investors are not frequently receiving sophisticated advisory services to support these needs. Most, 49%, are getting basic advice on stock, bond and fund selection. Deeper services, such as retirement planning, tax strategies, asset allocation and financial or estate plan creation were received by less than 30% of high-net-worth households in the past year.

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