The Laurex Process: Client Consultation
Wealthy Investors Fleeing Mutual Funds
By John Churchill

The wealthiest investors in America apparently had a problem with mutual funds even before the industry’s unethical behavior came to light.

A new report from the Spectrem Group, conducted before the current wave of scandals, shows that wealthy clients have been steadily reducing their holdings in mutual funds for the past two years.

In the report, called “Asset Allocation and Product Ownership,” Spectrem found that utra-high-net-worth households—those with a net worth of at least $5 million—had reduced investable assets in mutual funds to 6 percent, down from 11 percent in 2001.

“I believe these very wealthy individuals have taken into account three main factors in their decision to move assets to other investment products,” said George Wolper, president of Spectrum Group. “Down markets, world events that have bred instability and the corporate scandals in 2002 have all played a part.”

The report indicates 65 percent of wealthy investors still own mutual funds, but the average balances in these funds have declined nearly 33 percent, from $1.6 million to $1.1 million. Other investment products, such as hedge funds and real estate, have been getting the runoff.

‘Alternative investments,’ which in the report includes hedge funds, private placements, private equity and venture capital, now make up 9 percent of the average wealthy investor’s portfolio, according to the study. Hedge funds are now owned by 15 percent of these households, up from 6 percent in 2001. Real estate investments are now owned by 74 percent of UHNW investors.

Why the mutual fund backlash? “The industry has brought this upon itself by getting too big,” says George Diachok, founder of Geneos Wealth Management. “The big boys are now looking for another primary investment vehicle.” After all, he says, wealthy investors remain that way by staying ahead of the game.

“Many of the ultra wealthy are seeking broader asset allocation,” says Bill Carter, a broker with Carter Financial Management in Dallas. “Plus, they’re working with sophisticated planners who are comfortable moving in and out of alternatives.”

According to the Spectrem report, managed accounts made up 26 percent of the average UHNW portfolio, up from 13 percent two years ago. Individual stocks make up 20 percent of the average portfolio, followed by bonds at 10 percent and alternatives, IRAs and deposits at 9 percent.

“Many of the mutuals rode the market down, taking some of these clients for a 50 to 70 percent loss in some cases,” says Diachok. “Managed accounts, with professional managers unafraid of changing positions, are appealing to this crowd.”

A broker at Morgan Stanley put it another way. “These guys are looking for more opportunities for diversification—without the hair on it.”

Article Provided by:

John Churchill
Registered Rep.
Dec 3, 2003