The S&P 500, which climbed 23% in the year ended June 30, is a benchmark for many typical small retail investors.
However, few billionaires simply buy the benchmark index.
“There is a saying that if you want to get rich, you concentrate, and if you want to stay rich, you diversify,” quipped Katie Kalvoda, who managed $2 billion for Newport Wealth Management.
Where are the wealthiest in OC investing their assets nowadays compared to prior years?
Are private equity investments back in style after what were considered rich valuations a few years ago when interest rates were low? Are rising interest rates in bonds causing them to gain favor? Are office buildings too risky given the work-from-home movement and steep discounts on recent sales?
Below are comments from five wealth managers about where the rich are putting their money to work this year.
Bahnsen Group
In commercial real estate, the glut of interest in multi-family and industrial has dissipated, with higher interest rates not penciling for these over-saturated spaces the way they once did, according to David Bahnsen, founder of the Newport Beach-based Bahnsen Group, which has $5.6 billion in assets under management (AUM).
“And yet, data centers, hospitality, student housing and even retail have become very attractive,” Bahnsen said. “OC ultra-high net worth investors are particularly attracted to the hospitality space. I do think private equity has elbowed out a little bit of the venture capital space, where many investors just prefer a slight move up in quality, maturity and proof of concept.
“Public equities remain a huge destination for investors, yet we believe a rotation away from the very expensive mega cap growth space, especially in AI and big tech, and into more value-oriented sectors, is in very early innings.”
Full year return expectations remain in the low-to-mid teens, and yet many investors are using hope or recency bias to get there versus an honest assessment of earnings growth and valuation, he said.
“Market cap-weighted index funds are not a popular destination for ultra-high net worth investors and so that exposure to the very top-heavy (Nvidia-dependent) S&P 500 is less of a concern for this segment of investors, who often have diversified and customized portfolios in many niche asset classes.”
Whittier Trust
Whittier Trust, which manages $23 billion in assets for wealthy clients, has positioned equity portfolios to take advantage of potential AI-driven shifts in various industries, according to Executive Vice President Greg Custer, who manages the Newport Beach office.
The strategy focuses on an AI build-out of hardware and components, mega-cap technology companies with substantial balance sheets and captive ecosystems, and a shifting banking system, where the strong are getting stronger, he said.
Due to the rapid change in interest rates, high net wealth investors are once again thinking about fixed income, strategizing for opportunities in private equity secondaries, which involves buying existing private equity stakes at discounted valuations and making direct real estate investments after years of being on the sidelines, he said.
“The second half of 2024 is quickly inducing strategic shifts in a dynamic investment environment marked by an expectation for a moderating interest rate environment,” Custer said.
Corient
Darren Henderson, regional managing partner for Corient, which has about $120 billion AUM, said diversification “remains the best strategy for protecting wealth and growing it on a risk-adjusted basis.”
“My clients are typically investing in high quality municipal bonds, which are as attractive as they’ve been in many years,” he told the Business Journal.
“In equities, I tend to favor tax-advantaged indexing strategies and high-quality dividend-paying stocks. Though valuations are typically higher across the board, I still favor U.S. equity markets to international equities.
“I continue to see attractive investment opportunities in several areas of the private markets.”
He’s working to increase allocations to corporate private credit to take advantage of higher interest rates and a pullback in bank lending.
“With valuations generally coming down in private equity last year, I suggest investments in selected venture capital funds and secondary private equity funds. I typically tend to avoid large buyout funds, favoring instead middle market buyout and growth equity, where I believe the best risk-reward tradeoff often lies.
“I’ve been very cautious in real estate broadly, but I am seeing clients investing selectively in key growth markets in multi-family and luxury hospitality and lending strategies,” said Henderson, who works out of the firm’s Newport Beach office.
Weingart
Plenty of the wealthiest “are keeping their powder dry,” according to Kalvoda, who is incoming investment chair for $900 million in assets at the Weingart Foundation.
She’s seeing opportunities in dividends, agriculture, private markets for debts and investments in foreign assets since the dollar has appreciated.
While office buildings obviously have been hit hard, they are still attractive, she said, pointing out that offices are being repurposed to a trend of “live-work-play” development.
“Real estate is always a perennial favorite through ups and down,” she said.
Bank of America
Clients are looking for safe places like certificates of deposits, according to Joann Anderson, managing director, market executive for Bank of America Private Bank in Orange County.
The bank’s wealth management unit manages more than $50 billion in assets in OC.
“In my 30 years – I haven’t done as many CDs as now,” Anderson said. “Clients are locking in higher rates as the Fed is expected to lower rates in the coming months.”
Her clients aren’t as concerned with beating the benchmark S&P 500 as they are with safety of assets from fraud, she said. They also are still interested in borrowing, even though they are wealthy, so they don’t have to use the liquidity in their assets.
Plenty are building up dry powder for areas like offices, where discounted buildings look attractive, she said.
“Some of our very wealthy are seeing this as an opportunity,” she said.
Gross: Total Return is Dead
Bill Gross, often known as the King of Bonds for his stellar returns during a 50-year career, remains an active investor and often tells the public about his investments either through media interviews, Investment Outlooks published on his website or Tweets on X (@real_bill_gross).
“Yep, I said it, Total Return is dead,” the man many consider the inventor of the total return strategy tweeted in May. “Don’t let them sell you a bond fund. You’re only clipping coupons. Don’t expect capital appreciation.”
He said he’s had fun buying puts and call options for GameStop and AMC, which he calls “meme stocks.” Gross also has what he terms conservative stocks like Microsoft and Nvidia.
He told Barron’s he’s bullish on utilities, pointing out increasing demand from energy by AI-types of companies.
His wealth grew 11% in the past year to an estimated $2.78 billion, ranking him No. 26 on the Business Journal’s list.
Gross is not just an astute investor in bonds and stocks. His hobby of stamp collecting has paid off, proving the value of alternative investments.
At a recent auction for his remaining stamps, he sold an Abraham Lincoln 15-cent Z Grill for $2.8 million. Gross acquired the stamp for $209,000 in 1998.
He also collected $4.2 million by auctioning off “the most expensive U.S. stamp ever sold.”
The stamp–an 1868 one-cent “Z” Grill featuring Benjamin Franklin–is one of only two known surviving copies, with the other owned by the New York Public Library.
Both stamps were part of an auction of his once-formidable stamp collection in June for a “record-setting” $19.2 million. He’s donated a portion of the proceeds to his William, Jeff and Jennifer Gross Family Foundation.