Deidre Woollard: All right Fools. For the next half hour, we are going to talk about an interesting study that we've recently ran on fool.com. I can put the link in the chat for you. I have on, with me Jack Caporal who wrote the study. I'm going to see if I can share a slide deck because there are a couple of things from it that I want to share with you. Let me see if I can do that are always a little bit of a trick for me here. Hey, Jack, how are you?
Jack Caporal: Hey, I'm doing well. It's great to be here.
Deidre Woollard: Before we get into that, I want to talk a little bit about defining wealth because I think it's one of the things that people find confusing. You start reading a study here like ultra-high net worth, very high net worth, high net worth, it's all a blur. How do you go about defining that?
Jack Caporal: Sure. It's a great question. These are actually investor classes that have pretty common definitions. Ultra-high net-worth investors are generally thought of as folks with assets over $30 million. Very high net-worth investors, you're looking at assets between five and 30 million, high net worth, you're looking at assets between one and five million and then mass affluent, it's a little bit of a looser definition: most folks peg them as having assets between 100,000 and 100 million. I like to think of mass affluent basically as folks who save more than they spend and also folks who invest for their future. That's upper middle class around the world.
Deidre Woollard: As part of the idea of seeing what ultra-high net worth and high net-worth people do, when I look at it, I think what things can I learn from how these people are investing? Is that part of the reason that we did this study at the Fool?
Jack Caporal: That's definitely right. As, basically, your income increases, what we see in the data is folks with higher net worth just have different types of asset allocations. Obviously, at the Fool, we're pretty focused on equities and real estate over at Millionacres but with high net worth, very high net worth, and ultra-high net-worth investors, they are essentially diversifying their portfolio into the world of alternative investments. We wanted to get an idea of exactly how they spend their money and what they think of those assets.
Deidre Woollard: I think that's interesting too because looking at this data that you've had here, 81 percent of the ultra-high net-worth clients hold alternatives investments and then you go all the way down to mass affluent, it's just 14 percent. It's a really interesting thing. Some of that obviously is certain things aren't investable for certain things that there's things like accreditation that our gates that way. But do you think it's also an awareness problem and the people may not know what types of things are available for them to invest in?
Jack Caporal: I think that's exactly right. Accreditation is a big barrier but awareness is another one. There's some data that we looked at that towards the end of the study about whether institutions that folks essentially do financial services through whether or not they're thinking of expanding offerings, alternative investment opportunities to retail investors whether they think of expanding their services and quite a few actually are. There's definitely growing interest in allowing retail investors or those who we would generally think of as the mass affluent access to alternative investments. Then I think something that we'll talk about a little bit later are new apps and services that are allowing folks that will be in the mass affluent category to tap into some types of alternative investments through different means, essentially.
Deidre Woollard: Absolutely. This slide that I have here, I brought in from the Wealth Report. I don't know if you've ever looked at the Wealth Report, it comes out from Knight Frank once a year. It's one of my favorite things to note out over. But please I wanted to share it because I wanted to just share some of the breakdown of millionaires and billionaires. I think it's interesting to note that the distribution of millionaires and billionaires is changing. We're seeing a lot of billionaires now come from Asia. I'm wondering if, as we see wealth shift all around the world. Maybe that also shifts how people invest. The alternatives may be more attractive to people in some areas versus other areas. Do you think that's the case?
Jack Caporal: Yeah. I think that's definitely a trend, what I think of as the growing new middle class which is really going to take place in Asia and to a lesser extent Africa. That shifting of the economic center of gravity away from North America and Europe to that part of the world is definitely want to follow for alternative investments, it's a good lens to look at some of that data through. The other mega-trend that I like to think about when looking at alternative investments alongside population growth and growing middle class is urbanization. There's just going to be a mind-boggling amount of construction and urbanization specifically in Asia and Africa as well over the next decades as they deal with population growth. Looking at it from a regional perspective, definitely useful, keeping in mind growing middle-class, changing economics under changing center of gravity for economic growth. But on the other hand, the economy is global and we have the tools to invest in almost anything anywhere so keeping the global perspective is important as well.
Deidre Woollard: I think we'll talk a little bit about collectibles later, but I used to cover the luxury market in depth. That's one of the things that I noticed was the growing awareness and appreciation of things like maybe 10 years ago, China started getting into wine futures and Bordeaux and things like that. They used to talk about it as a luxury education, now it's just everybody's global but certainly there is that thing that happens that people learn about other things like that. Let's talk about a couple of the other stats that you had that are interesting. Ultra-high net-worth investors have an average of 50 percent of their assets in alternative investments. I thought that was really interesting. But also noticing this shift toward private equity and real estate as someone who covers real estate, that's obviously fascinating for me. It was an interesting year, 2020 for real estate as on the commercial investments side, there was a lot of hesitation. You had a lot the biggest foreign investor and commercial real estate in the US is China. China pulled back. They're still, of course, the biggest foreign investor in commercial but it does seem like this year there's a lot more investment. I'm seeing a lot more deals closing on the commercial side.
Jack Caporal: Yeah. Those two classes where we're seeing growth in investment over the past few years, private equity and real estate are, by most measures, the best-performing alternative investments. It's not really a surprise that we see folks putting more of their portfolio into those two areas. Totally agree that real estate last year throughout most of the year was a really big question mark. I think we're seeing some resiliency in the office space in particular which is a positive sign. There's a big question mark and still is about how that sector, in particular, with remote work accelerating how that will function in the future. What's interesting is if you dig into the data on deals a little bit which I did is deals for office spaces in general are rebounding close to previous levels. But deals in some big cities like New York and Chicago and DC are actually down year over year. What you're seeing is smaller and medium-sized cities making up for that deal-making activity. I think that reflects a lot of the big thinking that's going on about the future of work where people want to be and just be interesting to see how that area evolves. You definitely had, I think, winners in the real estate sector during the pandemic, logistics and warehouses, data centers. Then I think healthcare and life sciences to a lesser extent. Then another question mark for me still is hospitality rate. We've seen a bunch of different data points, hospitality rebounding, but we haven't necessarily seen that in deal-making numbers. It'll be interesting to see how that plays out over the coming year.
Deidre Woollard: Yeah, totally I agree with that. I'm watching the commercial mortgage-backed securities, some of the loans, what's happening with that. Hospitality is much better than people thought it was going to be. I always talk about that capital that was sitting on the sidelines like waiting to pounce but the rates never came down far enough that people really felt like pouncing. There has been a few opportunistic investments, but nothing like what some people were forecasting. Next slide. Just about private equity accounts for 54 percent of the alternative investments and also the real estate accounts. Always see that second-largest holding in alternative investments. We're seeing more of that in crowdfunding, one of the things that I cover is that we're seeing more, not just more investment in real estate, but also more ways to do it, whether it's more private equity funds, more opportunity zone funds, more real estate crowdfunding deals, it seems to me like we get a new company every so often with different ways to do it. We've seen some really interesting models cropping up and I think that's going to continue. Is that something you are tracking too?
Jack Caporal: Yeah. I think that's definitely on point. There's a ton of interest in the real estate space. That obviously gives rise to different ways of investing. I think one thing to keep in mind that's always in the back of my mind looking at this data from 30,000 foot level is again, the real estate market itself, especially on the private side is so big and there's so many different sectors that you obviously want to find winners but there are a lot of losers out there. With the amount of uncertainty that we have about what the future of certain spaces are going to look like and what the future of certain real estate sectors are going to look like. Even though there are a lot of different investment options, I think there's still a ton of risk and a lot of different types of risks.
Deidre Woollard: I want to share this slide because this one it comes from Visual Capitalist, one of my favorite sites for just data visualizations of all sorts. If you're a data nerd you should absolutely check it out. One of the reasons we at Millionacres particularly love this slide is because it brings home this idea that for most of us the principal residence is the primary source of our wealth. But if you are upper income or ultra rich, there's all these other things that people are into. Obviously, stocks, we love stocks that's a larger portion you see here on the ultra rich, but also business equity and other real estates, so there is that shift when you go from the upper income to the ultra rich. There's a big difference there, there's a story being told there, and a lot of that is about commercial real estate and about finding other alternatives.
Jack Caporal: Yeah, that's exactly right, and love Visual Capitalist. This is a great way of displaying the data that we had earlier which suggests that the ultra rich, about half of their assets are in alternative investments. If you think about it for the average American, your home is probably the largest purchase you'll ever make, which is reflected in that big purple block on the left, and then your retirement account is what you spend your life working towards and that's reflected as well in the pensions account area. But when you get into upper income and ultra rich, they're playing a little bit of a different investment game. Again, they have access to other types of investments through accreditation and also just through the ability to spend money on passion projects like collectibles and things like that.
Deidre Woollard: They may also be part of a company where they are getting stock options or things like that too. I think that might be another factor.
Jack Caporal: Exactly.
Deidre Woollard: This is from some of the research that you did that is in that article and talks a little bit about allocation and the trends we're seeing, so real estate going up. With hedge funds, what is the phenomenon there? What's happening?
Jack Caporal: Yeah. Hedge funds they're tricky. If you look at, on average, how these different assets have performed over the past year, five years, 10-years, hedge funds really don't have a really strong record and they're also pretty risky. They're top one percent of hedge funds in terms of their performance. Just their returns are so much higher [laughs] than the rest of the group. Either you're winning big and you're lucky, you found the right fund, and they're very few of them that do that, or you're producing meager returns, and you're just better off putting your funds elsewhere. They can also come with higher management fees, which is another consideration but, generally, my sense is that it has to do with returns and their historic record of returns and also just the small number of funds that are actually generating the really high returns that you're looking for when you're in an alternative investment.
Deidre Woollard: I'm wondering too, I always think about the way the media reports things and how that is shifted, and we've seen so much of that happen. There's been a hedge funds scandals and there's more focus and coverage of hedge funds in a more open and transparent way, I think than there was five or 10 years ago. Do you think that's playing a role too?
Jack Caporal: I suspect that it might be. There's definitely a mystique about hedge funds a number of years ago. I think you're right about that and they seemed like exclusive club. But I agree that some of the reporting, especially around some of the meme stocks and how hedge funds were involved there put those funds in a negative way, I would say, whether or not they deserved it.
Deidre Woollard: Next chart here, can you explain this one for us?
Jack Caporal: This is an imperfect way of looking how alternative investments have performed relative to the market over a number of different time periods. You have the S&P 500 at the top. Cambridge Associates US Private Equity Index, that measures returns in private equity by proxy, so you see, if you look on the returns over the past 10 years all the way over on the right, private equity is the only alternative investment on average that has outperformed the S&P 500, and not by a huge margin obviously, every percent matters, but even then, not by a huge margin. Then we have Barclays Bond Index, Cliffwater Direct Lending Index, so that's the proxy for measuring credit and debt, the property index, that's a proxy for measuring the value of investable real estate in the US, and the Barclays Hedge Fund Index tracks hedge fund performance within that Barclays tracks. The idea here is to just show that, when folks invest in alternative investments, they are looking for diversity in their portfolio. They want to diversify their portfolio, they want investments that aren't necessarily correlated with the market, but perhaps most importantly, they want to beat the market and the numbers, again, well, these are imperfect proxies suggest that it's actually pretty difficult to beat the market in alternative investment categories. Again obviously, you'll find winners, but on average it's pretty difficult to do.
Deidre Woollard: Well, I think that's an important point too, especially when you talk about some of the collectibles and what they call passion investments. Some of it is fun and some of it makes you money and they may not necessarily be the same thing. Let's talk just a quick second about cryptocurrency because I found that interesting in your study that so many people now are holding crypto, probably more than I would've thought among high net-worth investors.
Jack Caporal: Yeah. We've been doing quite a bit of research on crypto beyond just what we published in this article, and I would encourage folks check it out. But the 72 percent of high net-worth investor holding cryptocurrency. Pretty shocking, I think given how much fluctuation occurs within major crypto assets. I will say that we had trouble tracking down data on how much, what amount of value high net-worth investors have actually invested into cryptocurrency. Quite a few surveys suggest that there's a good deal of hesitancy among high net-worth investors when it comes to investing large sums in cryptocurrency, because the tax and regulatory situation is uncertain and the more you invest, the more you have to deal with those issues in any asset. A lot of the big banks and financial institutions that high net-worth investors are comfortable operating through are only beginning to build out their crypto infrastructure, and that has also driven quite a bit of hesitancy. Figuring out how much they're actually investing is the next step in our research. Obviously you have folks like Mark Cuban and Kevin O'Leary and the Winklevoss brothers who are the cheerleaders here. But whether or not their interests and the amount of money that they've put on the line for crypto currency is reflective of the broader high net-worth investor community, I think remains to be seen.
Deidre Woollard: I have this theory about the status factor of crypto as well because I started thinking about the luxury goods, very risky cars, that sort of thing. It seems to me, and maybe this is probably anecdotal, but it seems the classic car thing seems to be mostly an older high net-worth person, whereas a newer high net-worth person, younger people, there might be more status involved in owning certain amount of crypto. I've certainly seen some of those Instagram rich kids, there's a lot of flaunting of what you owned in different types of crypto. I find that an interesting societal thing. Is that something that you think is happening, that you have to own crypto? There's a status factor?
Jack Caporal: Yeah. I think that's a really interesting point for sure, and it's almost a little bit ironic because crypto and the whole concept of de-centralized finance is to cut out the middleman, escape government regulation, maybe that's too strongly worded but be outside of it, and so I think certainly could be seen as a status symbol of high network folks, but cryptocurrency can definitely be thought of as the every investor's asset. It plays into both levels, which I think is interesting.
Deidre Woollard: That is a really interesting point. I just want to dive in quickly on collectibles. This data is from the Wealth Report from 2020 data, demand for handbags. I covered it back almost 20 years ago when the rise of the $3,000 handbag and the early Paris Hilton days. Now, those handbags, Heritage Auctions, transact some certain Birkin bags, Christie's, Sotheby's, the big auction houses have sold them, which I think is interesting. But the thing I want to talk about here, you had mentioned earlier alternatives. These are just two of the crowdfunding platforms that I've seen so far. Masterworks, which does pooled investing in fine art, Vinovest, which has pooled investment in fine wine. But we're starting to see alternatives within the alternatives, I think, to some extent. Crowdfunding, that taking these types of assets and then portioning out shares.
Jack Caporal: Yeah. That's certainly how they're trying to reach the masses, I would say. Makes a piece of a bottle of wine or a bottle of whiskey, a baseball card, etc. essentially tradable, and they slice it up in such a way that the average investor who doesn't want to buy the 1990 Bordeaux outright or can't afford to, they can buy a slice of it and make some money when the value of that bottle of wine or piece of art hopefully goes up. These are almost a little bit more attractive for some reasons than actually owning the collectible stuff outright. When you think of owning a piece of fine art, think of what a museum has to do to make sure that that Art is maintained, the equipment that they need, the expertise that they need, etc. Same with the collectible car. Basically, these are all physical assets require some amount of maintenance and upkeep costs I think most folks don't necessarily think about. But with a pool investment, maybe some of that's baked in to the price of the overall piece, but it's not something that you necessarily have to worry about on a daily or weekly or monthly basis.
Deidre Woollard: Well, I think the important thing also for people to know is that this probably isn't going to outperform the market. This is fun. It's cool. I think the idea of pooling investment in fine art, yeah, cool, sounds fun. Is it going to outperform your investments? Probably not, right?
Jack Caporal: Yeah, I think that's 100 percent right. It's also a great conversation piece at the dinner table with your family over the holidays [laughs]. I'm now an investor in fine art and fine wine.
Deidre Woollard: We've got about five minutes left. I just want to go through these last couple of slides and seeing what people's plans are and how they are thinking about things. It seems like there's a lot of stay in the course for the most part.
Jack Caporal: Yeah, mostly stay in the course. This is data that looks at how institutional investors want to allocate alternative investments over the next five years. Again, you see a little bit of souring over hedge funds. That's a standout. Private equity folks will continue to bet on it. Real estate, for the most part, will continue to bet on it, definitely minority betting against it. Then going back to what I mentioned right at the top of our half-hour, infrastructure. Over 50 percent think that they're going to increase their allocation into infrastructure. Again, just the amount of organization that we'll see in the developing world is going to be mind-boggling and folks seem to have picked up on that trend.
Deidre Woollard: When you say infrastructure, I'm just going to stop sharing, is that just building? Is that things like data and broadband? What does that cover?
Jack Caporal: It's a broad category. It covers, I think, what folks are familiar with Millionacres know as core infrastructure, that's high-value real estate. Multi-family property is your typical infrastructure, but also will cover more basic infrastructure. That includes like power generation, utilities, etc., everything that makes a city run. In that category, you can also throw in broadband, data centers, etc. But the demand for all of that is real and real big and I think folks are picking up on that.
Deidre Woollard: The last couple of minutes we got a couple of questions. One of them from Don, what is the best avenue to invest in private equity?
Jack Caporal: Well, it's to become accredited which requires a level of income. I don't have it off the top of my head. The good news is in 2020, the income requirements to become an accredited investor were reduced by the SEC, and you also need professional certification to become accredited.
Deidre Woollard: For accredited, it is $200,000 income or one million in wealth, not including your principal residence.
Jack Caporal: Yes. But the SEC, my understanding is that in the last year they took steps to make it easier to become accredited. That's your good news.
Deidre Woollard: Got one minute left time for one more question from Mabel. Is it true that for real estate investments, there's a bias toward locations that are nearby and familiar to investors? Do this in rising wealth in East Asia explain insanely high real estate prices in China and Hong Kong?
Jack Caporal: That's interesting. I will kick that one to you if you have an answer there. I am not sure about bias in investing close to home.
Deidre Woollard: I'm not sure I would say that either. I think part of the reason that the Hong Kong has always been so expensive is there's no land. They've tried to build more land actually onto Hong Kong itself because there just is a real problem with finding space and that's why there's a premium for that. Not quite as sure about real estate prices in certain areas of China. I definitely think there's been a lot of speculation. There has been a lot of talk about that in certain areas and there's been certain areas of China where things have been, there are a few of ghost cities and you've seen pictures of things like that in the news. [MUSIC]