Ultra-high net worth individuals across the country are reducing their exposure to the stock market in the most dramatic way in years, according to recent data from Capgemini Research Institute.
High-net-worth individuals, defined by Capgemini as those with investable assets of $1 million or more, held more than 34% of their portfolio in cash as of January 2023. This is the highest level since at least 2002. This is also significantly higher than 24%. The cash exposure these investors had last year.
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The ultra-rich and billionaires appear to be following a similar pattern. Warren Buffett's Berkshire Hathaway, for example, added $17 billion to its cash reserves in the second quarter of 2023, bringing its cash balance to nearly $150 billion.
In comparison, wealthy investors invested just 23% of their net worth in publicly traded stocks. This is the lowest level of equity exposure in 21 years, according to the report. Despite the rally in some stocks, wealthy Americans appear to have given up on the stock market.
For some retail investors, the exit of the ultra-rich from the stock market may seem like an early warning sign. Here, we detail what the signs are showing and what investors should do.
The ultra-wealthy are in “wealth preservation” mode
“Wealthy investors are still in asset preservation mode,” CNBC wealth editor Robert Frank said while analyzing the Capgemini report in a recent interview with the channel. More than two-thirds of investors surveyed said preserving capital is their top priority right now.
Rampant inflation and rising interest rates have made stocks less attractive. Cash and cash equivalents, on the other hand, can generate higher-than-expected returns. The yield on two-year US Treasuries is currently around 5.0%.
By comparison, the S&P 500's earnings yield (inverse price-to-earnings ratio) is currently 4.08%.
Given their high levels of volatility and risk, stocks are an attractive investment only if they offer significantly better returns than safer options such as U.S. Treasury bonds.
Returns on very low-risk investments have become so high that wealthy investors may find better options elsewhere.
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better alternative
The latest UBS Global Family Office Report, which looked at families with investable assets of $100 million or more, also found that investors are turning to alternative assets and bonds.
The ultra-high-net-worth individuals plan to increase their exposure to these types of safer, more predictable bonds from 12% to 15% this year, according to the report.
Private equity and private credit were also on the radar of these families.
CNBC's Frank said in an interview that the rate of return on private credit trading can be in the 12% to 15% range, which is very attractive.
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