A recent Bank of America private bank study shows significant trends among 21- to 42-year-old high-net-worth investors compared with those aged 43 or older, particularly in their approach to alternative investments. Eighty percent of younger investors are turning to alternatives rather than traditional asset classes. This would seem to raise three main questions:
- Is the younger generation on the right track, and should older investors therefore be following their example?
- What is the rationale behind this trend?
- What type of alternatives are the millennial generation choosing – and why?
The first question is perhaps the least easy to answer. Investment needs do change as one ages. Those individuals who have either already retired, or are expecting to retire in a few years, are generally advised to be more cautious with their investments and are likely more risk adverse. However, if we are considering only those more mature individuals who are already extremely wealthy, their concerns are more likely to be the distribution of family wealth, minimalizing tax obligations, and succession planning. Older investors are also more experienced and have lived through many crises and cyclical changes in the markets. Younger investors, on the other hand, have far more time to grow their wealth and will likely be open to greater risk tolerance, while also perceiving the benefits of greater diversity and of responsible and sustainable investment.
This explains why attitudes to alternative – versus traditional – investments may vary between the generations; however, it does not really answer the question as to whether older investors should follow their example. There is an argument to be made that, if the trend towards alternatives is producing success, with portfolio values growing faster and providing a hedge against high inflation, then – yes – we should all follow their example, particularly during the current bear market and accompanying market volatility. The stock markets will surely rebound, as they always do, but meanwhile alternatives can provide an excellent buffer.
Questions two and three invite greater exploration of the current trend: What are the reasons for it? What effect will this trend have on advisors and fund managers? And thirdly, what types of alternative investments are proving most popular with the younger generation – and why? First, a look at the numbers:
- 75% of high-net-worth 21- to 42-year-olds, compared with 32% of those aged 43+, “do not anticipate higher-than-average returns from traditional investments alone.”
- 80% of these young investors who are turning to alternative asset classes are allocating approximately three times more to alternatives and only half as much to traditional asset classes when compared with the older generation.
- 73% of high-net-worth millennial investors (21- to 42-year-olds) choose sustainable investments – compared with 21% of older high-net-worth investors.
As the above statistics show, these generational differences are by no means insignificant.
The rationale
The main reasons behind this generation’s preference for alternative investments are:
- Reduced exposure to the volatility of the stock market
- Downside risk protection
- Providing a hedge against inflation
- Tangibility – the attraction of investing in something you can physically possess such as art, precious metals, and real estate, etc.
- Lower concern with illiquidity
- Increased concerns regarding equitable and sustainable investment
“Know what you own, and why you own it.”
Ashton Lawrence, CFP and partner at Goldfinch Wealth Management
How important is this to wealthy investors of all ages? While older investors maybe inured to stock market volatility, having lived long enough to experience many bear/bull market cycles, it would certainly make sense – in the current market – to follow some of the younger generation’s preferences, particularly with a view to reducing exposure to volatility, protecting against risk, hedging against inflation, and investing sustainably.
The types of alternatives currently preferred by millennial high-net-worth investors:
- Hedge funds
- Private equity
- Real assets – real estate and/or commodities
- “Structured products” – pre-packaged investments
A study by Cerulli.com suggests that – while some advisors may choose to stick with tried and trusted equities – many advisors have embraced these values and are increasingly adding alternatives to their clients’ portfolios.
Advisors’ distribution in 2022, in terms of liquidity¹:
- 41% Liquid – ETFs, mutual funds
- 22% Limited liquidity – Non-traded REITS (NTRs), Business Development Companies (BDCs)
- 33% Illiquid – privately-owned real estate, private equity, private debt, and hedge funds
It makes perfect sense that younger investors will be more accepting of higher risk, and of investments that are illiquid, or have limited liquidity. Time is on their side, after all. Assuming some detailed knowledge of investments, it is reasonable to assume that the younger generation can see the wisdom in long-term, tangible investments such as real estate as well as the advantages of certain alternatives during a time of volatility in the markets and high levels of inflation. That many advisors are beginning to lean the same way, suggests that alternative asset classes may be a good direction for many investors – of all ages – at this time.
¹ Cerulli Associates and Blue Vault