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Positioning HNW Clients’ Portfolios For Election Uncertainty

Brian Weiner, October 16, 2020

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The author of this article ponders a variety of investment strategies clients and advisors should consider in how to deal with possible US election outcomes.

How should high net worth and ultra-HNW individuals and families prepare themselves for the outcome of the US Presidential elections? A recent article pointed out the dangers of allowing one’s own political convictions to set asset allocation, rather than taking a cold-eyed view of what is actually likely to happen. This sort of consideration is particularly important given the much-vaunted polarization of US politics. A look beneath the surface can sometimes yield surprising conclusions, however. For example, while the rhetoric might change a lot, how much will a different presidency change US trade policy vs China, at least in the short term, given that the issues raised by Donald Trump and his colleagues aren’t going away? Of course, on tax, energy policy and regulation of business – all matters of importance to our readers – changes could come at some point. Even here, much will depend on the composition of the Senate, House of Representatives as well as the White House. 

Brian Weiner, JD, co-founder of Audent Capital Partners and managing partner of Audent Family Wealth Advisors, writes about the considerations that clients and advisors should bear in mind. The editors are pleased to share these views and invite readers to jump into the conversation. The usual caveats about external writers’ views apply. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Presidential election years usually make investors a bit uneasy. However, the election set for next month is not just a particularly contentious one, but comes amid a continuing global pandemic. 

Based on my conversations with high net worth individuals and families, this investor demographic generally possesses one of three mindsets for managing uncertainty about the future. A small portion of investors with whom I have spoken prefer to take a wait-and-see approach, putting off major investment decisions until after they know the Election Day results. The majority, however, would like to be prepared and strategically positioned to capture any upside, as well as hedged for downside protection. Is it possible for investors to achieve both? And, if we add the need for tax efficiency, how do we advisors manage it all for success?  

Indeed, these are particularly challenging goals to achieve given the great many uncertainties. However, as fiduciaries who are committed stewards of client wealth, we cannot dismiss them or choose to ignore our clients’ needs simply because they are made more difficult by the many headwinds of the day. On the contrary, we must work harder to achieve results.  
Below are tips for how to possibly hedge portfolios and position clients’ wealth for growth.

Increase exposure to real estate and other hard assets: The federal government has poured trillions of dollars into the US economy, with more likely on the way.  In addition to stimulus payments, the government has also purchased securities, and, for the first time, bought corporate bonds. Pouring trillions of dollars into the economy in an already low-interest-rate environment can potentially lead to the deflation of the US dollar, resulting in the cost of certain goods and services, and the value of hard assets like real estate, to increase significantly. 

Multifamily and industrial properties have continued to perform well in spite of the pandemic. Companies such as Amazon and Home Depot are expanding more than ever to meet the online delivery needs of consumers. This creates an excellent investment opportunity. However, exposure to these investments must be structured appropriately.  

A solution that family offices and advisors can seek is a structured co-investment with institutional-quality sponsors and/or funds. Many institutional-quality sponsors have contracts with LPs that limit their ability to invest fully in any one project. In many cases they can only invest a maximum of 85 per cent in any single deal. This requires the sponsor or fund to self-invest to complete the remaining 15 to 20 per cent or “seek outside capital.” This is where advisors can add value and create a win-win scenario.  

In the last 30 days alone, our clients have completed three such co-investments where they are at the Co-GP level receiving all of the benefits, including a piece of the promote! The depreciation afforded by real estate investing makes the tax consequences of such investing even more favorable.  

In this instance, we are thinking outside the box and adding enormous value for our clients.   

Capitalize on distressed real estate opportunities: COVID-19 restrictions have led to many restaurant closures (with more on the way) and office buildings are not seeing a major return of their tenants. In fact, the National Restaurant Association estimates that nearly 100,000 restaurants have closed permanently or for a long period of time. Landlords throughout the country have shut their doors and are now faced with having to give back their properties to the banks. This is a great tragedy of the pandemic. However, it also represents an enormous opportunity. 

Earlier in my career, I was taught by the great Stanley Black of Black Industries (a successful real estate investor): “In real estate you make money on the buy.” COVID-19 has created an incredible buying opportunity. Office buildings, hotels and other assets will go through major re-purposing. Wells Fargo data cited in the Financial Times indicates that commercial properties which are in COVID-related trouble have decreased in value by 27 per cent, on average. As advisors we should be prepared to evaluate these opportunities and begin to proactively align with entrepreneurial real estate developers.  

Use options contracts to drive value and income to client portfolios: According to the September 2020 SimplyWise Retirement Confidence Index, 29 per cent of Americans in their 50s now plan to postpone retirement, and 73 per cent of workers plan to continue working after they begin collecting Social Security benefits. These findings are reminiscent of the 2008-2009 financial crisis, when job losses and market turmoil forced many investors to postpone retirement or return to work. 

HNW clients, especially those in their 50s and 60s, need portfolios which are aligned to properly and managed for success. How do we deliver this peace of mind? Utilizing option contracts in the right way can provide clients with income, and the comfort of knowing that their portfolios are sufficiently hedged. 

Options investing requires a certain degree of investment savvy. If written properly, the premium from option contracts can deliver significant monthly returns to client portfolios. There are multiple separate account managers, including our firm, that specialize in this approach. By way of example, year-to-date as of October 13, 2020, our client portfolios are up by 22 per cent net of fees, with 50 per cent of the portfolio in cash and the rest of the portfolio invested in the top 20 S&P companies (Amazon, Nvidia, etc.). The monthly 1 per cent-2 per cent return created from option premiums makes all the difference. Perhaps what is even more interesting is that a hedge was placed on the portfolio such that if the portfolio declines close to 10 per cent, it triggers an immediate sell. In essence, we have created an artificial floor to provide clients with that “sleep well at night” feeling.  

We are living in very tumultuous times that require investors and advisors to adjust to the markets versus waiting for the markets to adjust to them. Understanding real estate and deploying a derivatives strategy can help all of us to thrive in volatility, accumulate the returns needed to retire, and stay in retirement regardless of the outcome on Election Day.  

About the author
Brian Weiner, JD is Co-Founder of Audent Capital Partners and Managing Partner of Audent Family Wealth Advisors, where he leads the firm’s global family office services program, Outsourced Chief Investment Officer (OCIO) platform and next-generation education program. 

 




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