In this era of volatile, hard to predict economic change, making the right investment choices can be complicated.
This is especially the case when managing a portfolio for ultra-high-net-worth investors — those with at least $30 million in investable assets.
This class of investor has more choices than simply stocks, bonds and funds, ranging from buying a business outright to private equity, venture capital, infrastructure funding, foreign real estate, commodities, different currencies, cryptocurrency and hedge funds.
In addition to that, geographic freedom can result in cross-border complexities in taxation, currency conversions and the challenge of balancing portfolios that have many moving parts.
Risk versus growth mindset
Faced with many choices, ultra-high-net-worth investors need to beware of making decisions in two opposing directions, says Amy Dietz-Graham, portfolio manager and investment advisor at BMO Private Wealth. At one end, it can be tempting to take huge risks, opting for unproven, or highly complex investments with little or no track record.
At the other end, ultra-HNW people may retreat into the shelter of investments that offer minimal risk but low, underperforming returns, Dietz-Graham says.
“Some investors lean toward investing in particular sectors or a few particular companies because they’re looking for their portfolios to produce income. This can lead to being overweighted in a particular sector or in particular companies, and this can bring its own kind of risk,” she says.
“You want to make sure that income is part of the mix in your portfolio, but you still want to make sure that the risk fits with what you’re trying to achieve.”
Even the ultimate professional institutional investors can struggle to find the right balance of sectors and companies. Berkshire Hathaway (NYSE:BRK.A), one of the most sensational market performers in history, has underperformed the S&P 500 index in both 2019 and 2020.
While the company is boosted by a 5.4-per-cent stake in Apple, it’s also burdened by holdings in the energy sector and a 26.6-per-cent stake in Kraft Heinz, which went through a costly merger.
It’s also tempting for investors — not just ultra-HNW ones — to opt for stocks that pay out high dividends, but careful investors should dig more deeply, Dietz-Graham says.
“The dividend should have a relationship to the company’s performance, and not just be one that’s high only to attract investors,” she says.
Currency conversion conundrum
The easy access to international sectors, currencies and markets that ultra-HNW investors enjoy can also bring currency complexities, says Darren Coleman, senior vice-president and portfolio manager at Coleman Wealth/Raymond James in Toronto.
“The first issue to consider is which currency you want to invest in and to receive your investment income in. It comes down to where you expect to spend the money you earn and how you are going to access funds in different currencies,” Coleman says.
The decision on currencies and markets is often governed by where you spend your time, Coleman adds. Many Canadian ultra-HNW investors live part of the year in warmer climates, for example; such individuals should think about investing a percentage of their funds in the places where they also live.
“If you’re going to spend 20 per cent of your time in the United States, you should consider generating 20 per cent of your income in U.S. dollars,” he says.
This helps avoid the cost of converting currencies when buying or selling huge amounts of foreign stocks or funds.
“If you want to invest directly in euros, or the British pound or Australian dollars, this can become costly and complicated. If you live most of the time in Canada, you have to find an investment dealer who can invest in multi-currency portfolios, and your costs of trading jump tremendously. There are a few investment firms in Canada that do this kind of investing, but not many,” Coleman says.
An alternative can be to invest in an ETF that trades in Canadian dollars but is based on the region where the ultra-HNW individual travels, Coleman adds: “The product you’re buying is actually based in Canada, but it follows the market in the country or region where you’re going.”
The tax toll
Investors in foreign markets should always be aware of the tax implications in Canada, says Eva Khabas, accountant and founder of Tax by CPA in Vaughan, Ont.
“For example, there are withholding taxes. Some of these can be recovered, some cannot,” she says.
“If you want to minimize withholding taxes, do not invest in any foreign, non-U.S. ETFs or stocks through your registered accounts because these withholding taxes can’t be recovered. They can be recovered if you’re investing in these using non-registered accounts,” Khabas says.
“You also have to consider the cost of foreign-exchange conversion and transaction costs for buying and selling,” she adds.
What ultra-HNW investors really need to consider, though, are the same principles that every investor should think about, Dietz-Graham says.
“Don’t let yourself get caught up in the latest trend. Avoid the emotional roller coaster,” she says.