To hedge against inflation, wealthy stock up on hard assets

Gold, timberland, farms rise in demand

May 2, 2010 @ 12:01 am

By Hilary Johnson

Although it is debatable whether inflation will become a problem for the U.S. economy, wealthy investors aren't taking any chances and are piling into tangible assets.

One benchmark indicator, gold, has been especially attractive recently. The SPDR Gold Shares ETF (GLD) had total assets of $40.4 billion as of the end of the first quarter, a 21.3% increase from $33.3 billion a year earlier, according to State Street Global Advisors.

Wealth managers report that their clients are increasingly interested in direct investments in timberland, farmland, mines and real estate.

Tangible assets such as gold traditionally maintain their value even as prices rise and the purchasing power of the dollar falls.

“We do fervently believe a collection of tangible assets will be an important inflation-fighting tool as inflation becomes more of an issue,” said Rick Pitcairn, chief investment officer of Pitcairn, a family office with $3 billion in assets.

“We're definitely seeing an overarching fear about inflation,” said Sam Katzman, chief investment officer at Constellation Wealth Advisors, which manages $4 billion.

Bank of America, U.S. Trust has helped high-net-worth clients invest about $200 million in direct investments in hard assets over the past few years, an amount that Dennis Moon, who heads the firm's $17 billion specialty asset management business, called “a sizable increase.”

He said that he has been especially busy recently and is helping one family worth about $1 billion negotiate a $50 million direct investment in timberland.

Many economists and money managers think, however, that though it is prudent to prepare for faster inflation, the risk of deflation is far greater, given overcapacity, stagnant wages and contracted credit. Just last week, the Federal Reserve said: “Inflation is likely to be subdued for some time.”

David Kelly, chief market strategist at J.P. Morgan Funds, emphasized that point at a recent meeting of the Financial Planning Association of New York. Inflation “is a possibility to hedge against,” he said, but “in the next three to four years, we will not be dealing with it.”

At GenSpring Family Offices, which oversees nearly $19 billion in assets for a number of families, the strategy is to consider and prepare for both possibilities but to err on the side of inflation.

Andrew Mehalko, the firm's chief investment officer, recommends that clients always have part of their portfolios in commodities, but in both long and short positions.

Should inflation gain traction, Mr. Mehalko will tweak his firm's recommended asset allocation to include more “hard” assets in the illiquid portion so that about a quarter of the typical 20% illiquid allocation could be in tangible investments.

BULLISH ON TIMBER

The firm wants to put more money to work in timber, which not only is a good inflation hedge but which should also increase in value as the housing market improves, he said.

Mr. Moon is also bullish on timber, and so are his clients, he said.

“Clients are saying, "Tell me about timberland. How do I fit it in, how do I get access to that asset class, what are the entry levels?'” Mr. Moon said.

Wealth managers caution advisers against overallocating to illiquid assets and instead consider a client's overall portfolio and net worth.

Mr. Katzman recommends that no more than 30% of a portfolio be tied up in illiquid investments such as real estate or timber.

For those wealthy clients who can afford to tie up money for the length of time it takes to make a sizable return on an investment such as timber, doing so can also be a matter of good financial planning, said Thomas Schneeweis, president of investing consulting firm Alternative Investment Analytics LLC and a professor of finance at the University of Massachusetts at Amherst.

A planting of trees that takes 18 years to grow to maturity might be just the right choice for college savings, for example. That is one reason that to a certain extent, the wealthy have always been active in these asset classes — it is a good way of matching assets to liabilities.

“Less liquid tangible and long-term-duration assets offset long-term anticipated liabilities,” Mr. Schneeweis said.

“You have to look at the investment duration of the asset.”

E-mail Hilary Johnson at hjohnson@investmentnews.com.

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