U.S. high net worth investors are shunning mutual funds, favouring hedge funds and real estate, according to a report from Chicago’s Spectrem Group.

The report examines the investment holdings of so-called ultra high net worth households, defined as those having a net worth of at least US$5 million. It finds that these wealthy investors are seeking higher returns in hedge funds, real estate and other alternative investments as they reduce their exposure to traditional mutual funds. Even before the recent mutual fund scandals, the nation’s wealthiest investors had reduced their holdings of mutual funds to just 6% of investable assets, down from 11% just two years earlier, the report says. And more than two-thirds (67%) say they intend to invest directly in equities over the next 12 months

The report also found that:

  • nearly two-thirds (65%) of UHNW households own mutual funds, but they have declined to the second smallest weighting in these investors’ portfolios (The smallest holding was stock options and restricted stock, 3%.);
  • average mutual-fund balances have declined by 31% over the two-year period to an average of US$1.1 million from US$1.6 million;
  • hedge funds are now owned by 15% of UHNW households, up from 6% in 2001;
  • real estate investments are now owned by 74% of UHNW households;
  • managed accounts jumped to 26% of the average UHNW portfolio – the largest single product holding – from 13% two years earlier.



“The sharp reduction in mutual fund holdings by the nation’s wealthiest investors suggests the industry was falling out of favor even before the scandals that hit late this year. These investors, whom we can assume are some of the most well-informed in the market, have been turning to alternative investments such as hedge funds and real estate in search of higher returns,” said Catherine McBreen, managing director of Spectrem
Group.

“On top of the scandals that are now roiling the industry, this exodus of the ultra high net worth investor raises some troubling questions about the continued status of mutual fund holdings in the portfolios of U.S. investors,” she said.

The report is compiled from data gathered this summer from more than 300 survey respondents. The margin of error for the survey data is plus or minus 6%. The UHNW group comprises an estimated 650,000 U.S. households, or about one half of 1% of all households. However, these individuals are estimated to control up to one-third of U.S. investable assets.