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How do Russian HNWI’s manage their investments?

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Fixed income investments constitute over half the portfolios of the Russian investors, whereas an average weight of the fixed income instruments within the portfolios of HNWI’s worldwide is 37% according to the Knight Frank global research “The Wealth Report 2019”.

Russian HNWI’s are among the most conservative investors globally.

For the first time, Knight Frank scrutinized the investments of the individuals with $30m or more in net worth from different regions of the world – Africa, Asia, Australia, Europe, Latin America, the Middle East, North America, Russia and the CIS. The data was aggregated from various sources around the world in 2018, including analytical agencies and banks. Additionally, 600 family offices and financial consultants were interviewed.

A safer portfolio

According to the study, the wealthiest Russians and residents of other CIS countries are invested in bonds (average share within portfolios – 27%), treasury bills (26%), and in real estate (20%). Moreover, in terms of the share of cash and bonds in the portfolios, Russians are ahead of the representatives from all other regions (share of cash and fixed income instruments varies from 9–24% and 14–24% respectively, depending on the region). Interest in real estate investments among Russians turned out to be around the global average and the same applies to gold (excluding jewelry which makes up 1% of assets).

But the investments of Russian HNWI’s in shares (excluding large stake ownership in companies) do not exceed 16% of their total assets. Only representatives from Latin America (12%) have invested less in the stock market. The leaders in this segment are wealthy investors from North America; the average weight of shares in their portfolios is 40%, as well as Australia (shares constitute 35% of the portfolio on average).

The investor profile of Russians is somewhat different to that of the Western investors. In Russia, the HNWI’s are mainly the owners and top managers of large and medium-sized companies. The pure rentier capitalism is not very common in Russia and CIS countries – in most cases, their own business is the main asset of the Russian HNWI’s. Hence, the rather conservative nature of portfolios and instruments of saving funds.

In the Sberbank Private Banking client portfolios, the share of bond investments rose from 15% (at the end of 2017) to 22% (as of today), and the increase of the share of bonds occurred due to a decrease of the cash and cash equivalents share within the portfolios. The share of investments in alternative investments by customers of this unit of Sberbank amounts to approximately 2%, and remains stable. The sad experience of financial crises, devaluations, etc. is present with the self-made generation of the Russian HNWI’s. Wealthy clients consciously pick more conservative portfolios, which mainly consist of the fixed income instruments such as bonds, treasury bills and bank deposits. From the point of view of the investment psychology, they are more cautious, restrained and thoughtful; first and foremost they strive to preserve what they have accumulated over the years, whereas multiplying their wealth is not their primary goal.

The way the clients structure their assets depends on their personal risk appetite and investment objectives, but most of them perceive the investment portfolio as a long-term financial backup for their family therefore they advocate conservative investment strategy which implies a high proportion of bonds and other low-risk assets within the portfolio. From their point of view, such a portfolio well balances the high risks associated with the business ownership. Last year, the share of the fixed income instruments in client portfolios increased significantly (on average from 10% to 30% of assets), as the risks of reversal on equity markets increased, while the increased rates on the foreign currency deposits became comparable to the yield of the investment-grade bonds.

An exception

However, there are exceptions. Active entrepreneurs are primarily focused on capital gains; weight of shares in their portfolios is usually 50–60%, while private equity funds and high-yield real estate make up a significant share of their portfolios as well.

In general, although it still remains a popular investment asset, real estate is gradually losing the demand of Russian clients in Europe as an investment vehicle. According to Knight Frank, two years ago, the share of real estate in the portfolios of HNWI’s from different countries averaged 35%, while these days it is down to 17–27%, depending on the region. The young generation of wealthy Russians today is actively investing in socially responsible projects, including green energy and P2P investments, through various lending and crowd funding platforms. Investing in the stock markets in Russia still is generally not a very widespread practice.

Structure of investments of UHNWI’s  by region, as a percentage of the total assets in the investment portfolio

Investments, % Africa Asia Australia Europe Latin America Middle East North America Russia/CIS World average
Stock 30 25 35 28 12 25 40 16 27
Bonds 14 24 19 14 22 19 18 27 20
Treasury bill 24 18 16 12 16 14 9 26 17
Private equity 4 4 4 10 9 10 12 7 7
Gold 1 3 1 2 8 1 1 1 2
Real estate 22 23 22 27 17 22 17 20 21
Luxuries 3 2 2 5 11 3 1 3 4
Other 2 1 1 2 6 3 0 1 2

 

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