Local wealth managers say the distinct investing approaches employed by wealthy Angelenos have helped them sustain, and in some cases even grow, the value of their portfolios this year.
The managers are tight-lipped about client identities — a basic expectation in the industry — but they hint that many of those clients would be counted among the “who’s who” of Los Angeles’ wealthiest.
And although the local wealth managers can’t name names, the strategies they employ are fair game for discussion. Most suggest that a key factor in their clients’ success is an unemotional approach to investing.
“Wealthy individuals tend to operate with an institutional mindset, meaning that they have very long time horizons,” said Justin Frame, UBS Financial Services Inc.’s Los Angeles and Orange County market lead.
These mindsets, according to Frame, help create a “steady keel” that discourages “whipsaw decisions” based on fluctuations in the market. So, when markets go down, wealthy individuals are less likely to sell off investments. Conversely, Frame said, they are also less likely to buy into a stock or other product at the top of the market.
This approach — remaining relatively detached from alternating market panic and euphoria — means wealthy investors are more likely to achieve the well-worn axiom of buying low and selling high, according to Frame.
“The more an investor can take out the emotional component and stick through their strategy, the better off they will be,” he said.
To go a step further and move from simply preserving capital to profiting, Frame said active portfolio rebalancing is necessary. Rebalancing involves selling off assets that have done well, or “selling your winners” in Frame’s words, and purchasing undervalued assets.
“From a sector standpoint, materials and industrials have underperformed prior to this cycle while tech has outperformed,” Frame said. “If you had a rebalancing strategy, you would sell some tech and buy industrials.”
The wealth manager added that the stock market environment during the Covid-19 pandemic demonstrated the efficacy of these investment approaches.
“If, when the knife was falling in April, you sold out, you would have missed the turnaround,” Frame said. “When it feels easy to buy, you shouldn’t. When it feels hard to sell, you should.”
Christiano Manfrè, a professor of finance at Pepperdine's Graziadio Business School and a former investment banker, echoed Frame’s views about the importance of holding to a strategy and the benefits this approach brings to affluent investors.
“Wealthy individuals tend to be a bit more sophisticated and understand a bit more about cycles,” Manfrè said. “If ‘(Average) Joe’ sees the stock market going down, he tends to sell, which is a bad idea because you sell at the lowest point. Then he buys when it goes back up.”
“Wealthy individuals tend to either know about (holding) or consult with people who understand about holding,” he said.
Manfrè added that, in addition to financial acumen, well-off investors typically have a buffer of available capital and expendable funds that many average investors lack.
“Wealthy individuals can afford to stay invested,” he said. “The smaller investors might need that $10,000 or $20,000 (they have invested) in the stock market for things like house repairs. (When the market goes down) they get spooked and pull their money out and lose a lot of money.”
Real estate woes
There is, however, one area where wealth managers say affluent Angelenos have felt the effects of the pandemic: real estate.
“There are a lot of wealthy Angelenos that have a significant portion of their portfolios in real estate,” said Stephen Prough, co-founder of Sawtelle-based Salem Partners and chief investment officer of his firm’s wealth management business. “They are all feeling like that (portion of their portfolios) is smaller now.”
Prough said factors such as the ongoing statewide eviction moratorium, Covid’s impact on L.A.’s retail economy and the uncertain future of office space amid the new remote working paradigm have made many real estate holdings a less sure bet than they once were.
These assets have been in “suspended animation,” according to Prough, as investors attempt to wait out ongoing uncertainties associated with Covid-19.
Giving and planning
Beyond the investment space, the prohibition on emotion-driven asset management among wealthy Angelenos does not seem to have held. Some wealth managers say they have seen an uptick in philanthropic spending among their clients over the course of the pandemic.
According to Caleb Silsby, chief portfolio manager at Pasadena-based Whittier Trust, the mismatch between wealthy investors’ portfolio performance and the broader economy has helped encourage this trend.
“Angelenos are seeing a lot of the organizations they care about losing budget,” Silsby said. “In this recession, because portfolios were up slightly, there was a pickup in philanthropic donations.”
Both Silsby and UBS’s Frame said they had also noted a significant uptick in estate planning requests by their clients.
“Normally we have to bring it up, and no one wants to talk about it,” Frame said. “Now people are bringing it up to us.”
Frame said the most marked shift in this line of business has been among his firm’s “mid-range clients,” which UBS defines as having net worths of at least $1 million. While the firm’s “very high net worth” clients typically already have estate plans in place “because their lawyers told them to,” Frame said there have been significant moves among the slightly less rich to line up plans for their assets beyond their deaths.
Going forward, most of the local asset managers say the two most strategy-defining factors they are watching are the next anticipated federal stimulus package and the Covid-19 vaccine.
“There are pretty decent upside opportunities with both of those,” Frame said. “We are talking to our clients and saying that, ‘If we see some dislocation, should we rebalance, should we move some cash off the sidelines?’”
Whittier Trust’s Silsby noted that the nature of both the stimulus and the vaccine would affect the relative impact of either development. A smaller stimulus package would likely have a correspondingly small impact on local wealth while a vaccine with more limited effectiveness would make for a less dramatic market rebound.
“It won’t get back to normal in the next few years, but a high percentage of normal,” Silsby said. “That will make a huge difference in the portfolios of wealthy Angelenos.”
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