It’s hard to get data on the investment patterns of the very wealthy. Many surveys are intended to cover the entire population, from to bottom, so they don’t offer many data points for looking at the behavior of the top 1% or the top 0.1%. In addition, any survey about economic facts, like personal wealth, is only as good as the memories and willingness-to-disclose of those taking the survey.
Thus, one of the hot topics in economics research is finding ways to access “administrative” data–which refers to data that was collected for other purposes, but in an appropriately anonymous form can be made available to researchers. For example, researchers looking at income inequality have found ways to used appropriately anonymized income tax data. For wealth data, Cynthia Mei Balloch and Julian Richers found a source of such data to address the question of “Asset Allocation and Returns in the Portfolios of the Wealthy” (presented at the 2021 Conference on Research in Income and Wealth held at the Summer Institute of the National Bureau of Economic Research, July 19-20, 2021). Just in case this isn’t yet broad knowledge in the economics community, I’ll also add that the NBER holds many workshops, methods lectures, and mini-conferences during its Summer Institute, and hours of material of of top research economists presenting their current work is available at the NBER YouTube page).
Here’s how Balloch and Richers describe their data:
[W]e use anonymized portfolio-level data from Addepar, a leading technology provider for the wealth management industry. Addepar provides an advanced financial reporting and analysis software platform for private wealth advisors. These advisors range in scale from single family offices to large wealth management firms with thousands of individual advisors and client portfolios. Advisors use the platform to get a comprehensive picture of asset holdings and returns across different asset and sub-asset classes, ranging from standard equity and fixed income investments to private equity, real estate and collectibles. While individual investors can access their own account data directly, advisors are the primary users of the software. These include family offices, private wealth advisors at banks, and
other advisors. Across 373 managing firms, we observe over 50,000 client portfolios on the platform, each representing an individual household. The range of total holdings ranges from the mid-six
figures to multi-billion dollar portfolios, with an average total size of portfolios of 16.8 million
(median 1.3 million) at the end of 2019. By this time, there are close to 1 trillion in assets
recorded on the platform …
With this data, the authors are observing changes in market values over time; for example, they can see both realized and unrealized capital gains. Because the wealth managers want to know about all aspects of health, this data also includes information on wealth held in private businesses and in real estate. Again, this data is the actual investments of the wealthy, not what the wealthy say when they fill out surveys about their wealth.
What are some of the main patterns that emerge?
One is that as wealth increases, people are more likely to put a larger chunk of their money in “alternative assets,” which is a category that refers to special funds like private equity funds or hedge funds. A second pattern is that as wealth increases, the average rate of return goes up, but so does the level of risk:
Among investors with less than three million in assets under management, the average return is 4.38 percent, while for investors with more than 100 million in wealth, the average return increases to 6.37 percent. This pattern of increasing return is mirrored in the standard deviation of returns, which rises from 13.9 percent among the least wealthy investors to 19.8 percent at the top of the wealth distribution.
Among other kinds of investments–bonds, stocks, mutual funds, exchange-traded funds–the returns on assets for the wealthy are basically the same as they are for everyone else, after adjusting for the risk of each kind of investment. However, the returns that the ultra-wealthy get from hedge funds and private equity funds are substantially higher than the returns that the less-wealthy get from these categories of investments. This pattern suggests that the ultra-wealthy have access to some combination of better money managers and better investment opportunities than the rest of us.
Those familiar with patterns of how college and universities have invested their endowments in the last few decades will recognize this pattern (for discussion, see “Some Snapshots of University Endowments,” July 22, 2019). The big kids like Yale, Harvard, and others crowded into various categories of alternative investments back in the 1990s, and have made outsized returns in doing in the last few decades. Indeed, the enormous endowments that the wealthiest universities have built up are just as much (or even more) due to canny investment teams as they are to big donors. However, universities and colleges with smaller endowments who attempted to follow the same pattern have generally not been as successful.
Of course, the follow-up question is whether there might be a way to give smaller-wealth investors a chance to benefit from these higher-return alternative investments.