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Citi Global Wealth’s CIO David Bailin shares 2 ways the ultrarich are nailing their investing strategies this year — and the 1 area where they fail miserably

  • David Bailin is Citi Global Wealth Investment’s CIO and cares for the bank’s richest clients.
  • As part of his role, he advises individuals with assets over $25 million on how to grow their wealth.
  • He shares where they are succeeding and failing with their investments so far this year. 

Citi Global Wealth Investments’ David Bailin has a unique insight into the world of the ultra-rich.

As the Chief Investment Officer, Bailin spends his time advising people who have at least $25 million in investable assets on how to grow their wealth, which is serviced by Citi Private Bank.

2021 has been a unique year for all investors, with the US equity markets continually reaching record highs, interest rates remaining at all-time lows and a booming economic recovery threatening to bring significant inflation

And that’s without counting the meme stock frenzy that has seen shares in anything little-known companies to those in “old-economy” firms to explode in price thanks to bursts of buying by retail investors banding together on social media.

Bailin has been in the unique position to see how the ultrarich are playing these markets.

There’s really only one standard of investment advice and only one standard for the quality of investment products, rather than different standards according to investor type, Bailin said.

“There is not one investment for my dad and another investment for all of the rich people in the world,” Bailin said.

And just like retail investors, the ultrarich can have both good and bad investing habits. Bailin breaks down where the super-wealthy are succeeding and failing in investing this year.

Successes by high-net worth investors

1) Private equity and VC investing

Ultra-high net worth individuals have been particularly successful in their activities around the private equity and late-stage venture capital space, Bailin said, which involves identifying and investing in pre-IPO companies.

“One way to take advantage of low interest rates is to actually invest in private equity,” Bailin said.

Low interest rates mean it’s cheaper to borrow and, therefore, private equity firms have access to easy funds and their fund-raising activities increase. It also means they can enter transactions and lock-in low interest rates, which means they can reduce their outflows and increase the return on their investment.

Low interest rates also come into play when a private equity firm is looking to wind up a stake in a company, as they can secure higher valuations and returns. 

2020 was a record year for IPOs and market watchers believe this momentum will continue in 2021.

“It’s a great way to take the environment, a positive new economic cycle, low interest rates, combine them together,” Bailin said. “In short, private equity is a great place to be.”

2) Buying structured notes and products

A structured note contains both a debt security, such as a government or

corporate bond
, and also a derivative element.

So for example, a 10-year government bond can be coupled with a gold futures contract.

The bond component can provide protection, while the derivatives element can provide exposure to any asset class and potential upside.

Citi Private Bank is seeing a lot of activity in this area, Bailin said. In fact, it’s one of the best activities taking place in the ultra-high net worth market.

“There are many ways to either create income from volatility, or to create attractive entry points now; to get more exposure to the equity markets and take less risk,” Bailin said.

And where the rich have failed miserably

Surprisingly, despite appearances, ultra-high net worth individuals aren’t always successful with their investments. Cash management, for example, is one such area. 

Most clients have too much cash on hand and aren’t optimizing their portfolios, Bailin said.

Having a lot of cash can be beneficial in the late stage of an economic cycle where cash could reduce portfolio volatility and increase safety, Bailin said.

But this is the start of a new economic cycle and, with it, will be a period of rising inflation, which erodes the value of cash.

“Clients that have too much cash will actually earn a negative return on that money. All during the beginning of an economic cycle, for several years, they may earn an actual negative return of 1% – 1.5% per year,” Bailin said. “And therefore, having too much cash actually creates a very large drag on real returns.”

The transitory inflation environment means clients could experience a real loss in purchasing power by holding too much cash.

“Part of that is because rates are low, but part of it is because clients aren’t looking at substitutions for traditional fixed income in a smart enough way, in my view,” Bailin said. “So that’s the one area that’s disappointing.”

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