Investment strategies for a global family

As high-net-worth (HNW) families become more mobile and globalized, navigating cross-border financial complexities will continue to increase in importance.

For example, as a global citizen based in Asia with business operations in Canada and children at school in the U.S., investors should look to build a portfolio to meet their long-term financial goals.

But where to start? Understanding the laws and regulatory requirements around the world is a good foundation.

It's also prudent to have an idea of where you want to be in five to 10 years, and what obstacles or needs could lay ahead. Understanding that will help guide your multi-currency and liquidity needs as part of your portfolio construction.

Planning ahead for costly expenses

Perhaps you plan to use US$5MM to expand your business in the U.S. or maybe you have a mortgage for a home in Europe and kids attending university in Canada. Whatever the circumstance, thinking about your currency needs is essential. Making a currency conversion every time you pay for something in another country, could become quite costly. Adding to the complication is the potential difficulty of transferring money across borders, especially in some jurisdictions.

“There's a lot of volatility in the currency market," says Michael Reed, head of RBC Wealth Management in Southeast Asia and chief executive of RBC Singapore branch. “Do you really want to be at the mercy of the pound after Brexit?" adding that this could have "a massive impact on cash flow" if funds are needed at a specific time.

And where do you plan on retiring or spending your money in the future?

According to research by The Economist Intelligence Unit (EIU), commissioned by RBC Wealth Management, 56 percent of high-net-worth individuals (HNWIs) in Asia say, when it comes to their ability to create, preserve or manage their wealth, global economic uncertainty concerns them most. These concerns are highest in Taiwan (65 percent) and Hong Kong (55 percent).

The New wealth rising survey, which targets HNWIs and their adult children, as well as high-earning professionals across China, Hong Kong, Singapore, Taiwan, Canada, the U.S. and UK, looks at the shifting landscape of global wealth, where wealth will be, what it will be invested in, and how it will be invested.

With the largest transfer of wealth in history underway, HNW Generation X and Millennials are becoming the predominant owners of that wealth and major attitudinal shifts are beginning to emerge. Interests are swinging from local to global, smart philanthropy is taking hold, and impact and alternative investing are going mainstream. As wealth shifts—globally and from one generation to the next—the influence of affluence will change.

Reed notes many global executives tend to keep their home currency for a certain portion of their portfolio. “We need to understand how we can invest that effectively for that individual," he says. “I think people underestimate the multi-currency angle."

The New wealth rising survey also found 75 percent of HNWIs in Asia hold savings and cash in the Asia Pacific area.

Understanding global money rules

Before an advisor can put together a portfolio, they need to consider the local rules of where you live, where you're a citizen, where your holdings are. This often means navigating the regulatory framework behind various acronyms.

If you're an EU citizen residing in Singapore, for example, you're allowed to invest in certain funds, such as UCITS (Undertakings for the Collective Investment in Transferable Securities), yet prohibited from other non-approved products, due to EU regulations. UCITS are mutual funds registered and regulated in Europe, and are popular with investors in Asia.

“It's the really simple things that people make mistakes on," Reed says.

This deviates from another example where, if you're a U.S. citizen, regardless of where you live, you should make sure your fund investments are PFIC (Passive Foreign Investment Company) compliant to avoid attracting a tax liability or penalty.

Foreign-based mutual funds and ETFs are a typical example of a PFIC, which are corporations where at least 75 percent of the gross income is “passive" (e.g. dividends, interest, capital gains, rent, royalties), or where at least 50 percent of the assets generate passive income.

The U.S. is one of the more complicated jurisdictions in the world, says Reed, and citizens must be mindful the rules may follow them around the world. In Singapore, you don't pay taxes on capital gains, but if you're an American, you're still required to file U.S. taxes, where short-term and long-term gains are taxed differently. This means a Singaporean money manager may not manage the frictional tax costs the same way a U.S. manager would.

Fixing an error after the fact can be extremely difficult and costly.

A diversified portfolio is key

Another area investors often overlook is their liquidity needs. “A pitfall that families can run into is too much concentration in high-growth illiquid strategies," says New York-based, Ben Goetsch, a senior analyst for Investment Solutions at City National Rochdale.

“Ensuring they have exposure to liquid asset classes is important. And that's especially important in the context of families that have large illiquid holdings already," Goetsch says, adding it's also important from a diversification perspective.

If a family's wealth comes from real estate business, for example, their portfolio should not hold significant real estate investments. In other words, diversify and invest in something different from the family business.

Diversification becomes all the more important considering we're in the late stage of the current economic cycle and not likely to see the same significant returns of the last decade in the coming years.

In the next five years, 36 percent of HNWIs in Asia say their investment strategy will shift towards greater diversification, according to EIU data.

Build your global portfolio

While markets are difficult to predict, City National's Goetsch recommends holding some traditional asset classes such as global equities, with a focus on emerging Asia and the U.S.

While the pace of growth in China has eased in recent years, it's still growing more rapidly than Western economies. The same is true for several other emerging markets in Southeast Asia, making them appealing investment targets.

Europe, still feeling some of the repercussions of the financial crisis more than a decade ago, has seen its growth slow substantially. And with interest rates sitting in negative territory, the region is less attractive for investors.

Outside of Asia Pacific, just eight percent of HNW respondents in Asia say they invest cash and savings in emerging markets such as the Middle East (four percent), Latin America (three percent) and Africa (two percent), according to The EIU.

“Ten years into this expansion, we've seen very high levels of returns in the equity markets globally, and we've seen interest rates come down significantly," says Goetsch, noting valuations for traditional asset classes are relatively high versus history.

“What that implies for the future is that there's a high likelihood that the returns over the next five to 10 years will be generally lower than the return for the last five to 10 years."

This is a sign for investors to look for differentiated sources of return. Some are turning to the loan or credit market. High-yield segments of bond markets, for example, have become popular and there is an increased interest in alternative asset classes, especially among ultra-high-net-worth individuals.

Of the HNW investors surveyed in Asia by the EIU, 42 percent say they invest in hedge funds, 18 percent are active with managed futures and 17 percent hold commodities.

Whatever your risk profile and your goals for the coming decade, being mindful of your needs, the tax implications of your investments, and the regulatory landscape of both your home country and where you reside, are essential building blocks for a diversified portfolio.