Fund view: Rich trim gold holdings, buy art

ZURICH Thu Sep 1, 2011 11:36am EDT

An employee displays a gold tooth at a shop that purchases gold in the Ginza district of Tokyo August 23, 2011. REUTERS/Toru Hanai

An employee displays a gold tooth at a shop that purchases gold in the Ginza district of Tokyo August 23, 2011.

Credit: Reuters/Toru Hanai

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ZURICH (Reuters) - Some of the world's richest families are cutting their holdings in gold to take profits on the run-up in prices and are buying high-end art to preserve their wealth during market turmoil, an executive advising these families said.

While many of these families have been holding gold for a decade or more, building positions of up to 15 percent of their investment portfolio, they are now taking profits and putting the money to work in the art market, said Andrew Nolan, a director of wealth management and advisory firm Stonehage.

"Families were well ahead of the market on gold. A lot of them were sitting on large amounts of gold for quite a while," said Nolan, whose company manages $2 billion and advises around 100 families with total wealth of around $30 billion.

"Families are putting more into the art market, which held up far better through the crisis than a lot of other assets. There are more emerging markets buyers now, they want trophy assets, which supports prices."

Although liquidity has become more of a concern since the financial crisis, rich families are prepared to tie up some of their wealth long term in developing investment themes like farmland and forestry, as well as "lifestyle assets" like art.

"If they are investing true family wealth, they are prepared to take a longer-term view," Nolan said.

Since the financial crisis, he said, these families are more focused on risk management and have slashed investment leverage.

When investing in financial assets, they are avoiding hard to understand investments in favor of simpler products and while they have 15 percent and more in hedge funds they are largely avoiding illiquid and complex strategies.

"They are avoiding 'black boxes' and 'structured notes'. They do not want that sort of illiquidity or counterparty risk," Nolan said.

"They are not accepting lock-ups or long-time horizons if they do not understand the strategy. They are much more specific in terms of what they expect from hedge fund managers."

MORE FAITH IN CORPORATES THAN SOVEREIGNS

With 20-25 percent of their investments in fixed income products, families are beginning to rotate out of sovereign debt and into corporate debt.

"Many companies are better off than many governments. Families have more faith in corporate at the moment than in a lot of sovereigns," Nolan said.

He said clients usually have a predominant currency exposure based on their home country, where they spend most of their money, but have added currency investments to hedge out value swings rather than to profit from movements.

"They are now tending to take a much wider currency exposure to mitigate downside risk from sharp currency movements. Speculation is marginal," he said.

Many are also very concerned about further turmoil in the banking system. They use multiple banks to keep a lid on counterparty risk, and prefer to deposit with banks that don't have big proprietary investment businesses.

Commodities remain popular, but families are holding fewer physical commodities, and avoiding exchange-traded funds (ETFs), as many have to roll positions monthly and can be easily gamed by hedge funds, Nolan said.

"A lot of families like playing commodities and energy themes through stocks. They are still avoiding banks and financial companies. Three or four years ago they had much more exposure than now," Nolan said.

(Reporting by Martin de Sa'Pinto; Editing by Greg Mahlich)

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