How the ultrahigh-net-worth investor prepares for a recession

Robert Janson’s clients are always fixated on protecting their money. Most of them, after all, have a lot to lose with investable assets exceeding $10-million and stretching into the billions.

Amid persistent predictions of an impending recession, the president and chief investment officer of Toronto-based Westcourt Capital Corp. has had a growing number of queries from his ultrahigh-net-worth (UHNW) clients on what precautionary measures they should take to weather an economic storm.

“No one has a crystal ball, but they’d rather be a little bit too early than too late for sure,” Mr. Janson says of his clients’ desire to be pro-active and try to prevent losing money in a downturn.

Concerns around a looming recession have Mr. Janson and many other investment managers thinking more strategically about how to protect their clients’ wealth, which includes everything from traditional stocks and bonds to alternative assets such as real estate, private equity and debt.

Mr. Janson, who still has “deep, long scars” from the 2008 recession, which he spent in Switzerland as a portfolio manager, says his main advice for UHNW individuals is to diversify. By spreading assets around, investors have a better chance of softening the blow to their overall portfolio if one sector is hit harder than others.

“Too many Canadians have too many eggs in one or two baskets, usually stocks and bonds,” Mr. Janson says. “You should be thinking about all asset classes, whether that’s stocks, bonds, private equity, private debt, real estate debt, real estate equity, hedge funds and others.”

Mr. Janson also keeps an eye on real estate investments as an opportunity. Housing prices typically fall during a recession, and more homes hit the market when owners can no longer afford the mortgages or need to shore up cash.

If the UHNW want to be involved in real estate in a recession, Mr. Janson recommends they look for “defensive” pockets in the market. For instance, he’s noticed some resiliency in the apartment market, which has seen strong, unwavering demand in recent years in most big Canadian cities.

Greg Rodger, the chief investment officer at HighView Financial Group in Toronto, recommends his clients zero in on income-producing commercial real estate opportunities that can be more immune to market troubles.

“If it is a consumer-led recession, and it is happening because interest rates have shot up significantly, then I am not sure I would want to be in residential real estate as an investor,” Mr. Rodger says. “Commercial real estate will go through its downturn as well, but we take comfort in the regular income that continues to be distributed from it.”

Investors are unlikely to find similar comfort in the high-yield bond market, he says. “As investors have reached for higher yields in this low-interest-rate environment, they’ve neglected to consider the quality of assets they are investing in,” Mr. Rodger says. “I think in the downturn there will be some significant defaults on those types of investments.”

Mr. Rodger advises his clients to pare back on riskier investments and start taking some profits. He’s also telling his UHNW clients to be even more selective about what they invest in.

“It’s critical to avoid investments in companies – public or private – that have excessive debt,” Mr. Rodger says. “Highly levered companies can have a very difficult time as revenues and earnings decline during a recession. Likewise, investors should be extremely cautious of carrying too much debt personally when going into a recession.”

Leanne Scott, a vice-president and portfolio manager at Vancouver-based Leith Wheeler Investment Counsel Ltd., regularly cautions clients against trying to “time the markets.”

It often leads people to sell their equities and go into bonds, she says, and can come with a downside – missing several quarters or even years of market gains.

“Anyone who lost faith in the ability of the economy to keep growing a few years back, or were spooked at rising interest rates last year, would have sold too early and missed the last few years’ worth of gains,” Ms. Scott says. “Or worse, back in 2008, when some believed that stock markets would continue their decline, they started selling their equities after taking heavy losses at exactly the wrong time.”

Instead of making decisions based on what they think will happen, she recommends UHNW individuals focus on a long-term plan that takes advantage of one of their biggest assets: time.

Because their wealth is plentiful, Ms. Scott says UHNW individuals can afford to make decisions based on seeing outcomes in three-to-five years. The most recent recession lasted roughly 18 months.

“The UHNW do have a long time-horizon. Their wealth is intergenerational. They are going to pass it down, and so they should have the ability to look through a recession,” she says. “It’s important they remember a recovery will eventually follow.”