Going Global to Maximize Family Potential

October 6, 2021 – by Shilpa Menon & Tom Garvey

When we talk with international families and ask what they are looking for with their financial goals, we hear two common trends:  the first is global diversification and the second is a desire to better understand alternative investments.

High net worth families across all of the markets we work in have a much more global outlook today.  They also have a higher level of sophistication that allows them to see beyond mainstream investments.

Consider India

When you look at published data on the foreign transfers of Indian residents, there has been a steady, significant rise in outward remittances under the Liberalised Remittance Scheme (LRS). In FY 2020-21, the outward LRS remittance by resident Indians stood at $12.7 bn, from just $1.3 bn in FY 2014-2015 (Source:RBI).  That is an 877% increase over just six years!  

The largest portion of these currency transfers is to support foreign education (30%).  This is followed by global travel (25%) and supporting close family members overseas (21%).  All of these point to a new Indian society that has chosen to go global with family members expatriating for a time to build experience outside India.  

It is not a surprise that the next largest reason Indians are moving money into foreign accounts is for investments.  $12.7 bn (10%) was families moving money to global deposit accounts, international equity markets, debt instruments and real estate investments. 

In many ways, the fact that only 10% of all foreign remittances are for investments seems surprisingly small.  

The next generation of HNI Indian families are clearly becoming more global, with many young members of the family pursuing foreign degrees and choosing to live abroad. And yet, when it comes to making investments, a significant number of families continue to focus on the domestic markets, resulting in a home bias of over 98% in their portfolios. 

The Growth in Foreign Investment in US Equities

In 2020, foreign investors put more than $900 bn into US-domiciled mutual and exchange traded funds during just the first half of the year (WSJ, Refinitive Lipper).  This is the highest amount since 1992.  Clearly international investors have been attracted by the run-up of US equity markets coming out of the pandemic, and the decline of the dollar, but it also reflects the increased access foreign investors have to buying US markets.  

The Brookings Institute’s analysis of the markets in 2019 showed foreign investors owned 40% of US corporate equity.  There is no formal requirement that investors be US citizens to buy US equities.  In fact a number of brokers and fund custodians enable foreign investors and working with a well established firm will help ensure all the required documentation is filed correctly.  This is important given the restrictions and regulations in the 2001 Patriot Act that focus heavily on confirming the investors identity and tracking activity.  

Diversification for Global Families

The question investors ask is, given the global aspirations and requirements of an international family, does a purely domestic investment strategy suffice? What about hedging the risk of local currency depreciation against the dollar? Over the past two decades, the Indian rupee has depreciated annually by about 2.3% against the US dollar and 3.9% against the Euro. 

What about access to investment products that are not available in the domestic market? Or about reducing the overall risk in your portfolio by allocating to “safer” capital markets in more developed markets? 

There may be strategic investments that can deliver a global lifestyle, provide access to better education or healthcare, and open doors to new career opportunities for both the investor and his or her family.

Categorizing Investments

Depending on the need they are looking to address, families can categorize their global investments in three main buckets:

  1. Investments that build assets in a foreign currency: These cover mainstream investments made from a pure asset allocation perspective. The focus here is to hedge against currency depreciation and domestic economic uncertainty, while reaping the benefits of portfolio diversification. It is crucial to work with an advisor who has presence (preferably regulated) and expertise in the offshore market; fully understands your requirements and risk profile; and is 100% aligned to your interest at all times
  2. Investments with Residency or Citizenship benefits: These include a wide range of Immigrant investor programs, e.g: programs like the US EB-5 program or the Portugal Golden Visa Program, that can help gain permanent living, working and studying rights in a foreign country. These investments are made with the objective of fulfilling the family’s lifestyle goals such as better education and career prospects for children, access to better healthcare, personal security, asset protection and global mobility. These are fairly involved, life changing decisions. It is extremely important to fully understand the implications, in terms of lifestyle, assets and taxation before you commit to the process
  3. Access to new ideas: The focus here is on emerging ideas that are not yet available in your home market. Families often scout for investments in the alternative or private market space here. Working with a partner with strong sourcing and manager/investment selection abilities in the foreign market is key

Why Families Go Global

Henry David Thoreau, the American philosopher and naturalist, famously said, “Wealth is the ability to fully experience life”.  Choices can be made only for financial return, but these are dwarfed by choices that allow a family to achieve its full potential.  Life goals are much more important than financial goals, and global investments can very well be a path to a richer future that goes beyond financial return.