Michael Sonnenfeldt — the founder of TIGER 21, a peer network of ultra-high-net-worth investors — discusses how members of his organization are positioning their portfolios in response to tariffs and market volatility.
In light of President Trump’s recent imposition of 25% tariffs on steel and aluminum imports, what should family offices and high-net-worth investors in general be doing with their portfolios?
You have to look at the family office market as mostly passive investment themes, and the ultimate passive investment theme would be just owning the S&P. So tariffs would have a relatively minimal impact, the more diversified your portfolio is.
But many family offices find the key to long-term superior performance is where they hold direct investments, either because they own a company or they own a piece of a small or big private company. And obviously, the more specific your investments are targeted, the more or less liable you are to be affected by tariffs. If you're part of the fantastic seven that are mostly domestic tech companies — whether it's Facebook or Amazon or Google — which have been driving the economy for a long time, they probably are quite immune to tariffs.
But If you're a Walmart, you're getting a lot of your merchandise from China. And if you're a builder and you're getting steel, that could become much more expensive as well. The most important thing is that the more diversified your portfolio is — and family offices tend to have diversified — the less susceptible you are.
What are you hearing from your 1,600 members?
When we recently polled them, half suggested that there were minimal or no impacts, while half focused on the businesses individually that would be impacted. That means the majority of our members are already past owning a business, so they feel less liable to tariff changes. And the minority of our members that still have direct investments or own businesses completely could feel quite exposed or not at all.
Obviously, steel tariffs and aluminum tariffs have ripple effects throughout the economy, including real estate and other areas you wouldn't naturally think of. Are there sectors that it might be worth cutting your exposure or reducing your exposure?
In terms of sectors — obviously within construction, it’s key to look at where the materials in construction are coming from. When you're a retailer or a reseller of any sort — a Mercedes dealer is probably going to be a lot more concerned than a Ford dealer. Certainly, some Mercedes are domestically produced, and some Fords are produced outside of the U.S., so you actually have to look under the hood with each one. But at the margins, if you were thinking of buying a Porsche, and it is coming from Europe, you're more likely to encounter a headwind than if you're looking to buy a Mustang.
So literally any retailer selling products and services has to kind of look at the mix of their products and services to see where they're coming from.
Beyond diversifying, are there other ways to anticipate the uncertainty of what’s possible in markets in regulatory change over the coming months?
Let’s say you're involved either as an investor or a seller or manufacturer of a product that has a foreign component and a domestic component. If you're investing in the domestic component, at the margin you're gonna get a lift because the foreign component will be more expensive, and you'll get a competitive advantage. That's obviously the whole point of tariffs is to try to level the playing field. But markets historically are as concerned about stability as they are about the substance, and you'd have to question whether this is a stable market environment or not.
We have some numbers that are quite extraordinary. We have what's called an asset allocation, where we track where our members are invested, and we've been doing it since 2006. And today we have $200 billion in assets spread among our 1,600 members. They have an average net worth of about $137 million, which is up from $117 million a year ago. So we know where the members are investing, and the amazing thing is that our members are 79% invested in long-only assets — public and private equity and real estate — and that's a very, very high number.
Some would call it exuberant, and some would call it irrational exuberant. But it shows that over the last six months, members have both liked the U.S. economy and, as Trump was elected, believe that there'll be a positive impact on the economy.
The more revealing number is that for 17 years, the single most constant number in our portfolio was cash. Our members have been holding 12% cash in probably 95% of the quarters where we do the quarterly asset allocation. And last year that number drifted down to 11%. And we had to ask, is that a statistical blip, or is there some meaning to it?
But then in the fourth quarter, the number dipped to 9%. That's the first time I had remembered it being under 10%. I thought it was very meaningful, and when we did the research, we went back and found out that the only other time that the cash was this low was in 2007 right before the financial crisis.
Some would interpret that with confidence, that with the new Trump administration, this is a time to be investing and in fact to reduce your cash security reserves and go all in; and others would be reminded that often is what precedes great market fails.
Warren Buffett just raised an extraordinary amount of cash by selling a lot of stock, and I wouldn't bet against Warren Buffett, although his returns haven't been great over the last years. He has a wisdom that few people have. So you can either think of this as a bullish sign, or you can look in history and realize that sometimes bullish signs actually are harbingers of great market falls.
Are you hearing from your members any insights or concerns about proposals to close the carried interest tax loophole?
Different people have different views about equity. Why would a private equity billionaire pay less on interest than his secretary does on the salary that she earns? That doesn't seem very fair. There are lots of anomalies that pop up in our tax law over the years that favor one group or another, and then those get sort of baked into the background.
And when you go to change them, it takes it out of context. Companies have been getting a benefit, and it's reduced the equity of our society. But I can tell you, if you're a private equity or private real estate general partner, you have lots of good reasons to believe that those are incentives that help you be successful. The economy benefits from that, and there's probably some truth to that, but how much that justifies the extraordinary tax treatment for those earnings is really in the eyes of the beholder.