Asset Allocation for Citizenship Portfolios: Maximize Yield, Hedge Against Black Swans

 

When it comes to asset allocation, any private banker will tell you to avoid putting all your eggs in one basket. The Coronavirus pandemic has shown that the same diversification principle firmly applies to investment migration. It’s time for immigration advisors to start offering their clients a portfolio of passports and residency solutions as a first line of defence against extreme circumstances, instead of exclusively focusing on individual country programmes.

Passport and residency portfolio diversification, after all, has the same goal as financial asset portfolio diversification across equities, fixed income, and alternative investments: Protecting and growing wealth by spreading investments across many asset classes to help smooth out volatility and reduce risk.

One citizenship? One basket.
Informed global investor migrants seek to avoid being over-exposed, which is what happens if they hold only a single country’s passport. Just like fluctuating currency values may amplify the volatility of a financial investment, unanticipated political and socioeconomic factors pose unique risks for investment migration. 

There can be no better manifestation of extraordinary risk suddenly crystallising out of the blue than the Coronavirus pandemic, a textbook Black Swan event. An investor betting his or her future on a single passport risks being literally stuck and unable to leave to access better health services and a safe haven for the family. By contrast, investment migrants who were diversified geographically through passports or residency permits were able to expand their mobility horizons during the pandemic. 

“We received our Caribbean passports just days before the lockdown and were able to travel at very short notice as a family to a safe country with low pandemic rate and good medical services. Only a second citizenship gave our family the security we craved for.”

The above remarks from a Russian client whose family received Caribbean passports just before the COVID-19 outbreak succinctly sum up the upside of risk diversification. Even at the peak of the crisis, countries that sealed their borders continued to admit their own returning nationals. International mobility during such an anomalous time of crisis was only possible through citizenship in another country.

See also: Eric Major on Investment Migration After COVID: “Phone Rings The Most During Times of Turmoil”

The pandemic has proven that second passports that can mean the difference between life and death for some, enabling the holder to escape to a safe place that offers advanced medical services. Passport and residency diversification can be an important weapon in the armoury of every long-term investor to protect against unprecedented risks with extreme impact.

Real estate-linked investment migration programmes in countries with secure healthcare systems have proven a reliable risk mitigation tool for investors looking for stability, safety and long-term security during this turbulent time.

Residency and citizenship planning should be a key consideration at a time when wealthy families all over the world are looking at diversifying risk and realigning their investment portfolios in the face of continuing stock market volatility and the oil price slump.

Reap returns by taking risks with part of your portfolio, just not all of it
For investment migration professionals, this is an opportune time to have risk diversification conversations with clients, to help them reassess their global mobility options to safeguard their families and wealth against future shocks. Diversifying via real estate-backed investment migration programmes could provide extra comfort for many.

Just like conventional portfolio diversification spreads risk across asset classes, currencies, and markets, passport or residency diversification helps investors spread the risk across geographies. When there is a pandemic, a natural disaster, or any other Black Swan event, it allows them to move freely to countries with better healthcare and infrastructure. 

Just like high-quality government bonds, the world’s best passports can provide investors with a safe haven during unanticipated turmoil. If a passport unexpectedly underperforms during a crisis, blocking its holder from being globally mobile, then a safe haven passport or residency ensures investors are not left without alternatives.

See also: Andrew Henderson on Investment Migration After COVID: “It’s Going to Be a Reset”

Weighting is another matter to consider. Holding passports of different countries with different strengths allows a useful counter-balance, or hedge, if one fails to deliver. Any individual country’s passport may be vulnerable to political and economic upheaval, natural disasters, unexpected changes in legislation, or a disease outbreak.

But holding citizenships in at least two countries and residency in a third dramatically reduces global risk. If you can’t use one passport to get to where you need to go, you can use the other. And if neither option is viable, chances that your third avenue is also blocked off are merely hypothetical; all three routes would have to fail at the same time. And that virtually never happens, even during a global lockdown.

The potential for income growth is another argument for expanding an investor’s migration horizons beyond the borders of a single country second passport or residency.

A portfolio of properties purchased through residency programmes can be leveraged for rental returns. Such returns are likely to be higher in dynamic and fast-growing emerging markets (in our firm, we tend to favor Turkey) than in the most developed economies. The wealthy European and North American destinations enjoy a stability that emerging markets don’t, of course, but that stability means lower risk, which – in turn – translates into low, even stagnant, yield potential.

A country like Turkey poses a variety of risks that more developed countries wouldn’t (currency risks, political risks, and so on) but the yield potential is correspondingly greater. Reliable Canada will only pay you 0.52% annually if you lend it your money for a decade; Argentina will pay you 37.32% for the same because repayment is far from assured.

In every asset class, be it bonds or real estate, investors must choose between high-risk/high-yield and low-risk/low-yield positions. In the residency and citizenship asset class – for such documents are assets – this trade-off is no different. And in exactly the same way that a fund manager allocates part of his portfolio to venture capital (high-risk/high-potential), part to publicly traded equities (medium-risk/medium-potential), and part to T-bills (low-risk/low-potential) – all weighted according to his/her risk profile – an investor migrant can get downside protection with a Western-world citizenship and also the chance to double their money in a few years by buying real estate priced in a beaten-up currency, like the lira.

Periodically rebalancing the portfolio
Long-term performance monitoring would be another consideration. Advisors should cultivate a durable relationship of trust with their clients and assist them reassess their residency and citizenship portfolio periodically to see if re-balancing and re-allocation are required as life events take precedence and goals shift. Your children might decide to attend university in a country to which you don’t currently have access; the country whose passport you obtained for its mobility strength might lose important visa-waiver privileges.

Continuing high levels of interest in residency and citizenship by investment schemes during the pandemic shows that more and more wealthy individuals are looking at global mobility options as a way of diversifying against risk. In the case of COVID-19, smaller countries and island nations have continued their popularity with investors. We have also seen continuing demand for Cyprus and Malta during the pandemic as they had low rates of infection, good infrastructure, and world-class healthcare facilities. Ditto for Vanuatu, which has remained totally COVID-free throughout.

See also: Historic Comeback for Portugal Golden Visa: May 2020 Best Month on Record

A word of caution, however. Trying to handpick winners and losers amidst residency and citizenship programmes would be akin to trying to time financial markets. Such an approach carries a high event risk and more often than not, may not work. After all, it is impossible to predict how any individual passport investment will perform in the face of a totally unexpected risk event.

So a more prudent approach would be going back to the principle of diversification to spread investments broadly to maximise the probability of being invested in the right place at the right time.

Citizenships and residence permits are assets. Treat them as such.

Tatiana Tolstaia AuthorSubscriber
Managing Partner UK , Beyond Immigration

Tatiana is an attorney-at-law and Managing Director for the UK office of Beyond Immigration. A native Russian, she has been living and working in London for the last decade, focusing on immigration law.

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