Rich pickings

By Charles Batchelor

The very rich will go on accumulating wealth faster than previously forecast, in spite of the turmoil in financial markets and the US economic downturn, according to a new survey.
A growing demand for “passion investments” – art collections and luxury goods – in Asia-Pacific, eastern Europe and the Middle East is expected to outweigh any slowdown in demand from wealthy individuals in western markets, the 2008 World Wealth Report, produced by Merrill Lynch and Capgemini, concludes. Contemporary art, Ferraris and 200-foot yachts featured prominently on wealthy people’s shopping lists last year.
The wealth report, now in its 12th year, seeks to understand the behaviour of wealthy individuals and the responses of wealth managers.
The report says high net worth individuals – people with net assets of at least $1m excluding their main home – are expected to own global assets of $59,100bn by 2012, an average increase of 7.7 per cent a year.
That compares with a forecast of an annual increase of 6.8 per cent to a total of $51,600bn in 2011, made in last year’s report.
The very wealthy grew richer last year but the very, very wealthy grew richer at an even faster rate. In 2007, high net worth individuals increased their wealth 9.4 per cent to an aggregate $40,700bn while their numbers rose 6 per cent to 10.1m.
But the number of ultra-high net worth individuals – those with free funds of more than $30m each – rose 8.8 per cent to 103,300 while their assets rose 14.5 per cent to $15,000bn. Average assets owned by all these wealthy individuals exceeded $4m for the first time.
The upward revision in the five-year forecast reflects increasingly effective monetary policy that has meant recent US downturns have been shorter than previously. The wealthy have also become more adept at shifting their funds out of troubled markets into more profitable areas, the study shows.
“As the portfolios of high net worth individuals continue to grow more diversified, spread across international boundaries and asset classes, their investments become increasingly mobile,” the report says.
“As growth in one region or market slows, [they] can move freely, re-allocating their funds to other areas, often more quickly than the troubled market itself can react and recover. Ultimately, this evolution will make [their] investments less vulnerable to market downturns.”
Strong economies and buoyant stock markets in three of the Bric nations – Brazil, India and China – meant that they were the main centres of wealth creation in 2007 in terms of the number of high net worth individuals and the wealth they controlled.
India led the growth in the number of wealthy individuals, with a 22.7 per cent increase to 123,000, driven partly by a 118 per cent rise in the market capitalisation of its stock exchanges. The Bombay and National stock exchanges ranked among the world’s top 12 exchanges at the end of last year.
China’s stock exchanges performed even more strongly but the country’s larger population meant that gains per head were lower. At the same time, much of China’s wealth accrued to the “mass affluent” who have yet to break through the $1m wealth threshold.
Even so, China counted 415,000 people with more than $1m in disposable assets, the largest absolute number globally.
Wealth creation in Brazil, meanwhile, benefited from the country’s closer integration into the global financial system.
Russia, meanwhile, saw a 14.4 per cent increase in the number of high net worth individuals to 136,000. This was a slower rate of growth than in the smaller communities of the very wealthy in South Korea, Indonesia, Slovakia and the Czech Republic. Russia is a big energy exporter and hosted the world’s two largest company initial public offerings last year, but it suffers from a lack of modern infrastructure, the report says.
The growing number of high net worth individuals in the developing world reflected in part those countries’ success in attracting new stock market listings. Emerging markets captured seven of the 10 largest IPOs while the Bric nations accounted for 39 per cent of global IPO volumes last year, up from 32 per cent in 2006.
Following a buoyant 2006, the wealthy bet heavily on the riskier asset classes during the early months of last year. But as the year wore on, financial market turmoil and economic uncertainty increased and they shifted their investments to safer, less volatile asset classes. Their overall portfolio allocation to cash, deposits and fixed income securities rose nine percentage points to 44 per cent.
They trimmed their investment in alternative assets from 10 per cent to 9 per cent of their total holdings, though the fall might have been steeper but for the fact that some hedge funds froze withdrawals. Gold, among other commodities, gained in popularity as a hedge against inflation.
Property investments fell sharply out of favour, partly because of profit-taking after a strong 2006, shrinking to just 14 per cent of portfolios, 10 percentage points down on the year before. In general, wealthy investors switched asset allocations to their domestic markets, though the report’s authors said this was “a temporary, tactical move”.
The outlook for 2009 is for a reduction in risk-averse investing and a two percentage point increase in holdings of alternative investments. Wealthy individuals in the Asia-Pacific region are expected to be most bullish with a three percentage point increase in alternatives.
Despite a 6.2 per cent rise in the Forbes’ Cost of Living Extremely Well Index, twice the rate of general inflation, high net worth individuals demonstrated “an unquenchable appetite for luxury items”, the report says. Luxury collectibles, comprising cars, boats, jets, fine art and jewellery, and luxury/experiential travel each accounted for about a sixth of “passion investments.”
Luxury goods makers, high-end services providers and auction houses all found ready clients in the emerging markets – most notably China, India, Russia and the Middle East – to compensate for high-rollers hit by the US economic downturn. “We used to think in terms of hedge funds when targeting new customers,” according to a leading auctioneer quoted in the survey. “Now we look for barrels of oil.”
North Americans have traditionally been the largest purchasers of private jets but in 2007, orders for Gulfstream jets from overseas buyers surpassed those from North Americans. Ferrari recorded 47.2 per cent growth in sales in Asia-Pacific, compared with single-digit growth in the US and Germany, historically its largest markets.
“Limited-edition and classic car prices remained immune to the economic downturn and custom-built motorcycles experienced a boom, with aficionados paying more than $300,000 for some of these one-of-a-kind ‘works of art’,” the reports says. Russians, meanwhile, “took the yacht market by storm”, accounting for at least 20 per cent of demand for vessels longer than 200 feet, according to yacht brokers.
The art market was booming, with strong growth in online auctions and private sales. Buyers were willing to bid up to $1m for items they had not viewed first-hand, while private auction house sales rose as more people chose to avoid being named in the press.
Green investing saw robust growth in 2007, partly owing to an increase in the investment products available. Clean technology investments rose to $117bn, 41 per cent up on 2005.
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