Fund Management

HNW Investors Becoming Conservative in Asset Allocation—Merrill/CapGemini Report

Contributing Editor, 10 June 2005

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The move by high net worth investors into numerous alternative investments continued in 2004, but they are increasingly taking a “hold and s...

The move by high net worth investors into numerous alternative investments continued in 2004, but they are increasingly taking a “hold and see” posture and becoming more conservative in their investment stance, according to the World Wealth Report, compiled by Merrill Lynch and CapGemini.

“With returns drifting lower and market volatility rising in 2004, HNWI levelled off their commitments to equities. As the year progressed, HNWIs’ allocation strategies grew more conservative and more diversified,” said the World Wealth Report.

Nevertheless, equities continued to represent the highest percentage of HNWI portfolio assets—around 34 per cent in 2004 (down from 35 per cent in 2003).

Despite rising interest rates, fixed income investments showed an increase in HNWI portfolios, rising to 27 per cent in 2004 from 25 per cent in 2003. Cash also rose over the same period, from 10 per cent to 12 per cent.

Private Equity

“We are seeing a big increase in interest towards private equity among HNWIs,” said Richard Turnill, chief investment officer of Merrill Lynch’s discretionary business at a press conference announcing the World Wealth Report.

Investment specialists interviewed for the World Wealth Report say the considerable flow of funds into private equity, particularly during the second half of last year, was further evidence of HNWIs’ growing conviction that high valuations can be a much more dependable wealth development strategy than volatile stock markets.

“For now, ultra-high new worth individuals and institutions remain the primary investors in private equity. According to financial advisors, the US remains the most important geography, but Europe is in a fast-growing second position,” said the Wealth Report.

Hedge Funds

Financial advisors interviewed by the Wealth Report say the rate at which HNWIs are investing in these investments has slowed since 2003, as returns have declined from 17.2 per cent in 2003 to 7.5 per cent in 2004.

Real Estate

HNWIs’ real estate allocations declined over the last year, from 17 per cent in 2003 to 13 per cent by the end of 2004.

“While our research does not show a net outflow in this asset class, we believe this relatively low allocation rate signals HNWIs’ desires to harvest returns from now premium-priced holdings to direct profits into other asset classes,” said the Wealth Report.

The downturn in the real estate investment trust market is unsettling the property market, with returns lower in 2004, compared with 2003. The Wealth Report sees HNWIs becoming increasingly risk averse in 2004 and many of them now perceive real estate as a riskier investment.

Regional Diversification

The Wealth Report said regional differences shaped allocation strategies. In North America, equities remain the asset class of choice among HNWIs, with around 41 per cent of their portfolios dedicated to equities. North American investors appear less interested in alternative investments than their counterparts in Europe, Asia and the Middle East.

Asian portfolios held the most equally distributed asset classes of wealthy individuals in any region. Real estate allocations were high in this region, accounting for 19 per cent of HNWIs portfolios. And property investing is also popular in Europe, with HNWIs allocating 21 per cent of their investment holdings to this asset class, the majority of which are in direct real estate.

HNWIs appear to be revisiting their investment desire for emerging economies. This was fuelled by a boom in emerging market stock exchanges, with the MSCI Emerging Markets Free Index returning 24.3 per cent, far higher than 6 per cent to 13 per cent returns possible in either European or American markets.

Europeans increased their share of assets invested in offshore tax havens, with Bermuda, the Cayman Islands and the British Virgin Islands continued to be the locations of choice for HNWIs’ tax-protected investments.

Other tax havens doing well from the trend towards alternative investments are Panama, Liechtenstein, Hong Kong and the Isle of Man.

Foreign exchange markets are being increasingly looked at by HNWIs. But the Wealth Report sounded a note of caution. “While we expected HNWIs foreign currency investments and speculation to increase with the asset class’s growing volatility, their interest was dampened by mounting anti-terrorism concerns and the recent passage of legislation—such as the US Patriot Act…”

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