Serious Money

September 25, 2009 6:53 pm

The rich raise the cry of ‘No surrender’

T he more you have to lose, the harder it is to admit you’ve lost. History books are full of great leaders who – considering what was at stake – simply refused to concede defeat: Charles I, Lord Nelson, Napoleon Bonaparte, Silvio Berlusconi…

In 1647, in spite of the Parliamentarians’ outright victory, the Stuart king was unwilling even to negotiate a settlement – although, arguably, he had more to lose than just the £2m that his queen, Henrietta Maria, had raised by pawning the family jewels (not including the 280-piece silver dinner service that they lost off the coast of Scotland).

In 1801, with his flagship under heavy fire at the Battle of Copenhagen, the British admiral raised a telescope to his blind eye and declared “I see no ships” – perhaps with one eye on his public sector pension of £2,000 a year, and a lump sum of £120,000.

In 1814, under seige from the forces of Britain, Prussia, the Netherlands and Belgium, the French emperor would not contemplate his loss – even though he had already spent 63m francs of his personal fortune on defending his throne.

And, more recently, in 2006, the Italian prime minister simply disregarded poll results showing he had lost power to Romano Prodi and demanded a recount – but being in office was worth $4bn a year to him, according to estimates from Forbes magazine.

More recent history has resulted in financial – if not personal – losses of even greater magnitude. In the global financial crisis of the past 12 months, steel magnate Lakshmi Mittal has seen his £33bn fortune shrink to £9.5bn, Carphone Warehouse founder Charles Dunstone has lost a third of his £904m shareholdings, Sir Richard Branson has seen the value of his £2.7bn empire halve, and Bono, the U2 singer/world authority on everything, has seen his band’s assets diminish by £70m (at least according to the Sunday Times Rich List).

So the findings of the “FutureWealth” study – issued this week by wealth management consultants The Scorpio Partnership in conjunction with Standard Chartered Private Bank – have astounded me.

In the largest research project of its kind, nearly 1,500 individuals with average personal wealth of $2m revealed how their financial situation had changed in the past year. Incredibly, 25 per cent said their wealth had stayed the same and 41 per cent said their wealth had increased. In other words, during the nearest thing to “financial Armageddon”, as Scorpio put it, two out of three wealthy individuals lost no money whatsoever.

So, did they simply put everything into cash deposits and AAA-rated government bonds and retire to their bunkers? Far from it.

According to the research, 78 per cent of these “future wealthy” individuals think they will grow their wealth in 2010. On average, they are targeting a wealth level of around $8m and they are in a hurry to get it – more than half expect to achieve their ambition within a 10-year time frame. They are not going to make this 300 per cent return from a gilt and fixed-interest fund.

So, are the better off just better at investing? Not if the initial findings of an FT Money survey are any indication. In our Private Client Wealth Management report – being published with the FT next weekend – we found that clients of private banks and discretionary portfolio managers have had an average equity allocation of 54 per cent, with another 10 per cent in hedge funds. And we all know what happened to global equities in 2008.

So, have hedge fund managers ridden to the rescue of the wealthy? They have certainly been trumpeting their success of late. Convertible arbitrage hedge funds gained 3.28 per cent in August alone, according to the EDHEC indices, with event-driven strategies up 2.37 per cent and long/short equities gaining 1.74 per cent. Overall, the Lyxor Hedge Fund Index is up 4.21 per cent in the year to date. But this is over a period when the the S&P index rose 13 per cent, and the year after the HFRX Global Hedge Fund Index recorded an average fall of 23 per cent. If anything, hedge fund managers have merely remembered what they were supposed to have been doing during the crisis: delivering modest absolute returns.

So, could it be that two out of three “future wealthy” individuals are suffering from a mass delusion? A couple of possible explanations suggest not.

First, Scorpio’s research found that 96 per cent of those millionaires regarded salary as their “most important source of wealth” – with listed investments coming second – and those in the UK and the Indian subcontinent were most likely to regard entrepreneurship as a source of future riches. In other words, these are the bankers and the business owners for whom investment returns matter less.

Second, an FT/Harris poll being published on Monday has found that average US and European investors now put more trust in their own ability to manage their money, than they do in banks or financial advisers. In other words, it is the wealth management industry that may soon be raising the white flag.

matthew.vincent@ft.com

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