Wealthy investors have been selling out of property holdings and piling into cash and fixed-income securities, according to research. But the growth in personal wealth in Europe is now lower than high-net-worth inflation, causing some wealth managers to admit that current portfolios may not generate real returns.
Overall, the wealth of high-net-worth individuals (HNWIs), who have assets of more than $1m excluding their homes, increased by 9.4 per cent in 2007, based on figures in this week’s Capgemini/Merrill Lynch World Wealth Report. And, over that period, the number of HNWIs in the world grew by 6 per cent to more than 10m.
In Europe, though, growth rates were lower. Personal wealth increased by only 4.4 per cent in 2007, while the HNWI population grew by 3.7 per cent to 3.1m. In the UK, this slowdown was even more marked. “The number of HNWIs in the UK rose 2.1 per cent to 495,000,” reports Nick Tucker, market leader for UK & Ireland global wealth management at Merrill Lynch.
He attributes this slower rate of wealth generation to the impact of the credit crunch on financial services and constrained lending. It appears to have affected the investment strategies of HNWIs, too.
Property assets have been reduced from 24 per cent of the average HNWI portfolio to just 14 per cent. At the same time, allocations to fixed income have been increased to 27 per cent and cash holdings have been raised to 17 per cent.
This shift to safer, less volatile asset classes has also been seen by other wealth managers. Michael Dicks, head of research and investment at Barclays Wealth, says: “We have certainly found that the recommendation we made last year – to reduce exposure to commercial property and real estate – was very well received by clients. So my sense is that many did sell such assets. Likewise, given fears of global recession, many clients have adopted a more cautious stance – upping the shares of their portfolios in cash and bonds.”
JPMorgan Private Bank, RBC Wealth Management and PSigma similarly advised clients to reduce property exposure, especially in the UK. However, managers differ in their fixed-
income strategies. “JPMorgan Private Bank has increased the overall fixed- income allocation including cash from 34 per cent to 38 per cent,” reports Roberta Gamba. But Peter Charrington, head of Citi Private Bank UK, points to using bonds. “We are seeing significant interest in inflation-linked fixed-income structures where clients can lock in guaranteed real yields.”
But with Merrill Lynch quoting inflation for HNWIs at 6.2 per cent, these investments may be unable to keep pace. “The inflation numbers quoted are a concern to the affluent and super affluent,” admits Byron Coombs of Coutts. “Exceeding this higher rate of inflation may be more challenging than in the recent past.” Roberta Gamba even concedes that “it seems unlikely that all financial portfolios will be able to beat HNW inflation this year”.
So wealthy investors are being advised not skew their portfolios too far towards cash. “With the returns on cash where they presently are, for clients to protect the real value of their wealth they need to take financial risk,” says Gavin Rankin, head of products and services consulting at UBS Wealth Management.