It isn’t just the faint-hearted who cowered during this downturn; the world’s millionaires and billionaires also went underground, seeking refuge in safer and homebound investments, according to the 2009 World Wealth Report from Merrill Lynch and Capgemini.
Globally, the recession-singed high net worth market — $1 million or more in investable assets — suffered a severe shrinkage in terms of headcount, from 10.1 million to 8.6 million in 2008, with the U.S. and Canada together posting the largest dip — 19% — of any geographic region.
The contraction in the global HNW population was exacerbated by the steeper-than-average decline — 24.6% — in the number of ultra high net worth investors with net assets of at least $30 million.
The coffers of the wealthy also became considerably lighter, with the high-net-worth investor class in North America slipping from $11.7 trillion in assets in 2007 to $9.1 trillion last year. Globally, the rich were reduced back to 2005 levels, and became poorer by more than $7 trillion — from $40.7 trillion in 2007 to $32.8 trillion last year.
And with high net worth clients losing money, so did their wealth managers. Their profitability recorded sharp declines as high net worth clients re-allocated assets to lower margin investments. One in four high net worth investors withdrew assets from a wealth management firm or left a firm altogether in 2008. Operational expense growth for wealth management firms fell to 6% in 2007-2008, from 17% in 2006-2007.
Currently, wealthy investors have stashed away half of their overall portfolios into cash and fixed income investments. The report suggests, globally, more than $455 billion flowed into money market funds last year. Fixed income allocations rose to 29% from 27%, and cash holdings rose from 17% to 21%.
A lot of this money came out of equities, particularly in the U.S., where wealthy investors have historically had a much higher percentage of stocks in their portfolios but nevertheless dropped their share of that asset class from 43% in 2007 to 34% in 2008.
But now, HNW clients and their advisors are set to return to risky assets. The report predicts a rebound in high-net-worth wealth, averaging an annual growth rate of 8.1% globally through 2013, and 7% — or $12.7 trillion — in the U.S. and Canada.
In 2010, allocation to equities is expected to recover to 28% and fixed income is expected to rise further to 30%. Cash and deposits are expected to dip to 20% of the assets.
Because the wealth levels will be bouncing back from today’s much lower, post-crash base, the projected rebound will outstrip growth expectations even from recent years, according to Ileana van der Linde, principal in the wealth management practice at global strategic consultancy Capgemini.
However, the sudden flood of money will bring another set of worries. Audrey Robinson, chief investment officer at WaterStreet Family Wealth Counsel, says the high net worth clients are already beginning to be anxious about how to protect their assets against inflation. “They’ve started talking to us about investing in commodities, hard assets and real return bonds.”
Wealth managers at WaterStreet are exploring derivative-based practices used by family offices south of the border, Robinson says. In preparation for what’s coming next, she suggests a staggered approach, and commodity funds that invest across a broad spectrum, including precious metals.
As conditions improve, Dan Sontag, president of Merrill Lynch Global Wealth Management sees encouraging signs. “Now, investors appear to be hitting the brakes on the movement into safer investments, and could start to head in the other direction.” he noted, citing Merrill’s own experience in recent months, where investor portfolio allocations to cash and cash equivalents peaked at 23% but have since fallen to 22% of the $1.3 trillion in assets that the firm holds. “That’s the beginning of the evidence that clients are either dissatisfied with the low rates of return or they’re beginning to move out on the risk curve here,” he said.
Merrill Lynch has also seen renewed interest in a new Federal Deposit Insurance Corp. — insured money market equivalent product — it rolled out for high-net-worth investors in partnership with the brokerage’s new parent, Bank of America, that earns 50 basis points. Sontag says in less than a month, the product has garnered $5 billion in assets, including $3.5 billion in money new to the organization.
However, once the market dynamics shift, so will the balance of power. Asia is all set to surpass the U.S. and Canada as the region with the most wealth overall at $13.5 trillion in 2013, thereby ending the western stronghold on wealth.
(06/26/09)