in Britain have taken little or no action in the past year to
shelter their net worth from the credit crunch, according to a
recent survey. And this is despite a fall of a third in the wealth
of the ultra-rich in the past year. John Evans
reports.
High net worth (HNW) investors in Britain have remained
surprisingly apathetic in the face of collapsing stock markets,
other financial assets and real estate.
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Even where high net worth investors have taken action to lessen
the impact of the crisis on their assets, it has mainly been to
move into cash in a shift away from riskier investments, according
to a survey by wealth consultancy Tulip Financial Research.
Separate research shows how quickly wealth is evaporating in the
UK. Consultants at MDRC estimate that financial assets among ultra
high net worth individuals – those with more than £5 million ($6.9
million) in free assets – fell by a whopping 33 percent in
2008.
Overall, the number of HNW individuals in Britain fell by
106,000 last year to stand at 465,000 by this January – a fall of a
fifth and the largest annual decline in the numbers of wealthy
since 1980. The financial assets of this group fell by 17
percent.
The affluent market segment fared better, where numbers only
fell by 11 percent to 1.66 million individuals, MDRC estimated.
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By GlobalDataRichard Williams, the consultancy’s managing director, forecasts
there will be little or no market growth this year. In fact, it is
possible that wealth will contract even further as the full extent
of exposure to financial products linked to Lehman Brothers, AIG
and Madoff Securities – and possibly others – comes to light, he
suggests.
And because so much UK wealth is linked to high-paying salaries
and bonuses in the financial sector and real estate investments,
the HNW sector may not “fully recover until 2012 or beyond.”
JPMorgan Asset Management, in its own research on the UK wealth
sector, expects the numbers of individuals in the UK who can be
defined as high net worth, typically with assets of $1 million or
more, to dip significantly in the short to medium term, probably up
to the end of 2010.
“There will also be a severe impact on the flow of young
up-and-coming clients due to the impact of the credit crunch on
employment and remuneration levels in key sectors such as banking,”
said Jasper Berens, head of UK retail at the US fund manager.
The Tulip data showed that ultra high net worth (UHNW)
investors, those with more than £10 million of net assets, were the
most proactive in seeking wealth preservation strategies, but even
within this elite group less than two-thirds acted to protect their
portfolios.
Of these “ultras”, 61 percent of those questioned had sold off
risky or other non-cash investments. That proportion fell to only
28 percent of ordinary HNW investors, those with £4 million or more
of net assets.
|
ASSET ALLOCATION |
|||
|
HNW and UHNW asset allocations – December |
|||
|
December |
January |
Index 2007-09 |
|
|
Index of change |
|||
|
Individual company shares/equities |
34 |
34.3 |
101 |
|
Investment trust shares |
3.3 |
7.6 |
230 |
|
Unit trusts or OEICs |
11 |
6.9 |
63 |
|
Other investment fund shares |
2 |
5.5 |
275 |
|
Cash in savings accounts or similar |
16.1 |
17.9 |
111 |
|
Gilts or gilt funds |
1.9 |
2.7 |
142 |
|
National Savings bonds or certificates |
3.5 |
5 |
143 |
|
Residential property excluding own |
5.9 |
6.7 |
114 |
|
Property funds or REITs |
2.3 |
1.6 |
69 |
|
Commercial property as an investment |
1.1 |
3 |
270 |
|
Structured products like capital guaranteed |
3.7 |
2.5 |
68 |
|
Corporate bonds |
5.2 |
1.3 |
25 |
|
With-profits smoothed insurance funds |
4.3 |
1.3 |
30 |
|
Commodities or commodity funds |
1 |
0.6 |
60 |
|
Alternative investments like wine, art, |
1.7 |
1.5 |
88 |
|
Source: Tulip |
|||
Research: UK
Spreading deposits across banks
About 40 percent of both client segments used a larger number of
banks for cash deposits and cash investments so as to spread their
deposits more widely.
Forty-four percent of the “ultras” built up stocks of physical
cash, a ratio that fell to 38 percent of HNWs. Eighteen percent of
ultras invested more in gilts, national savings or other safe
havens, a ratio that fell to 8 percent of HNWs.
None the less, where significant changes in asset allocation
have taken place, a major move has been seen out of unit trusts
into investment trust shares and other safer investment funds,
Tulip research found.
The HNW/UHNW allocation to unit trusts has fallen by over 30
percent, partly compensated for by increases in allocations to
investment trusts and other safe havens like absolute return or
strategic bond funds.
There’s also been a move away from complex, convoluted
investments like structured products and other similar constructs.
This has been fuelled by investor cynicism about banks’ abilities
to invent safe, viable products of this type, Tulip observed.
But there has been a surprising rise in the allocation to
residential and commercial property as opposed to property funds.
This is not the result of active investor intentions but results
from the lack of short term liquidity for these kinds of
investment, Tulip thinks.
Tulip managing partner John Clemens believes that there are two
reasons behind the surprising degree of apathy among the
wealthy.
Firstly, this lethargy among investors mostly stems from a lack
of investment knowledge and ability, but which often masquerades in
the minds of the wealthy as “caution”; and secondly, lack of
accessible professional advice.
“Those taking professional advice – just over half – have acted
much faster, indicating that it’s this inability to know what to do
that drives inaction,” Clemens says.
Tulip reiterated its belief, based on past research, that the
marketing of professional wealth advice is poor and that new
business acquisition is too dependent on referrals.
“Yet many of the wealthy are new to wealth and just do not know
where trustworthy professional advice can be found,” Clemens says.
“Much can be done to protect wealth from today’s ravages as is
shown by the actions of the active wealthy investors. This report
should be a call for more proactive marketing from professional
wealth advisers seeking additional business.”
Why have the ultra-wealthy, generally a segment regarded as
being the most sophisticated of investors, been so badly hit by the
crisis? JPMorgan’s Berens believes the wealthy are seeing income
levels far more severely hit than during the 2002-03 dotcom crash
because this time, stock market declines are steeper and faster.
And, crucially, property isn’t providing insulation in the current
shakeout.
“The nature of the credit crunch means that property – often
relied upon to have a low correlation to stock markets – is also in
sharp freefall,” said Berens.
“So whereas UK house prices actually appeared to accelerate
during the dotcom crash – thus insulating personal wealth from the
impact of falling share prices – this time around property prices
have fallen by around 20 percent from their August 2007 high.”
Meantime, MDRC’s Williams sees profitability becoming a problem
for advisers in a shrunken wealth sector which may not recover for
several years.
Income derived from ad valorem fees on assets under management
will remain under pressure, he says, declaring: “Those firms
demonstrating better than benchmark performance will be able to
sustain fee structures.
“However, firms that have performed badly are likely to suffer
asset outflows, fee erosion – or both.”
|
INVESTMENT DECISIONS |
|||
|
Action taken by HNWs and UHNWs – ‘Which of |
|||
|
All HNWs & |
HNWs (%) |
Ultra |
|
|
Sold off risky or other non-cash |
42 |
28 |
61 |
|
Used more banks for cash deposits & cash |
41 |
40 |
41 |
|
Built up stocks of physical cash |
41 |
38 |
44 |
|
Increased liquid cash holdings as opposed to |
32 |
20 |
46 |
|
Invested more in gilts, government bonds, |
14 |
8 |
18 |
|
Invested in currencies or currency funds |
3 |
n/a |
7 |
|
Limited investment in corporate bonds to |
1 |
n/a |
3 |
|
Mean changes |
1.9 |
1.3 |
2.5 |
|
Source: Tulip |
|||
CLIENTS
Meltdown in the City of
London hits UK wealth market hard
British-based high net worth (HNW)
investors, who have consistently represented one of the
fastest-growing parts of global wealth in recent years, may have
entered a downward spiral that will never allow them to recover
their former riches.
Two key drivers of the UK HNW sector –
sophisticated City of London financial services and real estate
development – have both contracted sharply in the face of the
credit crisis, and look unlikely to recover to pre-2008 levels in
the short term.
It is the meltdown in the City of London and
associated industries like the hedge fund business that is
particularly worrying, say analysts.
The city will lose more than 60,000 jobs by
the end of this year, the Centre for Economics and Business
Research, a think tank, has predicted. This could include more than
15,000 senior executive positions.
Richard Williams, head of wealth consultancy
MDRC, is particularly gloomy over the prospects for UK wealth, a
marketplace which, along with non-domiciled clients, has been the
bread-and-butter for many private banks.
“Individual wealth creation in London from
investment banking and related activities may never fully recover
to pre-2008 levels,” he contends.
Illustrating how high-end financial services
and big bonus payouts have been a driver of wealth, MDRC analysis
shows that since 1996 more than 60 percent of growth in the UK has
been driven by a combination of the city and property
development.
As a result, Britain has for years been the
star performer of the European wealth scene, while countries like
Germany and France were disdainfully treated as mature markets with
poor growth prospects. That perception is changing markedly as
banks wilt under the global crisis.
Growth in the UK HNW sector has averaged 6.34
percent annually over the past 12 years, the highest in the EU and
second only to the US in world terms. Stripping out the effects of
financial services and property development from UK HNW sector
shows that the underlying growth over the past 12 years has been a
little over 2.43 percent annually.
Property development adds 2.35 percent
annually to HNW growth while financial services adds 1.52 percent
per annum. In contrast, “core” HNW growth in Germany has been 3.58
percent and in France 3.31 percent – some 50 percent higher than
the corresponding UK figure.
At the start of 2008, some 20 percent of the
EU’s HNW individuals lived in the UK, with most of these living in
or near London. By the start of 2009 that figure had fallen to
below 15 percent and may fall further, Williams asserts.
Latest MDRC data shows that in the past year,
the number of UK HNW individuals fell by 106,000 in 465,000, a 19
percent fall and the largest annual decline in HNW numbers since
1980 as the credit crisis gained pace.
