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8/8/2019 World Wealth Report 2010-Capgemini and Ml
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Wr Weath Rert
2010
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TO OUR READERS,
Capgemini and Merrill Lynch Global Wealth Management are pleased to present the 2010 World Wealth Report.
Our two firms have been working together for more than 20 years to study the macroeconomic and other factors
that drive wealth creation, and to better understand the key trends that affect high net worth individuals (HNWIs)
around the globe.
The last couple of years have been momentous for wealthy investors and their Advisors. At this time last year, we wereanalyzing the dramatic effects of the financial crisis, which was quickly turning into a global economic downturn.
World equity markets had lost a decade of gains, and volatility had reached record levels. HNWIs were re-allocating to
safer investments and retreating to familiar markets close to home, and Financial Advisors were rallying to restore client
trust and confidence.
A year later, many markets are recovering well and the broader economy, after contracting across much of the world
in 2009, is showing distinct signs of recovery. The HNWI population itself has started growing again, and HNWI
wealth is also recovering. But it is clear from HNWIs asset allocations that they are taking a cautious approach to
investing and risk-taking. Moreover, it seems the lessons learned from the crisis have changed the way HNW clients
will think about investing for the foreseeable future.
Clients are now much more involved in managing their investment choices, asking for more specialized advice,
demanding full product disclosure and transparency. They are more educated about investing and about their own
needs. They now understand that when weighing potential returns, they must weigh the risks more thoroughly.
This years World Wealth Report (WWR) looks at how wealth-management firms are adapting to behavior-driven
investing by clients, and are re-evaluating their advisory processes, risk models and service offerings to cater effectively
to HNW clients in this new paradigm.
It is a pleasure to provide you with our findings, and we hope you find continued value in the WWRs insights.
World Wealth Report
Sallie KrawcheckPresident, Global Wealth& Investment ManagementBank of America
Bertrand LavayssireManaging DirectorGlobal Financial ServicesCapgemini
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4 2010 WoRld WEAlTH REpoRT
State of the
Worlds Wealth
1
HNWIsaredefinedasthosehavinginvestableassetsofUS$1millionormore,excludingprimaryresidence,collectibles,consumables,andconsumerdurables2 Ultra-HNWIsaredefinedasthosehavinginvestableassetsofUS$30millionormore,excludingprimaryresidence,collectibles,consumables,andconsumerdurables
HNWI SEGMENT RECOUPED SIGNIFICANT GROUND IN 2009
time, after falling 14.2% in 2008. Seven countrieswithin the region actually saw their HNWIpopulations recover beyond 2007 levels.
Asia-Pacific HNWI wealth surged 30.9% to US$9.7trillion, more than erasing 2008 losses and surpassingthe US$9.5 trillion in wealth held by Europes HNWIs.
After falling 19.0% in 2008, the HNWI population inNorth America rebounded, gaining 16.6% in 2009.
HNWI wealth there rose 17.8% to US$10.7 trillion.North America remains the single largest home toHNWIs, with its 3.1 million HNWIs accounting for31% of the global HNWI population.
The worlds population of high net worth individuals (HNWIs1) grew 17.1% to 10.0 million in 2009,returning to levels last seen in 2007 despite the contraction in world gross domestic product (GDP). GlobalHNWI wealth similarly recovered, rising 18.9% to US$39.0 trillion, with HNWI wealth in Asia-Pacific andLatin America actually surpassing levels last seen at the end of 2007.
For the first time ever, the size of the HNWI population in Asia-Pacific was as large as that of Europe (at 3.0 million). This shift in the rankings occurred because HNWI gains in Europe, while sizeable, were farless than those in Asia-Pacific, where the regions economies saw continued robust growth in botheconomic and market drivers of wealth.
The wealth of Asia-Pacific HNWIs stood at US$9.7 trillion by the end of 2009, up 30.9%, and above theUS$9.5 trillion in wealth held by Europes HNWIs. Among Asia-Pacific markets, Hong Kong and India led thepack, rebounding from mammoth declines in their HNWI bases and wealth in 2008 amid an outsized resurgencein their stock markets.
The global HNWI population nevertheless remains highly concentrated. The U.S., Japan and Germany stillaccounted for 53.5% of the worlds HNWI population at the end of 2009, down only slightly from 54.0% in 2008.Australia became the tenth largest home to HNWIs, after overtaking Brazil, due to a considerable rebound.
After losing 24.0% in 2008, Ultra-HNWIs2 saw wealth rebound 21.5% in 2009. At the end of 2009, Ultra-HNWIs accounted for 35.5% of global HNWI wealth, up from 34.7%, while representing only 0.9% of the globalHNWI population, the same as in 2008.
State of the Worlds Wealth
Globally, the HNWI Segment Regained Grounddespite Weakness in the World Economy
The worlds population of HNWIs grew 17.1% in 2009(see Figure 1), nearly recovering the unprecedenteddeclines of 2008 even though the global economycontracted (see 2009 in Review). HNWI financial wealthalso grew, posting a gain of 18.9% to US$39.0 trillion (seeFigure 2). The star performer was Asia-Pacific, the only
region in which both macroeconomic and market driversof wealth expanded significantly in 2009.
Regional findings show:
The Asia-Pacific HNWI population rose 25.8% overallto 3.0 million, catching up with Europe for the first
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52010 WoRld WEAlTH REpoRT
STATE of THE WoRldS WEAlTH
FIURE 1. HNWI Population, 2006 2009 (by Region)
(Million)
0
2
4
6
8
10
3.2
3.0
2.6
9.5 10.1 8.6 10.0
3.3
3.1
2.8
2.7
2.6
2.4
3.1
3.0
3.0
0.40.3 0.4
0.40.1
0.40.4
0.50.40.1
0.1
0.1
CAGR 2006-2008 -5.0% Annual Growth 2008-2009 17.1%
2008 200920072006
Number of
HNWIs
Worldwide
(in Million)
North America
Europe
Asia-Pacic
Latin America
Middle East
Africa
25.8%
12.5%
16.6%
8.3%
13.2%
7.1%
% Change Total HNWI Population
2008-2009
Note:ChartnumbersmaynotaddupduetoroundingSource:CapgeminiLorenzcurveanalysis,2010
FIURE 2. HNWI Wealth Distribution, 2006 2009 (by Region)
(US$Trillion)
0
10
20
30
40
50
11.3
10.1
8.4
5.1
37.2 40.7 32.8 39.0
11.7
10.7
9.5
6.2
9.1
8.3
7.4
5.8
10.7
9.5
9.7
6.71.40.9 1.7
1.0
1.40.8
1.51.0
CAGR 2006-2008 -6.2% Annual Growth 2008-2009 18.9%
2008 200920072006
Global
HNWI
Wealth
(in US$
Trillion)
North America
Europe
Asia-Pacic
Latin America
Middle East
Africa
30.9%
14.2%
17.8%
15.0%
20.2%
5.1%
% Change Total HNWI Wealth
2008-2009
Note:ChartnumbersmaynotaddupduetoroundingSource:CapgeminiLorenzcurveanalysis,2010
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2010 WoRld WEAlTH REpoRT6
STATE of THE WoRldS WEAlTH
The size and wealth of Europes HNWI populationgrew in 2009, though moderately. Europes HNWIpopulation rose 12.5% to 3.0 million after dropping14.4% in 2008. HNWI wealth increased 14.2% toUS$9.5 trillion after losing 21.9% in 2008.
The HNWI population in Latin America grew 8.3% to0.5 million, while HNWI wealth in the region jumped15%. While the percentage recovery in Latin Americain 2009 was not as big as in Asia-Pacific, LatinAmerican HNWI wealth is now 8% greater than in2007, while wealth among Asia-Pacific HNWIs hasgrown just 2% during that time.
In 2009, Middle East HNWI population and wealthgrew by only 7.1% and 5.1% respectively, as the regionwas impacted by the Dubai crisis.
While the global HNWI recovery was generally stronger
in emerging and developing nations than in mature ones,most of the worlds HNWI population and wealthremains highly concentrated in three countries. The U.S.,Japan and ermany together accounted for 53.5% of theworlds HNWI population in 2009, down only slightly
from 54.0% in 2008 (see Figure 3). And beyond that, theHNWI ranks remained spread across the globe in muchthe same proportions in 2009 as they had been in 2008.
Asia-Pacific HNWIs, Hit Especially Hardin 2008, Led Recovery in 2009
Several Asia-Pacific countries experienced greater-than-average growth in their HWNI populations in 2009. Infact, the region was home to eight of the worlds tenfastest-growing HNWI populations. Hong Kong andIndia led the pack, after experiencing mammoth declinesin their HNWI bases in 2008.
In Hong Kong, the rebound followed a sharp resurgencein the stock market, where market capitalization surged73.5% in 2009 after falling about 50% the previous year.Market capitalization is a powerful driver of wealth in
Hong Kong, which has a very high market-cap-to-nominal-DP ratio. (Market capitalization is almost 11times that of DP, compared with the global average of0.8 times.) That ratio makes Hong Kong particularly
FIURE 3. HNWI Population by Country, 2009
(Thousand)
0
500
1000
1500
2000
2500
3000
SpainBrazilAustraliaItalySwitzerlandCanadaFranceUKChinaGermanyJapanUS
2,460
1,366
1 2 3 4 5 6 7 8 9 11 10 12
810 861
365 362 346
477 448383
213251
185 164 129 131 127147 143174179222
1,650
2,866
Number
of
HNWIs(in thousands)
Position
in 2008
16.5% 20.8% 6.4% 31.0% 23.8% 10.8% 17.9% 19.7% 9.2% 34.4% 11.9% 12.5%
HNWI Growth
Rate (%)
2008-2009
53.5% of total worldwide
HNWI population
(54% in 2008)
Australia movedback to 10th position
by overtaking Brazil
20092008
Source:CapgeminiLorenzcurveanalysis,2010
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2010 WoRld WEAlTH REpoRT 7
STATE of THE WoRldS WEAlTH
3
IndividualswithinvestableassetsofUS$100,000toUS$1,000,000
vulnerable to losses in wealth when the market declines asit did in 2008, but also produces outsized gains in wealthwhen stock prices rise.
Hong Kong also has a very large proportion of HNWIsin the US$1 million-US$5 million wealth band, so many
had been quickly relegated to the mass affluent3bracket during the losses of 2008and many were justas quickly promoted back to HNWI status when assetprices rose in 2009.
As a result of these dynamicsand given the low base atwhich HNWI population numbers stood after the 2008lossesHong Kongs HNWI population posted a gain of104.4% in 2009. This was by far the strongest rebound inthe world but since it followed a 61.3% decline in 2008,the number of HNWIs at the end of 2009 was still only79% of the number at the end of 2007.
In India, the HNWI population grew 50.9% in 2009.India also has a relatively high market-cap-to-DP ratio(two times DP) and its stock-market capitalizationmore than doubled in 2009, after dropping 64.1% in2008. The recovery was also underpinned, however, bythe strong outlook for Indias underlying economy.
China remained the worlds fourth largest HNWI base,with 477,000 HNWIs, up 31.0%. Stock marketcapitalization in China soared more than 100% in 2009,as the economy grew at a rapid 8.7% pace.
Australia, meanwhile, moved back up to tenth position inthe HNWI-population rankings, overtaking Brazil, aftermany of those who had fallen into the mass affluentcategory in 2008 regained their HNWI status. InAustralia, HNWIs in the lowest (US$1 million-US$5million) wealth band account for 55.4% of all HNWIwealth, so far more HNWIs fall out of the HNWIcategory when wealth declines than is the case inBrazilwhere a staggering 87% of HNWI wealth lies inthe hands of Ultra-HNWIs.
Not All of 2008s Big Losers RecoupedTheir Losses in 2009
Notably, not all the hefty losers of 2008 were able torecover the lions share of their losses. In many cases, therebounds were tempered by underlying macroeconomic
concerns.
For example:
The HNWI population grew strongly in the U.K.(42.7%) and in Russia (21.3%), but those gains did notcome close to recouping the losses of 2008. In bothcases, stock market capitalization surged, but wasapparently more than offset by the effects of thecontracting economy. DP shrank by 5.0% in theU.K. and by 7.9% in Russia, while the stock marketsrose 49.6% and 103.6% respectively.
Some countries, such as Ukraine, Turkey and reece, are
experiencing persistent weakness in their markets andeconomies. reece is a prime example, and its HNWIpopulation continued to decline in 2009 (by 1.2%).
Similarly, the United Arab Emirates (UAE) lost around19% of its HNWI population in 2009, mainly due to thecrisis in Dubai and the signif icant fall (-48.0%) in realestate prices.
Ultra-HNWI Segment Showed Outsized Gainsin Ranks and Wealth
Ultra-HNWIs increased their wealth by a striking 21.5% in
2009, far more than the average in the HNWI segment as awhole. This resurgence followed a mammoth 24.0% loss inwealth for Ultra-HNWIs on aggregate in 2008, and wasmost likely due to a more effective re-allocation of assets.
A disproportionate amount of wealth remainedconcentrated in the hands of Ultra-HNWIs. At the endof 2009, Ultra-HNWIs represented only 0.9% of theglobal HNWI population, but accounted for 35.5% ofglobal HNWI wealth. That was up slightly from 34.7%in 2008.
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2010 WoRld WEAlTH REpoRT8
STATE of THE WoRldS WEAlTH
North America still has the largest regionalconcentration of Ultra-HNWIs. At the end of 2009, thenumber of Ultra-HNWIs there totaled 36.3k (see Figure4), up from 30.6k in 2008, but that was still downsharply from 41.2k in 2007. Regionally, Latin Americastill has the highest percentage of Ultra-HNWIs relative
to the overall HNWI population2.4%, compared withthe global average of 0.9%.
Asia-Pacific will Likely be the Powerhouse ofHNWI Growth in Coming Years
On aggregate, the number and wealth of HNWIs aroundthe world recovered significantly in 2009, but Asia-Pacific was the showcase, thanks to a solid performancein both the economic and market drivers of wealth.oing forward, the BRIC (Brazil, Russia, India, andChina) nations are expected to again be the drivers for
their respective regions. In Asia-Pacific, China and India
will continue to lead the way, with economic expansionand growth likely to keep outpacing more developedeconomies. The regions HNWI growth is likely to bethe fastest in the world as a result. In Latin America,Brazil is similarly expected to remain an engine ofgrowth. Russia is also expected to display strength due to
its commodity-rich resource base.
However, HNWI-wealth creation is always driven by amixture of economic and market factors, and 2009suggests macroeconomic concerns can contain upsideHNWI performance, even when market performance isstellar. Around the globe, then, the creation of HNWIsand wealth is likely to depend heavily on the success eachcountry has in managing the nascent economic recoverywhile driving expansion and handling ongoing domesticand global challenges in financial conditions.
FIURE 4. Geographic Distribution of HNWIs and Ultra-HNWIs, 2009 (by Region)
(%)
0
2
4
6
8
10
0
20
40
60
80
100
3.1 36.3
20.7
19.6
10.7
2.9
3.0
0.43.62.0
0.40.1
Number of
HNWIs
Worldwide
(in Million)
Number of
Ultra-HNWIs
Worldwide
(in Thousand)
HNWI Ultra-HNWI
10.0 93.1
North America
Europe
Asia-Pacic
Latin America
Middle East
Africa
0.7%
0.7%
1.2%
2.4%
1.9%
0.9%
Ultra-HNWIs as %
of HNWIs, 2009
Note:Chartnumbersmaynotaddupduetorounding Ultra-HNWIsaredefinedasthosehavinginvestableassetsofUS$30millionormore,excludingprimaryresidence,collectibles,consumables,andconsumerdurablesSource:CapgeminiLorenzCurveModel;CapgeminiWorldWealthReport2009
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92010 WoRld WEAlTH REpoRT
2009 in Review2009 in Review:MAN DRIERS OF WEALTH REBOUNDED,BUT ECONOMIC RECOER IS STILL NASCENT
WORLD ECONOMY CONTRACTED IN 2009, BUT ASIA-PACIFIC KEPT GROWING
Europe and Latin America was primarily due to the dropin exports and reduction in industrial production(manufacturing, mining and utilities). However,economic growth was evident in some parts of the world.DP grew 4.5% in Asia-Pacific excluding Japan, helpedin particular by strong DP growth of 8.7% in Chinaand 6.8% in India6 (see Figure 5). DP also expanded by1.4% in the Middle East and North Africa7.
World gross domestic product (GDP) contracted 2% in 2009, as the effects of the global financial crisisworked their way deeply into the fundamentals of the global economy. Europe was hit hardest, with GDPshrinking by 4.1% in Western Europe and by 3.7% in Eastern Europe. In Asia-Pacific excluding Japan, however,there was positive GDP growth of 4.5%.
Governments around the world stepped up efforts to stimulate economic recovery and support thefinancial system. Governments implemented a wide array of measures to try and keep their economies fromsliding into recession as financial conditions remained challenging. Those efforts included fiscal stimulus bymany nations, but most sizably by the U.S. and China.
Key drivers of wealth experienced strong gains. Many of the worlds stock markets recovered, and globalmarket capitalization grew to US$47.9 trillion in 2009 from US$32.6 trillion in 2008, up nearly 47%. Commoditiesprices dropped early in the year, but rebounded sharply to end the year up nearly 19%. Hedge funds were alsoable to recoup many of their 2008 losses.
The global economic recovery remains nascent. World GDP growth is likely to be positive in 2010-11 and isexpected to be led by Asia-Pacific excluding Japan. However, sustained economic recovery is contingent uponthe timely withdrawal of government stimulus along with the return of growth in private consumption.
4 EconomistIntelligenceUnit,RegionalData,April2010
5
Ibid
World GDP Contracted in 2009, Hit by theEffects of the Global Financial Crisis
World DP contracted 2.0% in 20094, after growth of1.8% in 2008, as the fundamentals of the global economywere gripped by the effects of the global financial crisis. InWestern Europe, DP shrank 4.1% in 2009, drivenprimarily by ermany and the U.K. Eastern Europe andLatin America were also hit hard, and DP contracted by
3.7% and 2.3% respectively5. The DP contraction in
6 Ibid
7
Ibid
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2010 WoRld WEAlTH REpoRT10
2009 IN REVIEW: MANY dRIVERS of WEAlTH REBoUNdEd, BUT ECoNoMIC RECoVERY IS STIll NASCENT
Fiscal Stimulus Worldwide Sought to StaveOff Recession
At the start of 2009, the effects of the global financialcrisis were becoming starkly evident in many weakeconomic indicators. Aggregate demand was in sharpdecline across the world, and most countries had onlylimited room to reduce short-term interest rates to drivedemand. To keep their economies from sliding intorecession, or at least to limit the downside, manycountries implemented fiscal stimulus plans, usinggovernment spending to provide much-needed support.
Some initiatives were more aggressive than others.South Korea, Russia and China were among the mostforceful, implementing fiscal stimulus measuresamounting to more than 2.5% of DP8. At the other
extreme, Italys discretionary fiscal stimulus amountedto just 0.1% of DP9. In absolute terms, the largestfiscal stimulus was implemented by the U.S. (US$787bill ion), followed by China (US$586 billion). In theU.S., stimulus spending was directed primarily atimmediate tax relief and direct aid to states andindividuals, as well as infrastructure-spendingprovisions thought to buoy longer-term investment inprojects such as high-speed rail, health technology,broadband, a smart electrical grid, clean cars and
batteries, and renewable energy. In China, the mainbeneficiary was infrastructure (railway, road, irr igationand airport construction), followed by allocations toearthquake rebuilding efforts. The other major areas ofallocation were Public Housing, Rural Developmentand Technology advancement.
FIURE 5. Real GDP Growth Rates, 2008-2009
(%)
-10
-5
0
5
10
BrazilMexicoChinaIndiaSingaporeJapanPolandRussiaFranceUKGermanyUSCanada
0.4 0.4 0.5 0.3
5.65.0
1.7 1.4
6.16.8
9.6
8.7
1.5
5.1
1.3
-2.6 -2.4-2.2 -2.0
-6.6
-0.2
-1.2
-5.0 -5.0 -5.2
-7.9
NorthAmerica
Western Europe EasternEurope
Asia-Pacic LatinAmerica
Percent
Change
(%)
20092008
Source:EconomistIntelligenceUnitApril2010.RealGDPvariationoverpreviousyear.
8 ExecutiveOfficeofthePresident:CouncilofEconomicAdvisors,TheEffectsofFiscalStimulus:ACross-CountryPerspective,September10,2009
9 Ibid
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2010 WoRld WEAlTH REpoRT 11
2009 IN REVIEW: MANY dRIVERS of WEAlTH REBoUNdEd, BUT ECoNoMIC RECoVERY IS STIll NASCENT
lobal stimulus measures clearly yielded economicbenefits, but the government spending spree also led to asharp increase in public debt in many major economies. In2009, public debt in the U.S. remained the highest atUS$6.7 trillion (up 24.3% in 2008-09), closely followed byChina at US$6.2 trillion (up 29.0%)10. The combined
deficits of European governments are now more thandouble the 3% mandated under the European Union law11.
Central Banks Cut Interest Rates and KeptThem Low
Although interest rates were already low in much of theworld, many central banks made additional cuts duringQ1 2009. Moreover, most countries kept rates low forthe whole year, recognizing the need to provide supportfor the fragile global economy by keeping the price ofmoney downmaking it cheaper for individuals and
businesses to borrow, and reducing the interest costs ondebt. The Bank of England cut the Official Bank Ratefrom 2.0% in January to 0.5%12 in March amid depressedconfidence and persistent problems in internationalcredit markets. The U.S. Federal Reserve kept its federalfunds rate between 0.0% and 0.25%13 during 2009, andthe Bank of Japan retained its Basic Discount rate at0.3% throughout the year14.
National Savings as a Percentage of GDPDecreased Worldwide in 2009
Changing levels of national savings15 affect wealth bymaking more or less funds avai lable for futureinvestment. In 2009, world national savings as a
percentage of DP dropped to 21.3% from 23.3% in200816. The drop was especial ly sharp in WesternEurope, mainly due to the contraction of DP by 4.1%and the increase in government spending from US$3.06trill ion in 2008 to US$3.13 trill ion in 200917. Amongdeveloped nations worldwide, the decline was led by
ermany (from 25.7% in 2008 to 20.9% in 2009) andJapan (from 25.5% to 21.4%)18. Both countries hadexperienced a contraction in DP. Emerging economiesexperienced a lesser drop than the developed ones. Chinaand India in particular experienced only slight declines,largely because of their strong DP growth.
Private Consumption Dropped Marginallyin 2009
Despite the challenging economic climate, global privateconsumption dropped only marginally to US$29.3 trillion
in 2009 from US$29.4 trillion in 200819
. North Americaaccounts for a third of all private consumption worldwide,and levels there dipped to US$9.9 trillion from US$10.0trillion in 200820. Western Europe, which also accountsfor nearly 30% of global private consumption, similarlyslipped to US$8.5 trillion from US$8.6 trillion. Notably,though, private consumption did not rise in either regioneven though consumer confidence was steady or risingafter having sunk during the crisis. In Asia-Pacificexcluding Japan, private consumption rose to US$4.0trillion from US$3.8 trillion, the second straight year ofhealthy gains, but the region still accounts for only about
14% of global private consumption21.
10 EconomistIntelligenceUnit,January201011 MarkScott,EuropesDelicateDilemma,BloombergBusinessweek,January25,201012 BankofEngland,OfficialBankRatestatistics,http://www.bankofengland.co.uk,accessedMarch15,2010
13 FederalReserve,FederalFundsRatestatistics,http://www.federalreserve.gov,accessedMarch15,201014 BankofJapan,BasicDiscountRatestatistics,http://www.boj.or.jp/en/index.htm,accessedMarch15,201015 NationalSavings=GDP[PrivateConsumption+GovernmentConsumption]
16 EconomistIntelligenceUnit,RegionalData,February201017 Ibid18 EconomistIntelligenceUnit,CountryData,January2010
19 EconomistIntelligenceUnit,RegionalData,February201020 Ibid21 Ibid
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2010 WoRld WEAlTH REpoRT12
22
WorldFederationofExchanges,marketcapitalizationstatistics,http://www.world-exchanges.org/statistics,accessedMarch9,201023 DowJones,DowJonesGlobalSelectREITIndex,http://www.djindexes.com,accessedFebruary4,2010
24 GlobalPropertyGuide,VariationofmonthlypricesadjustedforinflationfortheDecember2008-December2009,February2010
KEY MARKET AND OTHER DRIVERS OF WEALTH SHOWED STRONG GAINS IN 2009
Latin America. The strongest growth was seen in theBRIC (Brazil, Russia, India and China) nations,where market capitalization more than doubled.
Equity-marketvolatilityplungedfromrecordhighsin
2008,butremainshigh. The rapid meltdown inequities in 2008 occurred amid record levels ofvolatility, but that volatility plunged in 2009, and hascontinued to drop in 2010. The daily volatility of the DJWorld Index had sunk to 1.30% by end-2009 from2.48% at the beginning of the year and 2.56% at itspeak in mid-September 2008 (see Figure 7). Inearly-2010, volatility declined further as crisis fearscontinued to fade, though as per mid-April, volatilitylevels still remained above those seen during the Asianfinancial crisis and after the September 11th terroristattacks in the U.S.
Globalrealestateturnedpositive. The global realestate market had suffered heavy losses in 2008, causinga drop of 49.2% in the DJ lobal Select REIT Index 23.In 2009, however, housing prices recovered moderatelyin most countries, largely due to governmentintervention. Hong Kong posted the greatest gains,with housing prices up 20.8%24, helped in part by a
FIURE 6. Equity-Market Capitalization, 2002-2009 (by Region)
(US$Trillion)
0
20
40
60
80
20092008200720062005200420032002
US$
Trillion
22.8
31.5
37.6
42.9
52.2
63.4
32.6
47.9
CAGR (02-07)
22.7%
CAGR (07-08)
-48.6%
CAGR (08-09)
47.1%
APAC: 73.6%
EMEA: 38.0%
Americas: 35.8%
Americas
Europe /Middle East /
Africa
Asia-Pacic
Source:WorldFederationofExchanges,March2010
2009 IN REVIEW: MANY dRIVERS of WEAlTH REBoUNdEd, BUT ECoNoMIC RECoVERY IS STIll NASCENT
Strong gains were evident in 2009 in many aspects ofmarket performance, another key driver of wealth. Majorasset classes (equities, fixed income, real estate andalternative investments) all rebounded after severe losses
in 2008. Commodities also posted substantial gains,while the performance of currencies remained heavily tiedto underlying economic performance.
Notable market developments during the year includedthe following:
Globalequity-marketcapitalizationrosenearly47.1%in2009toreachUS$47.9trillion (see Figure6). lobal equity markets had collapsed in 2008,when capitalization sank 48.6%, and dropped close to2003 levels. In 2009, however, equity marketsrebounded strongly, after an initial dip in Q1 2009, toend the year above 2005 levels. lobal equity-marketcapitalization rose 47.1% to stand at US$47.9 tri llionby the end of the year22. Short-term investors cashedin on the attractive investment opportunities inequities by taking advantage of the consistent upwardtrend across indices. Market capitalization increasedacross all regions, but was led by Asia-Pacific and
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2010 WoRld WEAlTH REpoRT 13
25
DowJones,DowJonesGlobalSelectREITIndex,http://www.djindexes.com,accessedFebruary4,2010
26 JennyStrasburgandGregoryZuckerman,HedgeFundsRegainSomeSwagger,Wall
StreetJournal,January4,2010
27 Ibid
28 CreditSuisse/TremontHedgeFundIndex,http://www.hedgeindex.com,accessedFebruary4,2010
29 JoannaSlater,Up-and-Down2009forDollar,Wall Street Journal,January3,2010
massive influx of buyers from mainland China. In theU.K., the recovery was mainly driven by low interestrates and a lack of supply. In the U.S., housing marketsstabilized as the U.S. Federal Reserve drove interestrates to 50-year lows, and in China, housing prices andsales were boosted by direct government intervention.
The DJ lobal Select REIT Index ended the year withtotal returns of 32.2%, with Canada (86.4%) andSingapore (83.7%) emerging as the top performers25.Although the residential real estate market hasmanaged to bounce back somewhat, the recovery couldbe hard to sustain without ongoing governmentintervention. Commercial real estate prices, meanwhile,are unlikely to recover broadly until there are substantialgains in drivers of commercial real estate demand, suchas job growth, rising incomes and private consumption,and widespread economic growth.
Hedgefundsrecoupedmanyoftheir2008losses.Hedge fund managers remained cautious at thebeginning of 2009 after assets plunged US$500 billionin 2008 from their end-2007 peak of US$1.9 trillion26.Many managers initially kept 50% to 60% of theirportfolios in cash, and some restricted redemptions,sparking an outcry among investors. However, hedgefunds reinvested as the markets stabilized, andcontributed to the resurgence in stocks and bonds.
Hedge funds received more than US$1 billion in netinvestments in Q3 2009, experiencing the first quarterof positive inflows since Q2 200827. This influx broughtindustry-wide assets to US$1.5 trillion. The CreditSuisse/Tremont Hedge Fund Index posted a year-endreturn of 18.6%28. In the near future, however, hedge
funds are likely to face a variety of challenges, includingincreased regulation and higher taxes.
TheUSdollarremainedvolatileduringtheyear.Investors bought dollars in Q1 2009 amid demand for asafe haven while stocks remained in decline. By April,however, investors began to move away from the dollaras central banks around the world stepped up efforts tosupport their economies. The dollars slide wascompounded by the relative weakness of the U.S.economic recovery. By the fall, some countries includingAustralia were even raising interest rates, while the U.S.
Federal Reserve maintained key rates near zero.Encouraged by the availability of cheap money,investors borrowed dollars to buy stocks, gold,commodities and other currencies. In December,however, U.S. data on employment and retail sales weresurprisingly positive, while credit-rating agenciespainted a gloomy picture about some of the Europeaneconomies. This led to a slide in the euro by about 6.0%against the dollar in just three weeks29. At the end of
FIURE 7. Daily Volatility of DJ World Index, January 1997 - April 2010
(%)
Daily
Volatility
of DJ
World
Index (%)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Asian
Debt Crisis
Russian
Crisis
Tech
Bubble
Q4 2008
April 2010
Sept 11,
2001
Source:DowJonesWorld(W1)IndexDailyclosevaluesfromJanuary1st,1997toApril15th,2010;CapgeminiAnalysis
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30 Ozforex,HistoricaldataforselectcurrenciesagainsttheU.S.dollar,http://www.ozforex.com.au,accessedFebruary2,2010
31 DowJones,DowJonesCommodityIndex(DJUBS),http://www.djindexes.com,accessedJanuary29,2010
32
CarolynCui,MetalRallyHasLegstoKeepRunning,WallStreetJournal,January3,201033 Kitco,LondonPMFIXPrices,http://www.kitco.com,accessedFebruary11,201034 Ibid
35 U.S.EnergyInformationAdministration,Cushing,OKWTISpotPriceFOB,http://www.eia.doe.gov,accessedJanuary28,2010
36 Kitco,LondonPMFIXPrices,http://www.kitco.com,accessedFebruary11,201037 WorldGoldCouncil,GoldDemandTrends:FourthQuarterandFullYear2009,February
17,201038 CarolynCui,MetalRallyHasLegstoKeepRunning,WallStreetJournal,
January3,2010
the year, the dollar was up against the yen by 2.1%, butwas down against most major currencies, especially theBrazilian real (-25.2%), Canadian dollar (-14.3%) andBritish pound (-9.9%)30.
Commoditiespostedstronggainsin2009,butcouldnotwipeout2008losses. The Dow Jones-UBSCommodity Index (DJUBS) rose 18.7% in 2009,recouping only some of the 36.6% drop posted in200831. The 2009 commodity rally was driven by metalsas hopes of a global economic recovery spurred demand,and fears of inflation encouraged hedging. Copperrecorded gains of 139.0% as industrial demand soared,and ended the year at US$3.3275/pound32, which wasaround 18% less than the highs of 2008. Silver pricesrose steadily to end 2009 with a gain of 57.5%33. Strongdemand from automakers increased demand forplatinum, which is used in catalytic converters, andlead, which is used in car batteries. Platinum prices rose63.3% to end the year at US$1,466/oz34, and lead morethan doubled in price to US$2,416 a metric ton.
Oilpricesended 2009 at US$79.4/barrel, a gain of78.0% on the year35. Prices more or less tracked theeconomy, falling at the beginning of the year, beforemoving higher as fears about the financial crisis beganto ease. Prices also rose on expectations of long-term
demand, especially from emerging markets. Despite thesustained gains of 2009, prices ended below theUS$145/barrel high reached in July 2008. That highhad been followed by a steep decline that left oil pricessharply lower by the end of 2008. Analysts expect oilprices to rise in 2010 as economies around the world
continue to stabilize.
Goldpricessoaredin2009,fuelledbybroadinvestordemand. old prices increased steadily throughout2009, registering a total increase of 26.9% for the year36.The price of gold peaked in early-December atUS$1,212/oz, but dropped to US$1,104/oz at the end ofthe year amid profit-taking. Challenging economicconditions impacted industrial and jewelry demand forgold, which dropped 16.0% and 20.0% respectively in200937. However, gold saw hefty buying by funds andindividual investors alike, seeking insurance againstpossible inflation and a declining dollar. The worldsbiggest gold ETF, SPDR old Shares, increased itsgold holdings by 45.0% to more than 1,133 metrictons38 in 2009. Central banks around the world,especially those of China and India, were net buyers ofgold in 2009 after decades of selling. old prices arelikely to rise further in early 2010, but may facedownward pressure thereafter, due to expectations thatinterest rates will rise around the world.
2009 IN REVIEW: MANY dRIVERS of WEAlTH REBoUNdEd, BUT ECoNoMIC RECoVERY IS STIll NASCENT
SUSTAINED GLOBAL ECONOMIC RECOVERY DEPENDS ON RETURN OF
PRIVATE CONSUMPTION AND CAREFUL HANDLING OF GOVERNMENT-
STIMULUS WITHDRAWAL
The global economy was supported by extraordinarymeasures from governments around the world in 2009.Central banks favored highly expansionary monetarypolicies, with interest rates at record lows in manycountries, and fiscal stimulus was implemented tosupport economic recovery. As a result, signs ofeconomic resurgence were emerging in many key
sectors in numerous countries in early-2010, but thatgrowth remains nascent. In fact, sustained globaleconomic recovery will depend heavily on how wellgovernments manage their use of, and exit from, theirfiscal stimulus policies, and whether privateconsumption can re-emerge to drive a sustainedglobal recovery.
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39 EconomistIntelligenceUnit,RegionalData,April2010
40 InternationalMonetaryFund,WorldEconomicOutlookUpdate:APolicy-DrivenMultispeedRecovery,January26,2010
41 Ibid
42
InternationalLabourOrganization,GlobalEmploymentTrends,Geneva,January2010
In the year ahead, there are numerous key economicissues to watch, including the following:
WorldGDPisforecasttogrowin2010and2011,aftercontractingin2009. Asia-Pacific excluding Japan isexpected to show the strongest DP growth of anyregion, with growth of 7.0% in 2010 and 6.4% in201139. That would outpace growth in the 7developed nations. The regions DP growth is likelyto be led by China and India, where independentengines of growth, such as domestic consumption, areexpected to be strong. In Latin America, the growth isexpected to be led by Brazil, amid expanding credit,strong demand for commodities and substantial capitalinflows. The outlook for Russia is also promising,as the country stands to benefit from higher pricesfor oil and base metals, especially if the global recoveryis sustained.
Financialconditionsarestillchallenging. Thetightening of bank lending standards has moderatedsomewhat, but bank lending is likely to remain sluggishas banks wait to see the extent of additional loanwrite-offs. Corporate bond issuance increasedsignificantly following a rebound in equity markets, butthose issues have not been able to make up for thescaling back of new bank lending to the private sector40.Sovereign debt ratings have come under pressure insome countries struggling with large governmentdeficits and debts. Cross-border bank financing is stillcontracting in some regions, and is likely to affect
domestic credit growth. Howandwhengovernmentswithdrawstimuluswillbecritical. If governments exit their supportive policiesprematurely, they are likely to undermine globalgrowth. In fact, the immediate withdrawal of stimulusmeasures could increase the chances of an economicrecession similar to that seen in the U.S. in 1937 and inJapan in 199741. Conversely, if governments overlyprolong stimulus, it could inflate fiscal deficits tounmanageable levels, and undermine the prospects forlong-term growth.
Returnofvibrantprivateconsumptionisessential. Theglobal economy is showing clear signs of recovery, butthat revival is still underpinned by the effects ofgovernment stimulus. A sustained recovery will require a
return to vibrant private consumption, which dependsheavily on employment, overall consumer confidenceand spending, as well as income. lobal unemploymentgrew 14.4% to 211.5 million in 200942, and is expectedto keep rising, but the employment recovery is expectedto be gradual, and companies are likely to try raising
productivity before they add employees. Consumerconfidence is rising from the lows of early-2009 butremains tenuous. iven current conditions, privateconsumption is expected to grow only mildly in 2010 inNorth America and Western Europewhich togetheraccount for more than 60% of global privateconsumption. Other major contributors to global privateconsumption include Japan, ermany, the U.K., Franceand China, which will all face similar issues within theirown economies. Each contributes from 3% to 9% toglobal private consumption.
Beyond these major factors, numerous other issues havethe potential to restrain world growth. They include fearsof inflation, especially in Europe, and spillover fromproblems in individual institutions or countries. Inearly-2010, for example, the fiscal crisis in reece and theeffective default of one of Dubais largest government-owned companies offered sobering reminders thatunforeseen problems can quickly undermine consumerand business confidence and restrain growth if notcredibly managed.
oing forward, then, governments around the world willbe juggling several challenges, including the need tomaintain appropriate fiscal stimulus and support healthygrowth, the imperative to correct unhealthy economicimbalances, and the need to nurture the conditionsnecessary to encourage private consumption. Regulatoryreform will present additional challenges to markets andeconomies. overnments around the world are eachconsidering and implementing reform measures, but thefinancial crisis proved that global economies are nowhighly interdependent, and attempts to coordinateinternational supervisory frameworks and market
regulations will continue for some time. Specific reformmeasures, and the speed with which they are executed,has the potential to impact investors, markets andeconomies significantly.
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HNWIs Warily
Returned to Markets
HNWIs Warily Returned to Marketsin 2009 in Cautious Pursuit of Returns
HNWIS SOUGHT TO RECOUP LOSSES IN 2009, BUT TOOK A MEASURED APPROACH
Of global HNWI assets, 31% were held in fixed-incomeinstruments by the end of 2009, up from 29% in 2008.This reflected the crisis-driven desire to securepredictable cash flows. The Barclays Capital lobalAggregate Bond Index returned 9% on the year.
lobally, equities accounted for 29% of total HNWIfinancial assets at the end of 2009, up from 25% a yearearlier as many of the worlds stock markets recovered
sharply. lobal market capitalization rose to US$47.9trillion in 2009 from US$32.6 trillion in 2008, up 47%43.
Equity holdings among European HNWIs rose from21% of total assets in 2008 to 26% in 2009 as Europeanstock market capitalization grew by 38%44. AmongNorth American HNWIs, who have long favoredequities as an asset class, equity holdings edged up from34% of total holdings in 2008 to 36% in 2009 as stockvalues rose. North American HNWIs remain far moreheavily invested in equities than the 29% global average.
HNW investors cautiously returned to the markets in 2009 as fears over the financial crisis eased. However, theyfavored predictable returns and cash flow, as evidenced by the rise in HNWI allocations to fixed-income instruments, to31% from 29%. Equity holdings also rose, to 29% from 25%, as the worlds stock markets recovered. Cash holdingsdeclined slightly.
HNWIs overall had proportionally more invested outside their home regions by the end of 2009 than they had ayear earlier. This shift countered a widespread trend toward asset repatriation to home regions during the crisis. Thedecline in home-region investments was most marked in Europe, where such holdings dropped to 59% of overallportfolios from 65% in 2008. Among Latin American HNWIs, by contrast, home-region allocations were up 3
percentage points to 47%. In general, HNWIs allocations to emerging markets rose overall, and to Asia-Pacific inparticular, as investments flowed to regions and markets expected to have the most growth in the coming years.
By 2011, HNWIs are expected to further reduce their home-region investments, and look to those regions inwhich growth is expected to be more robust. North American HNWIs, who have typically held a large portion ofassets in their own region, are shifting those allocations to become more geographically diversified. They are gravitatingin particular toward regions in which growth is anticipated, especially Asia-Pacific and Latin America. Home-regionallocations are also expected to drop among Europes HNWIs, who are also likely to invest more in Asia-Pacific.
43
WorldFederationofExchanges,Marketcapitalizationstatistics,http://www.world-exchanges.org/statistics,accessedMarch9,201044 Ibid
As projected in the last WWR, HNW investors began toregain their appetite for risk in 2009, especially as the yearwore on and the global economy showed signs of recovery.As a result, there was a tentative but tangible shift inHNWI asset allocations, both in aggregate and by region.
HNWIs Exposure to Equities and Fixed-IncomeIncreased as Crisis Fears Abated
The proportion of HNWI assets held in equities increasedslightly in 2009. At the same time, the share held infixed-income rose, and cash-based holdings dropped,suggesting that while HNWIs were keen to pursuereturns and recoup some of their 2008 losses, they alsovalued predictability in returns and cash flows.
More specifically, a number of tangible shifts in theworldwide portfolio of HNWI financial assets occurredin 2009 (see Figure 8), including the following:
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HNWIS WARIlY RETURNEd To MARKETS IN 2009 IN CAUTIoUS pURSUIT of RETURNS
51
DowJones,DowJonesGlobalSelectREITIndex,http://www.djindexes.com,accessedFebruary4,201052 DowJones,DowJonesGlobalSelectREITIndex,http://www.djindexes.com,accessedFebruary4,2010,CBRichardEllis,AsiaInvestmentMarketView2H2009,http://cbre.com
Commercial real estate was held in the highest proportionsby HNWIs in Europe. However, those holdings32% ofall their real-estate investments vs. the global average of27%reflected an inability to shed assets in the illiquidmarkets more than a desire to be heavily invested incommercial interests.
Ultra-HNWIs again held more of their real estate holdingsin commercial real estate than HNWIs did overall in 2009(32% of the total vs. 27%), while holding less in residentialreal estate (45% vs. 48%).
Farmland and undeveloped property, meanwhile,comprised 6% and 8% respectively of aggregate globalHNWI real estate portfolios in 2009, little changed from2008. However, the Farmland allocation was much higher(23%) in Latin America, where a significant amount ofwealth has traditionally been derived from agricultural
businesses, and the undeveloped land allocation was muchhigher in the Middle East (21%), where such land has beenin speculative demand amid the real-estate boom.
HNWI holdings of real-estate investment trusts (REITs)rose in 2009 to 12% of all HNWI real-estate assets from10% as the lobal REIT Benchmark Index grew 23.8%.That index remains far below the highs of 2007, though 51.
REIT holdings are proportionally higher among HNWIs inNorth America and Japan, where REIT returns have beenrelatively attractive and the product itself is more readilyavailable and more familiar to investors. The U.S. HighTotal Returns on All REITs Index rose 27.4% in 2009, andthe average dividend yield on J-REITs was 6.8% vs. 1.3% forthe 10-year Japanese overnment Bond (JB)52.
HNWI Holdings in Hedge Funds Rose thoughAlternative Investments Held Steady Overall
HNWIs holdings of alternative investments were littlechanged overall in 2009 at 6% of the aggregate portfolio vs.7% in 2008. However, allocations to hedge funds rose to27% of the alternative-investment total from 24% as the
hedge fund industry recovered from its dismal performancein 2008. The Credit Suisse/Tremont Hedge Fund Indexposted an 18.6% return in 2009.
Among HNWIs from Latin America, hedge funds clearlydominate alternative-investment holdings and accountedfor 49% of all such holdings in 2009, when theEurekahedge Latin American Hedge Fund Index rose26.9%. The picture is similar in Europe, where HNWIsheld 32% of alternative investments in hedge funds in 2009when the Eurekahedge Europe Index returned 21.85%.
Commodities also accounted for a larger share of theaggregate alternative investment HNWI portfolio in200916% vs. 13% in 2008. That amount was boosted inparticular by HNWIs buying gold as insurance againstpossible inflation and dollar weakness. The price of goldrose 27% in 2009, its ninth straight year of gains. HNWIs
from North America have a much higher-than-averageallocation to commodities (24%), but they also have accessto a wider array of commodity-based instruments, such asexchange traded funds, so have more opportunities to buy.
Foreign currency investment comprised only 13% ofoverall HNWI alternative investment allocations, butthat proportion was much greater among HNWIs inJapan (28%) and higher too among HNWIs in the rest ofAsia (20%) and the Middle East (20%) as HNWIssought to hedge against local currency fluctuations.
The share of alternative investments dedicated tostructured products was little changed in 2009 at 20% asHNWIs continued to hold the type of structured vehiclesthat offer capital guarantees (not the more complex,opaque structures that contributed to the financial crisis)and sought to capture superior returns to conventionalfixed-income investments. Among Japanese HNWIs, infact, structured products are the single most popular formof alternative investment as they offer the potential foryield when prevailing interest rates are low.
Geographical Diversification Was Evident
in HNWI Asset Shifts in 2009The geographic distribution of HNWI assets also shiftedin 2009 while HNWIs generally sought higher returnsand greater geographic diversification in their portfolios(see Figure 9).
The following trends were especial ly notable:
HNWIs in all regions except Latin America increasedthe relative share of holdings in markets outside theirhome regions in 2009. European HNWIs had 41% oftheir holdings in investments outside Europe, up 6
percentage points from 2008, marking the largest suchshift. The underlying trend was similar among HNWIsin North America, who reduced their home-regionholdings by 5 percentage points to 76%. Even Asia-Pacific HNWIs sought opportunity outside their ownthriving region, reducing home-region allocations by 4percentage points to 54%.
HNWIs allocations to emerging markets rose overall.Of global HNWI holdings, the amount dedicated toAsia-Pacific investments rose to 22% of aggregate
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portfolios from 19% in 2008, and 13% was tied up inLatin America, up from 11%, as the equity markets inthose regions surged.
Latin American HNWIs actually increased domesticallocations by 2 percentage points to 47%, part of anongoing trend that has seen HNWIs pursue significantinvestment opportunities (e.g., surging equities) in theregion in recent years. overnment-driven fiscalincentives in Latin America and high interest ratesrelative to more developed economies have alsoencouraged HNWIs to repatriate offshore investments.
By 2011, HNWIs from both North America and Europeare expected to reduce their home-region allocations quitesharply, marking a significant shift for these HNWIs,who are used to favoring their own markets.
HNWIs in Europe are expected by 2011 to have shiftedtheir home-region allocations to 48% of all assets from59% in 2009 and 65% in 2008. Among HNWIs inNorth America, the home-region allocation is expectedto drop to 68% from 76% in 2009 and 81% in 2008.
While HNWIs from the mature economic regions ofNorth America and Europe are expected to continueincreasing their allocations to Asia-Pacific in search ofhigher returns, HNWIs in Europe are also likely toincrease their North American holdings to injectstability into their portfolios. More broadly, though, theregional asset-allocation shifts are likely to ref lect adesire by HNWIs to diversify, with some investorsshopping around for increased returns and othersseeking greater stability.
FIURE 9. Breakdown of HNWI Geographic Asset Allocation, 2006-2011F
(%)
0
25
50
75
100
2011F20092008200720060
25
50
75
100
2011F2009200820072006
0
25
50
75
100
2011F20092008200720060
25
50
75
100
2011F2009200820072006
27% 26%17% 19% 19%
9% 8%
61%64%
6%9%
10%
68%
12%
53%
6%
14%
50%
Asia-Pacic HNWIs Europe HNWIs
Latin America HNWIs North America HNWIs
26% 24%18% 21%
25%
59% 48%
15%
7%
11%
5%
65%
10%
4%
56%
11%
6%
52%
14%
6%
73% 76%
8%
76%68%
9%
11%
12%
7%7%
6%
81%
6%3%
11%
8%
4%
12%
10%
4%
47%38%
32% 32%36%
12%
8%14%
11%
47%37%
15%
7%
45%
18%
10%
31%
19%
12%
20%
4%4% 2%
3%2% 2%
2%
1%
2% 2% 3% 3%
1%
1%1%1%
1%1%
1%1%
1% 2% 2%3%1%1%1%1%
1%
2% 2% 1% 1%1%1%
1%
North America
Europe
Asia-Pacic
Latin America
Middle East
Africa
Note:Totalforthechartmaynotaddto100%duetorounding
DatafortheMiddleEastisnotdepicted,butshowedthesametrendtowardincreasedinvestmentoutsideofthehomeregion
Source:Capgemini/MerrillLynchFinancialAdvisorSurveys2007,2008,2009,2010
HNWIS WARIlY RETURNEd To MARKETS IN 2009 IN CAUTIoUS pURSUIT of RETURNS
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HNWIs Cautiously
Returned to Passion
Luxury Collectibles Accounted for the LargestShare of Passion Investments in 2009
Luxury Collectibles (e.g., luxury automobiles, boats, jets)accounted for 30% of HNWIs overall passioninvestments in 2009, up from 27% a year earlier(see Figure 10). However, that larger share was of asubstantially smaller outright allocation than in 2007,before the financial crisis had fully emerged. Major
increases were recorded in Europe, Latin America andAsia-Pacific excluding Japan.
The wealthy from North America allocated the most(31%) to Luxury Collectibles among the passioncategories, closely followed by those from Europe andLatin America with 30%. There also seems to be agrowing demand for luxury collectibles in emergingmarkets, especially China, as the HNWI allocation tothe category grew by 8 percentage points from 21% in2008 to 29% in 2009.
Sales of yachts, jets and luxury cars have all been hit veryhard by the financial crisis, and all continued to showprofound weakness in 2009 as a whole. However, somesigns of buying started to emerge in the second half of2009, and results are expected to improve tangibly in 2010.
lobal yacht sales tumbled 45% in 2009, and 80% ofyacht manufacturers were forced to suspend or shut downtheir operations53. But 2010 started on a good note, with
yacht brokerages in the U.S., for example, closing nearly30% more boat sales in the first quarter than a yearearlier, and at a total valuation 70% higher54.
The jet business similarly was one of the hardest hit bythe crisis. In normal times, 12% of the worldwide privatejet fleet is for sale, but that figure soared to 18% in July2009 as inventory swelled. However, sales since then haverisen every month55.
The luxury car market has floundered in developing andmature markets, but luxury car makers have reportedstrength in some key emerging markets. For example,erman luxury car maker BMW reported double-digitgrowth in China and Brazil in 2009, and Audi (a unit ofolkswagen A) has also reported sharply higher sales inChina56. Early signs in 2010 point to a global revival inthe luxury car industry. The collectible-car market hasalso begun to show signs of life. The three largest autoauctions in Scottsdale, Arizona (home to some of the
largest and well-attended auto auctions in the world)generated US$122.6 million in sales in January 2010, up8% from a year before57.
Art Remains Key to HNWIs as a Passionand as a Sound Investment
Overall, 22% of HNWI passion investments wereheld in Art at the end of 2009, down from 25%.There was also a decline in the proportional share of
HNWIs Cautiously Returned toPassion Investments in 2009
53 WangYing,ChineseYachtFirmsSetSailintheDomesticMarket,ChinaDaily,April10,201054 Big-BoatSalesSpurBrokerageGains,TradeOnlyToday,April7,201055 GeraldineFabrikant,TheWell-OffAreSpendingAgain-butCarefully,TheNewYorkTimes,April9,201056 JackEwing,BMWandVWResultsShowMoneyIsStillinSellingLuxuryCars,TheNewYorkTimes,March11,201057 PeterCorbett,CarAuctionsBringinUS$122.6millionDespiteStorms,Recession,TheArizonaRepublic,January26,2010
As HNWI cautiously returned to financial markets, they also returned to passion investments in 2009. Outrightglobal demand remained weaker than before the crisis in many passion categories, such as luxury collectibles (luxuryautomobiles, boats, jets), Art, and jewelry, though demand began to grow in the latter half of 2009.
With financial markets still in flux, some HNWIs indicated they are approaching their passion investments asinvestor-collectors, seeking out those items that are perceived to have tangible long-term value. The two categoriesthat are most attractive to these investor-collectors are Art and Other Collectibles (coins, antiques, wines, etc.).
The demand for passion investments overall is expected to increase in 2010 as wealth levels rebound. This is
evidenced by the fact that auction houses, luxury goods makers and high-end service providers all reported signs ofrenewed demand toward the end of 2009, and in the early part of 2010.
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58 MichaelPlummerandJeffRabin,ArtvestPartners,interviewedbyCapgemini,NewYork,April201059 Capgemini/MerrillLynchFinancialAdvisorSurvey201060 Ibid61 2009ArtMarketTrends,March2010,Artprice.com,http://imgpublic.artprice.com/pdf/trends2009_en.pdf62 TobyUsnik,ChristiesCorporateCommunications,interviewedbyCapgemini,NewYork,April201063 Ibid
FIURE 10. HNWI Allocations to Passion Investments, 2006 vs. 2008-2009
(%)
200920082006
Pre-crisis
26% 27% 30%
22%
23%
14%
8%
25%
22%
12%
7%
7%
20%
18%
14%
6%
16%
3%
Luxury Collectiblesd
Art
Jewelry, Gems & Watches
Other Collectiblesc
Sports Investmentsb
Miscellaneous
aMiscellaneousrepresentsclubmemberships,travel,guns,musicalinstruments,etc.bSportsInvestmentsrepresentssportsteams,sailing,racehorses,etc.cOtherCollectiblesrepresentscoins,wine,antiques,etc.dLuxuryCollectiblesrepresentsautomobiles,boats,jets,etc.
Source:Capgemini/MerrillLynchWealthManagementFinancialAdvisorSurveys,2007,2009,2010
HNWIS CAUTIoUSlY RETURNEd To pASSIoN INVESTMENTS IN 2009
Art holdings by Ultra-HNWIs. Art represented 25%of all Ultra-HNWI passion assets, down from 27% in2008 when Art had been their primary passioninvestment. The proportion of passion investments
allocated to Art in 2009 was the highest in Europeand Latin America at 27%.
Notably, while many HNWIs buy and hold art asconnoisseurs, there are also numerous investor-collectors, who view Art as a good financialinvestment58. In fact, among HNWI investor-collectors, Art is the most likely of all such investmentsto be acquired for its potential to gain value 59. Artinvestors in countries such as India, China, and theMiddle East also have a higher predilection to holdtangible assets like Art as a possible inflation hedge 60.
lobal Fine Art auction sales totaled only US$4.6billion in 2009, down by a hefty US$3.7 billion from200861. Contemporary art sales contracted as demandreturned for Old Masters and Modern Art, which wereperceived to have more price stability and were thereforemore attractive to HNWIs and Ultra-HNWIs whowere seeking less risk in all investment decisionsduring the crisis.
While private sales are still popular, the Fine Artmarkets seemed to be rebounding rapidly across allcategories by early-2010, with sellers confident enoughin demand to bring rare, high-value items to auction,
and buyers proving especially quick to pay top dollar forone-time opportunities or, for example, rare items withextensive provenance attached62.
Notably, the Fine Art markets thrived in much ofAsia-Pacific even during the general market weakness of2009. Chinas auction revenues rose 25% to US$830million in 2009, helping China to gain market share fromthe U.K. and U.S., though it maintained its third placeoverall. U.K. sales generated US$1.9 billion less in 2009than in 2008 and U.S. sales were down US$1.6 billion.
Also notable is the increasing tendency of Fine Artcollecting to expand across borders, periods andcategories as the investor base widens and diversifies. InApril 2010, a mid-17th Century South East Persian rugsold for nearly US$10 million at Christies, reflecting thesubstantial HNWI appetite for all types of Fine Art63.
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64 MattTownsend,LuxuryIsNotDeadasGreubelSellsforUS$490,000inGreenwich,BloombergBusinessweek,March31,2010
65 MehmetYorukoglu,HouseofBurgundy,interviewedbyCapgemini,NewYork,April201066 JeffD.Opdyke,TheMillion-DollarPenny,TheWallStreetJournal,
November19,2009
67 MatthewVincent,AReturntoLuxury,FinancialTimes,March25,201068 AndreasCremer,VW,BMWForecastGrowthasGermanCarmakersLead,Bloomberg
Businessweek,March11,201069 MichaelPlummerandJeffRabin,CouldtheArtMarketbeUndergoingaFundamental
Restructuring?,TheArtNewspaper,January29,201070 Ibid
HNWIS CAUTIoUSlY RETURNEd To pASSIoN INVESTMENTS IN 2009
Proportionally More Assets Were Heldas Jewelry, Gems and Watches, Especiallyin Middle East
Jewelry, gems and watches became the second-largestpassion-investment category for HNWIs globally in
2009, overtaking Art. This robust demand continued thetrend seen in 2008 when the financial crisis increasedHNWI demand for more tangible assets expected tohold their long-term value. HNWIs from the MiddleEast and Asia excluding Japan were most heavilyinvested, at 35% and 31% respectively, and the MiddleEast share was up most sharply, from 29% in 2008.
The recovery in high-end retail was uneven, however.Jewelry sales were slow to rebound after a 12% drop in2009 as many consumers bought less-showy pieces andswitched to silver from gold64.
Allocations to Other Collectibles Grew Slightly
The market for many Other Collectibles (whichincludes e.g., wine, antiques, coins, memorabilia) alsoshowed signs of recovery. For example, the Live-ex 100Fine Wine Index, which tracks the price of 100 of theworlds finest investment-grade wines, rose 15.7% during2009. Fine Wine continues to be an easy entry point fornew collectors as the price point is comparatively low, butserious investors also continue to expand their extensivewine collections 65.
Sales of coins and memorabilia were also on a rise withsome high-end items registering huge auction pricesduring late 2009. For example, a 1795 reeded-edged U.S.penny, one of only seven known to exist, sold for nearlyUS$1.3 million at auction, the first time a 1-cent coinhad cracked the mill ion-dollar price barrier66.
Other Collectibles are favored by HNWIs secondonly to Art for their potential to return f inancial gains,and are more popular even than Jewelry, ems, andWatches, or Luxury Collectibles among
investor-collectors.
Sports Investments (e.g., in teams, race horses) saw anincrease over 2008 in both the HNWI and Ultra-HNWI segments, though Ultra-HNWIs allocatedproportionally more to the category (9%) than HNWIsas a whole (7%) in 2009.
Lifestyle Spending Rose on Health/Wellness and Travel
HNWI spending increased again in the Health andWellness category (which includes activities such ashigh-end spa visits, fitness-equipment installations,and preventative medical procedures), and was the toplifestyle spending category in 2009. Luxury travelers alsoreturned to market in 2009, with increased spending onLuxury/Experiential travel.
HNWI purchases of luxury consumables, meanwhile,varied across the globe. In North America, HNWIs hadreduced such spending, but in emerging markets such asChina and Brazil, HNWI spending on luxury consumableswas reportedly on the rise in the latter half of 2009. In fact,China reportedly now accounts for 49% of luxury-marketgrowth as Chinas wealthy spend heavily on private jets,luxury cars, lavish homes and other luxury goods67. Notably,
the cost of luxury goods and services edged up only slightlyin 2009, according to the Forbes Cost of Living ExtremelyWell Index (CLEWI). The index, which tracks the cost of42 goods and services, gained just 1% in 2009, reflectingwidespread discounting to boost flagging sales.
Demand for Passion Investments is Likelyto Rise in 2010 as Wealth Levels Rebound
HNWIs passion investments are likely to expand in 2010as wealth begins to recover to pre-crisis levels.
Auction houses, luxury goods makers, and high-end serviceproviders, which all reported signs of renewed demand laterin 2009, expect spending to be more robust in 2010.
For instance, most premium car brands, including BMWand Audi, are forecasting strong growth in 201068,particularly in emerging markets. Investments perceived tohave tangible value are likely to remain the strongest. Art,for instance, will always be a valuable asset and a must-holdasset for both connoisseurs and investor-collectors69. In2010, though, Art and Other Collectibles could also get aboost from HNWIs seeking a hedge against inflation70.
Further recovery in passion investments, however, is likelyto be slow as investors weigh a wide variety of market andinvesting variables before starting to indulge again broadlyin their passions.
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HNWIs Demand forPhilanthropy-Related
Advisory Services is Rising
HNWIs Demand for Philanthropy-Related Advisory Services is Rising
71 AmyFeldman,RethinkingHowtoGive,BloombergBusinessweek,February1&8,2010,page7272 Capgemini/MerrillLynchFinancialAdvisorSurvey,March201073 AmyFeldman,RethinkingHowtoGive,BloombergBusinessweek,February1&8,2010,page7274 Capgemini/MerrillLynchFinancialAdvisorSurvey,March2010;83%ofAdvisorssayHNWIsaredriventogivebyasenseofsocialresponsibility
HNWIs and Ultra-HNWIs have long been active in charitable giving, and HNWI allocations to philanthropicactivities increased in all regions except North America in 2009. However, the increase followed a year in whichphilanthropy fell sharply, and the financial crisis has clearly reduced the outright level of donations.
While North Americans still have a strong culture of philanthropic giving, and donate more than $200 billion a yearto charities around the globe71, a smaller share of their assets was allocated to philanthropy in 2009 than in 2008.Among HNWIs in Europe, Asia-Pacific, Latin America and the Middle East, the philanthropic share of assetallocations was slightly larger in 2009 than 200872. Since the crisis, donors have had fewer funds available for
giving, so they are focusing on assessing the mission and effectiveness of charitable organizations to make suretheir donations are really making a difference73.
Notably, while most HNWIs and Ultra-HNWIs give primarily for altruistic reasons, feelings of social responsibility74,social networking, and tax benefits are all reasons for philanthropic giving. Whatever the motivation, philanthropicchoices are often inextricably linked to broader financial-planning initiatives, including tax strategies. As a result,the demand for philanthropic-related services offered by wealth management firms is also on the rise.
In fact, advice on financial planning and tax aspects of philanthropy was the most demanded piece ofphilanthropic offerings in 2009 (see Figure 11). Additionally, nearly half of all Advisors said their HNW clientswere asking for services related to philanthropic project organization and selection.
FIURE 11. Client Demand for Philanthropic Offerings of Wealth Management Firms
(%)
Other philanthropy
offerings
Setting up a
giving vehicle
Monitoring and
impact assessment
Project and
organization selection
Advice on nancial
planning and tax4% 26% 23% 57%8%
26% 17% 48%5%
26% 16% 46%4%
27%
9% 9%
13% 43%
20%
7%5%16%
6%7%7%20%
8%7%7%
14%
22%
20%
6%6%7%19%
3%
3%
2%3%
Slightly High
High
Extremely High
Low
Extremely Low
Slightly Low
Note:Totalforeachphilanthropicofferinginthechartmaynotaddto100%asthepercentageofrespondentswithneutralanswershavebeenexcluded
Source:Capgemini/MerrillLynchWealthManagementFinancialAdvisorSurvey,March2010
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HNWI dEMANd foR pHIlANTHRopY-RElATEd AdVISoRY SERVICES IS RISINg
75 TheChronicleofPhilanthropy,BritishDecisiononTaxBreakCouldEaseCross-BorderGiving,http://philanthropy.com,March25,2010
76 SeanStannard-Stockton,Philanthropy:TaxPlanningandBeyond,WealthManagerWeb,September21,2009
77 ShellyBanjo,ConsiderItanInvestment,WallStreetJournal,November09,2009
78 SeanStannard-Stockton,TheNextWaveofPhilanthropyandWealthManagement,PlannedGivingDesignCenter,December2008
Tax considerations are certainly a reality forphilanthropists. After all, when tax policies change,HNWIs may want to make philanthropic decisions inline with other wealth and finance strategies beingemployed to optimize the tax efficiency of theirportfolios. Moreover, as global media make world crises
more visible, HNWIs are increasingly likely to give tocauses beyond their own tax jurisdictions. BritainsTreasury has extended the countrys gift aid tax break tocharitable donations headed to other European Unionnations, lifting a bureaucratic burden on cross-border giving75. HNWIs will certainly need specializedadvice to navigate these kinds of rules and regulations inline with their other holdings and finance decisions, andincreasingly, they expect that advice from their wealthmanagement advisors.
In addition, todays philanthropists generally want to
make sure their giving actually makes a difference, andare likely to demand the same kind of professional advicein making these types of investments as they do whenconsidering investments designed to meet other financialand lifestyle objectives76. Some philanthropists, for
example, are starting to employ more sophisticatedfinancial vehicles and options once used only by the largerinstitutions and Foundations77.
All of these developments are consistent with theincreasing trend in modern philanthropy toward more
so-called giving while living, in which philanthropistsare incorporating their giving strategies into theirongoing wealth accumulation and capital-preservationplans78. This shifts charitable-giving considerationsfarther into the purview of wealth managers andpotentially away from estate planners that typicallymanage bequests.
As demand from HNWIs continues to increase, wealthmanagement firms and Advisors will need to understanda wide array of issues related to philanthropy in order toprovide relevant solutions. Indeed, several wealth
management firms are already beginning to buildexpertise in-house or leverage third-party ventures moreextensively, and offer these capabilities to their clients toaid in their continuing philanthropic efforts.
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POST-CRISIS, CLIENT EXPECTATIONS HAVE CLEARLY SHIFTED;FIRMS ARE ADAPTING
While 59% of HNWIs indicated they had regained trustin their Advisor over the past year, and 56% had regainedtrust in their wealth management firm, a striking 71% ofHNWI have yet to regain trust in the regulatory bodiesthat were supposed to be monitoring the markets, andultimately protecting investors (see Figure 12). They alsocontinue to have ongoing concerns regarding the
direction of the financial markets. iven the depth ofthis distrust, wealth management firms and Advisors willbe further challenged to overcome investor hesitation andcaution as they encourage the kind of investing that isneeded to recoup losses.
Post-crisis, most HNW clients have yet to regain their trust in the regulatory bodies and institutions thatare meant to oversee markets and protect investor interests. Coupled with ongoing concerns aroundfinancial markets, this lack of confidence has long-term implications for investing behavior.
Shifts in asset allocation mirror investor caution. HNWIs are favoring predictable forms of cash flow likethose in fixed-income products, and are seeking protection against downside risk, and their search for returnstakes place within the broader context of portfolio risks and goals.
HNWIs have seized a more hands-on role in their finances. Above all, they want specialized and independent
advice, transparency and simplicity, and effective portfolio and risk management, and are looking for wealthmanagement provider relationships that can clearly demonstrate a more integrated approach to meetingtheir needs.
Emotional factors are a prominent feature of the HNWI psyche today, and wealth management firms andAdvisors must incorporate those emotional factors into stronger portfolio management and risk capabilities soas to properly support client goals and needs.
With billions of assets still in motion post-crisis, wealth management firms are embracing change,leveraging key tenets of behavioral finance to rebuild investor trust and confidence and drive furtherinnovation into their offerings and service models.
Undeniably, the global financial crisis was a watershedevent that deeply affected the psychology of HNWImore so than many might have anticipated. In spite ofstock market rebounds and early signs of recovery invarious economic indicators, wealthy investors have notrushed to chase performance or seize risky marketopportunities. Rather, HNWIs have remained cautious
and have asked much more of their Advisors and Firmsin particular demanding more information, transparency,and risk-adjusted portfolio management to manage theirdownside risk. We expect this change in behavior toendure for the foreseeable future.
Spotlight:CRISIS HAS CLEARL SHIFTED INESTORPSCHE, AND WEALTH MANAEMENT
FIRMS ARE RESPONDIN
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investors were encouraged to be aggressive in themarkets in their 30s, some 40-50-year-old investorshave experienced a lost decade in terms of gains, andare questioning whether they still have the stomachto ride out possible market swings again.
As all this uncertainty persists, wealth management firmsand Advisors will need to engage in much more dialoguewith clients to address their ongoing concerns.
HNWIs, Confidence Shaken, Seize a MoreActive Role in Investing
Post financial crisis, HNW investors are now muchmore engaged in their financial affairs. HNW clientsare re-evaluating their current wealth managementprovider relationships and moving assets to firms that canclearly demonstrate a more integrated approach to
meeting their needs.
Emotional Factors Clearly Emergein HNW I Investing Behavior
HNW clients are not just investing on intellectualinformation and news, but are being driven by emotionswhen making investment decisions post-crisis. Again, thetrend is hardly surprising. After all, the crisis hit investorsat every level of wealthand impacted investors on a verypersonal and emotional level: Retirees saw their portfoliosand nest eggs dwindle; those wanting to bequeath moneyto heirs and charities have to reevaluate what is possible,and those counting on assets for a new business venturewere challenged to find available cash.
And investor wariness is certainly pervasive.For instance, many wealth management executives areespecially surprised at the degree to which youngerinvestors (those under 50) around the globe remain
cautious despite rebounding markets. While these
FIURE 12. Level of Agreement that HNW Clients are Regaining Trust and Confidence in Financial-Market Entities
(%)
Regulatory Bodies
Financial Markets
Wealth Management Firm
Financial Advisor
4%
6%5%
8% 23% 25%
25% 56%25%
30%
9%8%
17%
17%
47%
11%
6%
59%
6%
18%
32%29%10%
14%
16%
17%
36%
71%
4%
4%
Somewhat Agree
Agree
Strongly Agree
Disagree
Strongly Disagree
Somewhat Disagree
Note:1)Totalforeachcategorymaynotaddto100%asthepercentageofrespondentswithneutralanswershasbeenexcluded
Note:2)Surveyasked,Towhatextentdoyouagreeordisagreewiththefollowingstatements?
Source:Capgemini/MerrillLynchClientSurvey2010
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Three unequivocal demands HNWIs are making of theirwealth management firms today (see Figure 13) are:
SPECIALIZED ADVICE:As clients become more educated about their owninvestment choices, they increasingly expect
Specialized or Independentinvestmentadvice, andare re-validating advice from their Advisors/Firmsthrough other sources, including peers, the Internet,and other research alternatives. They also expect theadvice to be aligned with realistic and appropriategoal-setting, based on their actual risk profile.
TRANSPARENCY AND SIMPLICITY:HNW clients want increased TransparencyandSimplicity and ImprovedClientReporting so theycan better understand products, valuations, risks,performance, and fee structures. HNWIs are reviewing
product disclosure statements and investment risksbefore even conferring with their Advisors. They alsovalue better reporting and more frequent updates afterbeing blind-sided during the crisis, when they lacked a
real-time view of what was happening to the value oftheir investments. And increasingly, the type of productsthey seek out are the ones they can understand.
EFFECTIVE PORTFOLIO AND RISKMANAGEMENT:
The vast majority of clients see EffectivePortfolioManagement and EffectiveRiskManagement asimportant after the crisis. As a result, they increasinglywant and expect scenario analysis on proposed allocationsand products that is al igned to their individual goals andexpectations, and in-depth research around all types ofproducts so they can better understand the risks. Forinstance, many wealthy clients are very concerned abouttheir exposure to markets and want to limit theirdownside risk. At the same time, they know they need todiversify and have global exposure, particularly tofast-growing markets. As a result, they want evidence
through risk-scenario analysis to facilitate investmentdecisions that meet their goals while remaining alignedwith broader volatility and risk-appetite limits.
FIURE 13. Importance of Client Priorities Post-Financial Crisis
(%)
Independent
investment advice
Specialized
advice
Improved client
reporting
Transparency and
simplicity
Effective risk
management
Effective portfoliomanagement
14% 54% 27% 95%
90%
93%
85%
93%
89%
21%
14%
21% 42% 22%
20% 48% 25%
20% 45% 24%
45% 34%
43% 26%
Portfolio &
Risk Management
Emerging Themes HNW Client Expectations
Transparency and
Simplicity
Value of
Advice
Scenario analysis on the proposed allocations/
products aligning to individuals goals/expectations
In-depth research around in-house and third-party
products to be better aware of risk aspects
I
I
Greater transparency and simplicity around products,
risks, fee structures, portfolio reporting, performance
Greater understanding what they are investing in,
where its held and how it is valued
More frequent updates
I
I
I
Higher standards of expertise to better understand
their investment choices
Deeper specialization across investment areas for
receiving customized advice
Realistic/Appropriate goals based on their actual risk
prole
I
I
I
Somewhat Important Important Extremely Important
Note:1)Totalforeachcategorymaynotaddto100%asthepercentageofrespondentswithneutralandnegativeanswershasbeenexcluded
Note:2)Surveyasked,Afterthefinancialcrisis,howimportantarethefollowingtoyourclients?
Source:Capgemini/MerrillLynchFinancialAdvisorSurvey2010
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79
BradBarberandTerranceOdean,DoInvestorsTradeTooMuch?AmericanEconomicReview,199980 GurHubermanwithDanielDorn,PreferredRiskHabitatofIndividualInvestors,JournalofFinancialEconomics,97(2010),p.155-173
clients overall goals, understanding what principal mustbe protected (house, business, college fund), what portion
of the assets can be exposed to market riskas well aswhat assets might be set aside for aspirational risk (seeFigure 14).
RiskandScenarioAnalysisis now being used moreextensively to help HNW clients understand theextremes, with risk positioned as a series of ups anddowns not an average. Firms are extending the possibleextremes (increasing the standard deviations) in theirmodels of what could happen?, as many pre-crisis modelsdid not account for the extremes that ultimately occurred.
But more importantly, risk analysis is being revamped toinclude a more thorough client goal assessment.Previously, clients may have been simplistically assignedthe typical labels (conservative/moderate/aggressive), andconsequently provided the appropriate models in which toinvest, based on a very basic outline of their objectives.That label served as a proxy for risk tolerancecategorizing the clients willingness to pursue or avoidrisk, while often using simple volatility to quantify thatrisk. The crisis proved the flaws in that approach sincestrategies to avoid volatility, for example, did notnecessarily limit downside risk. The more sophisticatedscenario approaches, beginning with client goals ratherthan just a risk label, assist in identifying the emotionaltriggers that could ultimately help to better optimize aclient portfolio for risk.
Firms are also making sure the risk-scenario results arereflected in portfolio models and comprehensiveasset-allocationmodels, which ensure the underlying needs aremet, and gauge what the portfolio would do cohesivelyensuring the clients overall risk and volatility concernsare addressed.
Comprehensive asset-allocation models are thereforebecoming more client-driven, and better aligned to theclients true appetite for risk than the traditional, oftenproduct-based solutions, which so often focused on returnsin the past. A comprehensive asset-allocation approach isbetter able to integrate degrees of client risk across anentire portfolio, facilitate true diversif ication and providemore systematic protection against market swingswhilepreserving the integrity of the clients financial andlifestyle objectives.
DEVELOPING A DEEPER UNDERSTANDING OF INVESTOR PSYCHOLOGYWILL HELP FIRMS AND ADVISORS DEAL WITH A MORE VOLATILE AND LESSCERTAIN ENVIRONMENT
In the aftermath of the financial crisis, emotionalinvesting may not seem surprising, but research has long
shown that psychology and emotion prompt investors tobehave in ways that are inconsistent with what is deemedrational in modern portfolio theory. These concepts formthe basis of behavioral finance.
More specifically, behavioral-finance research in recentyears has actually demonstrated that investors are oftendriven emotionally, not just intellectually, to buy and sellon market information. Investor biases, overconfidenceand loss aversion lead to investing that doesnt correlate toefficient market theory, and actually causes adisposition effect in which individual investors aretwice as likely to sell winning positions, and hold on tolosing investments79.
Research also suggests a substantial number of investorsactually forego holistic portfolio optimization, and ratherselect stocks sequentially, evaluating holdings based ontheir overall risk attitude, while disregarding overallportfolio volatility80. The irony is, in this crisis at least,HNW investors who had bought into traditionalmanaged accounts wouldnt necessarily have beenprotected from large portfolio losses as risk models
werent always optimized for the downturn.
While behavioral finance has not been widely integratedinto wealth management to date, it is gaining momentumas Firms seek to navigate the new challenges in theinvesting environment.
Firms Can Differentiate Themselves byIntegrating Behavioral Finance as TheyStrengthen Portfolio Management and RiskModels and Capabilities
Among wealth management firms, early adopters areincorporating and applying behavioral finance into theiradvisory processes to capture and translate investorbehavior into a more robust advisory processso as tofacilitate the kind of financial strategies clients reallywant and need.
As part of this approach, wealth management firms arealso looking to help clients identify their true risktolerance by not just looking at their life-stage, potentialwealth, etc., but more importantly, understanding a
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FIURE 14. An Integrated Investment Advisory Process and Wealth Allocation Framework
Source:Capgeminianalysis;AshvinB.ChhabraBeyondMarkowitzAcomprehensiveWealthAllocationFrameworkforIndividualInvestors,MerrillLynch,2005
Individual Goals and Needs Wealth Allocation Framework
to address various types of risk
An individuals diverse set of goals and needs is fullyincorporated, giving a more accurate picture of theclient risk profile
with each type of risk assuming its own Asset Allocation.By working out an appropriate percentage for each positionthe client may still retain balance across all three
Investor risk appetite,can vary by wealth band,
region, life-stage, etc.
Principal
Protection
Market
Risk
Aspirational
Risk
Scenario 1 70% 20% 10%
Scenario 2 50% 31% 19%
Scenario 3 20% 50% 30%SAMPL
E
MORE MAINSTREAM USE OF BEHAVIORAL FINANCE APPROACHES WILL HAVE
A SIGNIFICANT IMPACT ACROSS SERVICE DELIVERY MODELS AND PLATFORMS
Challenge Lies in Mainstreaming ApproachesOnce Reserved for Ultra-HNWIs
Wealth management firms of all types (large, small,boutique) are deciding to what degree they should adapt
to a paradigm that integrates behavioral factors, but manyface a dilemma when looking at the options for deliveringsuch an a