Noticing Fiscal Crisis Trends

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OCEAN CITY – Each year the Capgemini–Merrill Lynch World Wealth Report tracks financial trends among the globe’s most affluent investors, offering insights on how they save, spend and invest. This year’s report has particular historical significance, as it tracks 2008’s unprecedented global financial changes and reveals some unexpected shifts in investor behavior, with people everywhere reassessing their risk tolerance in reaction to the economic downturn.

One finding that was predictable in light of the financial crisis: fewer millionaires. The 13th annual World Wealth Report discovered that one in seven “high-net-worth” individuals — defined as anyone with at least $1 million in investable assets — fell out of the millionaire category last year. And the ranks of those with at least $30 million in investments — classified as ultra-high-net-worth individuals — shrank by roughly a quarter as a result of the global recession.

What is notable about the consequences of this recession is that  many of the world’s wealthiest investors were able to keep their financial losses to a minimum and preserve the lion’s share of their wealth. Although their net worth has dropped below 2005 levels by as much as one-fifth, diversification may have spared them greater harm. The global equity markets lost nearly half their value during the downtown.

“The events of the last year fundamentally changed the way clients think about investing,” says Dan Sontag, President of Merrill Lynch Global Wealth Management. “Many have re-examined their strategies and portfolios and reset their expectations to account for a slower growth environment.”

Indeed, in 2008, caution appears to have motivated decisions at every turn, according to the report. Many wealthy investors sold stocks, increasing their allocations to bonds and cash investments. They also invested closer to home, in markets they felt they understood. Others put their faith in tangible assets such as gold, fine art and real estate. “There was a clear shift to those investments that seemed likely to hold their value over the long term,” says Bertrand Lavayssière, managing director of global financial services for Capgemini Financial Services.

The surge in cash holdings was particularly striking: Among high-net-worth individuals, cash holdings climbed to 21% of total portfolio holdings in 2008 from 17% in 2007. Fixed income investments also edged higher, to 29% from 27% in 2007. At the same time, equity holdings as a share of total portfolios dropped to 25% from 33% in 2007. But not every region followed the same investment formula. In Asia, where investors have long relied on safe savings vehicles, cash climbed by five percentage points to 26% of total assets. In contrast, cash accounted for only 14% of assets in North America.

Beyond selling stocks and increasing liquid holdings, high-net-worth individuals reduced their stakes in alternative assets to 7% of total portfolios in 2008, compared with 9% in 2007. The often volatile alternative category includes hedge funds, normally a mainstay in high-net-worth portfolios but less so now, accounting for just a quarter of the category, down from a third a year earlier. The reason for the decline in alternative investing may well be that investors have grown wary of investments like hedge funds that follow complicated and frequently opaque trading strategies. “Clients don’t want products they can’t understand easily,” says Ileana van der Linde, a principal in the wealth management practice of Capgemini Financial Services and lead author of the World Wealth Report.

Another tangible asset, real estate, climbed four points to make up 18% of total portfolios. Real estate was particularly important in the Middle East, where investors had a quarter of their assets in the category, and Asia (excluding Japan) was close behind, with 23% of assets in real estate. Commercial properties accounted for 28% of total global real estate holdings, while farmland and undeveloped property made up 15%.

In seeking security, many investors exited foreign investments in favor of domestic holdings. Retreating to familiar ground, North Americans increased their domestic allocation to 81% of total portfolios, up eight percentage points.

The report also found that, increasingly, wealthy investors are seeking more tools and resources to help them monitor the performance of their accounts on a day-to-day basis. “There has been a large increase in demand for improved client reporting to help people better understand their statements and get a clearer picture of what they have in their portfolios at all times,” van der Linde says.

As a result of the heightened interest in monitoring capabilities, such features as improved statements, convenient online access, stronger due diligence processes and more frequent contact with Financial Advisors have taken on far greater importance. This new level of engagement in day-to-day finances may well be a lasting legacy of the current downturn. “I think an important lesson to take from the report, moving forward, is: Get more involved with your investments and increase communication with your financial advisor,” van der Linde observes.

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)

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