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Alternative Latin Investor: Wealth Management Issue 18

The Alternative Latin Investor Issue #18 is focusing on Wealth Management in Latin America.

Special Issue: Wealth Management

The World’s First Diamond Fund
Lack of Transparency in Colombia: Root Causes
LatAm Wealth Management Overview
Private Aviation Takes Off in Latin America
High-Tech Financial Technology Hits LatAm

…and much more. Regulations,  Tax & Money Laundering, Structured Finance, Political Risks,  Agri Business, Impact Investment, Wine Investment, Infrastructure, Art

Please view and access Issue 18  in the following formats

Virtual Viewer

For more details and information please view

Source: AlternativeLatinInvestor 18.10.2012

Filed under: Argentina, Banking, BM&FBOVESPA, Brazil, Chile, Colombia, Energy & Environment, Islamic Finance, Mexico, News, Services, Trading Technology, Wealth Management, , , , , , , , , , , , , , , , , ,

Luxury Spending in China – Are the wealthy disappearing? Wealth Management Research – KapronAsia

Earlier this week, Burberry announced lower than expected earnings which largely disappointed and somewhat scared markets. Their slowdown is global, but a key challenge was declining luxury spend from Chinese consumers – which is seen by many as a bellwether for the rest of a general industry slowdown. We’ve talked about luxury spending in China in the past, but it’s worth considering the implications of a potential slowdown in the luxury industry and the implications if the slowdown is indeed an indicator of a shift in the habits of China’s wealthy.

The origins of money

If you look at the development of China’s wealthy, it really started in the late 70s with the opening up of China’s economy and then picked up speed again in the 1990s through today as China’s inclusion in the WTO gradually brought the country to become known as the ‘factory of the world’. Although cost and quality questions have arisen again recently, the ability of chinese factories to produce low-cost and medium to high quality products drove incredible revenues and profits for small and medium enterprises and, at the same time, made their owners tremendously wealthy. Due to a somewhat challenged national transport network, many of these factories were by necessity concentrated on or near the east coast of the country in order to decrease the complexity of actually exporting the goods; mainly near the port city of Shenzhen or further up the eastern seaboard near Shanghai or Beijing.

But factory owners weren’t the only ones to benefit. As China’s insatiable appetite for natural resources has increased, companies and individuals have benefited greatly as commodity prices have increased rapidly. Mine owners and processors as well anything energy related has driven another level of wealth that is not just located near the coast, but often much further in-land either to the west in Xinjiang or to the North in Inner Mongolia. Finally, although a civil service job in the west typically means ok pay, but high stability, government officials in China do quite well so many of officials and families of officials are known to be quite well off.

Show me what you got

I don’t want to make any suggestion as to whether it’s right or wrong or the meaning behind it, but the wealthy Chinese, in general, like to show off their wealth. Carrying the right bag, driving the right car or telling time with the right watch is important in both a personal and or a business context. At large dinners, people (typically the men) will fight over who pays for the bill as not paying can often mean a ‘loss of face’ (similar to respect) in the eyes of others.

This need for showing off wealth has driven the growth of the luxury industry in China. What it has also done is created another layer of what you might call ‘wealthy aspirants’, who while not necessarily wealthy themselves, are keen to give the appearance of being wealthy or at least hip to the latest trends. For the extremely wealthy, the sign that you’ve made it is the BMW 7-series or Bentley that you pulled up in, for the rest, it’s an iphone. An iphone is a sign that you’ve made it

The iphone is a great insight into wealth or lack thereof in China: although there are iphone knock-offs out there, most of what you see when you walk around the big cities are real iphones whether bought directly from Apple, a mobile network operator, or off the grey market (HK imports). When you consider that a new iphone in China from Apple costs about US$800, even if you look at the GDP per capita in Shanghai, one of the wealthier parts of China, which is about US$13,000, that still represents about 7% of the average yearly salary for a phone. So some people are spending up to, and in many cases over, a month’s salary to have the latest and greatest from Apple.

Built into relationships

We’ll get into the implications for wealth management shortly, but one last illustration of how important wealth is in China, and again, this is changing slowly, but typically before a Chinese woman will accept a marriage proposal from a man, the man needs to have an apartment for the couple to move into. With housing prices in the major Chinese cities reaching that of London or NY, but with salaries hovering at about 15% or less of London/NYC salaries, this can be a daunting prospect. A son will often need to rely on his parents and potentially even grandparents to be able to afford a place.

So what now

So with that context in mind, what will happen with China’s wealthy? Well, there is a certain segment of wealthy customers that are unaffected by economic downturn. These are simply the ones that have accumulated enough wealth to maintain their lifestyle at the same level regardless of the economic conditions. The wealthy aspirants that we mentioned above however will likely be more negatively affected as they have less disposable income or built-up wealth, so what could we reasonably expect see if that demand for ultra luxury products (think a Hubolt watch or a Bentley) will be unaffected, but the demand for lower luxury products such as handbags and phones will likely drop – already we’re seeing increased indications of the slowdown in hiring, which would put a squeeze on the middle-class market segments.

Implications for the wealth management industry

read full article at KapronAsia WealthManagement

Source: KapronAsia, 12.09.2012

Filed under: Asia, China, Wealth Management, , , , ,

Latin America Fund and Investment News Aug-Oct 2011 – Alternative Latin Investor

American Business Practices in Brazil: A Contrarian’s View

Premium Article OCT, 2011 U.S. companies have been investing heavily in Brazilian private equity in recent years, capitalizing on the across-the-board growth in the country’s small, mid and large cap companies. But according to Malcolm McLelland, an American-born, Brazil-based consultant and…Read Full Article

Latin American Hedge Funds

Premium Article OCT, 2011 Hedge funds have become one of the most vital asset classes in LatAm in recent years, and LatAm hedge funds some of the most successful in the global industry, as local investors aim to diversify their strategies and exposure in the region while foreign investors vie for b…Read Full Article


Premium Article OCT, 2011 Given its robust growth in recent years and massive wealth compared to its neighbors, Brazil has attracted the lion’s share of global investment in LatAm, with foreign investors allocating especially aggressively to equity and government bonds. Brazilian investors, …Read Full Article

MILA Integrated Latin American Market

OCT, 2011 On May 30 of this year, the Integrated Latin American Market (Mercado Integrado Latinoamericano, or MILA) was launched, combining the stock markets of Colombia, Chile and Peru into a single cross-trading platform. A key component of a regional trend toward integration, MILA has been wide…Read Full Article

Brazilian Pension Funds

Premium Article OCT, 2011 Alternative asset managers around the globe are vying for the attention of Brazil’s swelling pension funds. As of early 2011, these funds had a total of $342 billion under management and had grown an average of 14% per year for the last five years, one of the highest…Read Full Article

Meta-Trends in LatAm Investment

Premium Article OCT, 2011 The progress of alternative asset investment in LatAm is following two basic meta-trends, that is, large-scale and long-term patterns that transcend specific products, firms or opportunities. These meta-trends are, first, the increasing interpenetration of managers from th…Read Full Article

High Net Worth Individuals in LatAm

Premium Article AUGUST, 2011 The wealth and quantity of high net worth individuals (HNWI) in LatAm has grown in recent years. According to the Capgemini/Merrill Lynch World Wealth Report 2011, the number of LatAm HNWI grew by 6.2% in 2010, and its total HNWI wealth by 9.2%. There are about a half…Read Full Article

Quant Funds

Premium Article AUGUST, 2011 After taking a battering during the 2008 credit crunch and struggling in the early stages of recovery, quantitative (or ‘quant’) funds are trying to reassert themselves in the industry. And a small, but growing, number are looking to start afresh in the …Read Full Article

LatAm Funds

Premium Article AUGUST, 2011 U.S. Institutional investors looking to increase their exposure to emerging markets have been turning increasingly to a handful of LATAM countries, where they see a swelling pool of experienced fund managers working within a context of political stability and economic g…Read Full Article

Institutional Investing in LatAm

Premium Article AUGUST, 2011 For most institutional investors, there is an uncertainty about LatAm´s quality and future – and a certainty about its checkered past – that gives them pause as they investigate young managers in the region. Most of these investors want to see a stron…Read Full Article

Source:Alternative Latin Investor, October 2011


Filed under: Brazil, Chile, Colombia, Exchanges, Latin America, Library, Mexico, News, Peru, Risk Management, Services, Wealth Management, , , , , , , , , , , , , , , , ,

Asia’s affluent lose one-fifth of wealth in 2008 – CapGemini-Merryll Lynch Asia Wealth Report 2009

Hong Kong’s high-net-worth crowd were the hardest hit by the financial crisis, according to the annual wealth report from Capgemini and Merrill Lynch.

It was perhaps inevitable that after experiencing such rapid wealth growth in the past few years, Asia’s high-net-worth individuals suffered particularly keenly from the recent crisis. But there is still huge market potential in the region for those wealth advisory firms able to tap it.  Download: Asia-Pacific_Wealth_Report_2009_CapG_ML

The wealth of the region’s high-net-worth individuals (HNWIs) — those with $1 million or more in investable assets — fell by 22.3% to $7.4 trillion last year, below the level in 2006. That compares to a fall of 19.5% for global HNWI wealth, according to the 2009 Asia-Pacific Wealth Report, released yesterday by consulting firm Capgemini and Merrill Lynch.

Hong Kong HNWIs saw by far the biggest drop, losing 65.4% of their wealth, followed by those in Australia (29.7%), Singapore (29.4%) and India (29.0%). South Koreans got off lightest with a 13.4% decline in asset value, while Japan saw a fall of 16.7%.

In terms of market capitalisation, the Asia-Pacific region as a whole saw an average fall of 48.6% last year, with China (60.3%) and India (64.1%) suffering the biggest declines of the countries surveyed*.

With regard to asset allocation, the report noted three key trends. First, Asian HNWIs undertook a ‘flight to safety’ to cash-like assets with their allocation to cash-based investments rising to 29% in 2008 from 25% the year before. This reflected an increase in the global allocation to cash in 2008 to 21% from 17% in 2007. Taiwan had the highest allocation to cash/deposits at 41% of its total portfolio, while India had by far the least with 13%.

Another trend was an opportunistic shift back to real estate investment with an allocation of 22% in 2008, up from 20% the year before. Regionally, Australia had the highest allocation to real estate (41%), closely followed by South Korea (38%), while Taiwan had the least (15%).

As for other asset classes, India had the largest allocation to equities (32%), despite the heavy fall in the country’s stock market last year, while South Korea had the smallest (13%). And, perhaps surprisingly, Indonesia had the largest allocation to alternative investments (9%), covering structured products, hedge funds, derivatives, foreign currency, commodities, private equity and venture capital.

The third broad trend noted by the report was a retreat to home-region and domestic investments with HNWIs increasing their domestic investments to 67% in 2008 from 53% the year before. China was the top Asian market for investment by HNWIs in Asia-Pacific ex-Japan, while their peers in Japan preferred to invest domestically.

Allocations to mature markets are likely to increase through 2010 as Asia-Pacific HNWIs seek more stable returns. Allocations to North America, for example, are predicted to rise from 17% last year to 20% in 2010.

In terms of diversity of geographic distribution of investments, Japanese HNWIs were the most diversified beyond Asia in 2008 with 45% of their allocation outside the Asia-Pacific region. The least diversified were the Chinese with a 17% allocation outside Asia-Pacific, and India with a mere 14% invested outside the region.

On a wider level, the crisis resulted in many Asian clients shifting their assets towards regional and local firms, changing the competitive landscape. Such moves exposed “weaknesses in the capabilities of the region’s wealth management firms and especially revealed the disparate strengths and weaknesses of international firms versus regional and local competitors”, says the report.

In terms of the challenges faced by wealth management firms in Asia, they feel maintaining client trust/client retention is by far the biggest concern, according to a Capgemini survey carried out during July and August. Eighty-five percent of wealth management advisers cited this as the biggest challenge they face as a result of the crisis, and 45% cited as the next major issue the need to have the right skill set and talent to cater to HNWI clients.

A closer look at the issue of client attrition shows that 42% of wealth advisers lost clients last year; 63% of those advisers employed an individual-adviser model, while 37% used a team-based model. Meanwhile, younger advisers tended to lose more clients than older ones with 62% of those who lost clients being 40 or under. “Advisers were not mature enough to handle the intense market conditions,” says the report.

Experience is clearly key, and advisers in the Asia-Pacific region were less well able to handle the economic turmoil. The average amount of experience for the region was 9.7 years, versus the global average of 13.3 years. Wealth management firms need to remedy this situation if they are to make the most of the untapped market potential in China, India and elsewhere in the region.

* The report focuses on 11 markets: Australia, China, Hong Kong, India, Indonesia, Japan, New Zealand, Singapore, South Korea, Taiwan and Thailand. Together, these account for 95.3% of Asia-Pacific gross domestic product.

Source: Asian Investor, 14.10.2009

Asian Investor

Filed under: Asia, Australia, China, Hong Kong, India, Japan, Korea, Library, News, Services, Singapore, Thailand, Wealth Management, , , , , , , , , , , , , , , , ,

Is Latin America the future of offshore banking?

The Climate Of Greater Transparency And Stricter Regulation Is Forcing Great Changes In The Offshore BankingWorld; Latin America’s Industry Is Poised and Ready For The Future. Offshore Banking. Latin America 2009 combines interviews, analysis and expert opinions on all the most important factors shaping the industry in the region today.

Register for free at to download full report.

Offshore Banking_Latin America 2009 Source: Alternative Latin Investor, September 2009

Filed under: Argentina, Banking, Brazil, Central America, Chile, Latin America, Mexico, News, Services, Wealth Management, , , , , , , , , , , , , , ,

Private banks under pressure to Change Business Models

Private banks that don’t focus on profitable segments won’t make it, says Scorpio Partnership.

Amid the losses suffered by individuals, corporations and institutions from the global financial crisis has emerged the opportunity for private banks to step into the spotlight and highlight their strengths. Private banks, after all, are associated with financial advisory services and what was sorely lacking during the buying frenzy in capital markets in the run-up to the financial crisis was precisely that: advice. Too many investors were chasing the momentum, and sales-driven money managers were all too happy to take in the excess liquidity. The rest, as they say, is history.

A report by Scorpio Partnership, a London-based strategist and high-net-worth consumer issues research firm, shows that the private banking industry managed to pull through in relative terms in 2008. However, the industry is facing a very difficult 12 months ahead if it fails to adjust business models, according to Scorpio Partnership’s Global Private Banking KPI Benchmark 2009 report.

“2009-2010 will be a moment of truth for the global private banking model,” says Sebastian Dovey, managing partner of Scorpio Partnership. “Asset levels have declined by a median of -15.7% and cost-to-income ratios have risen by 13.7% which places a huge strain on the models of many competitors.”

The way to survive post crisis is through an “intelligent focus on profitable segments and efficiency drives”, Dovey says, adding that the traditional management tendency for “slash and burn” in such conditions will be much more damaging in the long-term.

“This is a time for vision and leadership,” Dovey says. “Our view is firms must now use traditional consumer tools in branding and advertising to reclaim confidence and new business.”

Global wealth managers now have around $14.5 trillion in assets under management (AUM), a decline of 16.7% from the previous year, according to the report.

Apart from slashing assets, the global financial crisis also affected the roster of the top private banking institutions in AUM. M&A activity, particularly in the US, influenced the top 10, with Bank of America (BoA) now becoming the world’s largest wealth manager, according to the report. The core of BoA’s asset base remains inside the US, however. UBS, meanwhile, remains in second spot and is effectively still the largest non-US international wealth manager.

AUM of the world’s top 10 private banks, according to Scorpio Partnership:

  • 1. Bank of America – $1,501 billion
  • 2. UBS – $1,393 billion
  • 3. Citi – $1,320 billion
  • 4. Wells Fargo – $1,000 billion
  • 5. Credit Suisse – $611 billion
  • 6. JP Morgan – $552 billion
  • 7. Morgan Stanley – $522 billion
  • 8. HSBC – $352 billion
  • 9. Deutsche Bank – $231 billion
  • 10. Goldman Sachs – $215 billion

The top 20 global private banks manage nearly $9.2 trillion of private client assets. That’s around 63% of the total global market and challenges the widely expressed view the global wealth industry is fragmented, according to the report.

The report shows that “market fragmentation as a characteristic of the industry is hugely overstated”, Dovey says. “Our goal has always been to demonstrate that market share — as measured by a percentage of assets managed relative to the total asset managed by all competition — is much more concentrated. This has significant consequences for evaluating the industry and businesses within it.”

Meanwhile, despite the fall in assets last year, the private banking industry as a whole added to its headcount. Overall, there was an uptick in new hires of 6% worldwide and the ratio of firms that were hiring in 2008 versus those that were shedding private banking staff was 4:1, the report says.

The report shows little evidence of a flight to quality through the worst of the crisis. Net new money results hint only that Swiss private banks may have seen a very marginal uptick in business, while some household names did not benefit at all.

It appears investors restructured portfolios among a number of different types of institutions when it was unclear which private banking institutions would emerge successfully from the banking crisis and which would fail.

The report points to five core strengths in the private banking model that enabled players of different types to perform well in difficult market conditions:

  • Ability to generate income from multiple sources rather than purely asset management
  • Wealth re-creation approach to business rather than exclusively wealth preservation
  • Ability to guide clients into high-quality specialist investments
  • Strength of brand and contemporary relevance to client requirements
  • Network leverage (either through branch systems or strong external partnerships) for new client access

“These five qualities are the future principles upon which the private banking industry can rebuild based on our analysis of business model performance,” says Catherine Tillotson, head of research at Scorpio Partnership. “The market champions will be those that concentrate on modernising the proposition using contemporary positioning tools to re-engage with the client and developing products and services that are committed to wealth re-creation. Institutions that opt to sit tight in 2009 and ride out the storm will sink.”

The Global Private Banking KPI Benchmark 2009 reviews the global wealth management industry. The annual report covers more than 248 private banking and wealth management firms.

Original article here

Source:, 09.07.2009 by Rita Raagas De Ramos

Filed under: Banking, Library, Risk Management, Services, Wealth Management, , , , ,

Singapore’s private banks lacking back office automation in trade processing – study

Research on the post-trade processing practices of private banks in Singapore has revealed that nearly 60% of private banks in the region lack back office automation in trade processing.

The study was conducted by InsightAsia Banking & Finance Consulting, a division of InsightAsia Research Group, that specialises in the Asia Pacific region, and commissioned by Omgeo, the global standard for post-trade efficiency.

Against a background of the growing importance of Singapore to the global private banking sector, Insight Asia surveyed a group of Singapore-based private banks regarding their post-trade processes. The study focused on a range of issues related to trade processing, including the effects of the recent financial crisis on the private banking sector and the current mechanisms that private banks are using to process trades.

The study showed that nearly a third of private banks continue to manually carry out trade allocation and confirmation, rather than processing their trades electronically. Manual processes can make a firm more vulnerable to trade failure and create a more risk-prone environment because there is more room for error in comparing trade details.

Many of the Singapore private bank executives surveyed highlighted the importance of having efficient and flexible banking and processing systems as a key area of development. There was general agreement that higher levels of automation in trade processing would result in a reduction in operational risk. In fact, of the executives interviewed from within private banks currently carrying out trade matching in Singapore, 59% said they either wanted to make improvements to their system or were in the process of doing so.

“This study suggests that Singapore private banks are becoming increasingly aware of the benefits of introducing automation into their back-offices,” said James Drumm, Executive Director, Asia Pacific for Omgeo. “At present, many private banks operate in a manual environment, but there is a growing consensus that introducing more automated processes will significantly decrease their operational and systemic risk.”

In addition to the findings on electronic trade processing, the study also found general agreement from the private bank executives interviewed that, while recent events in financial markets were unprecedented and posed some challenges to the sector, Asia, and in particular Singapore, remains a key element in their global expansion strategies.

Another key finding of the research was that there was almost universal agreement among executives that the focus on counterparty risk has increased substantially over the last 12 months, and is likely to continue in the foreseeable future.

“We conducted this study against the background of the global financial crisis,” Phillip King, Head, Banking & Finance Consulting for InsightAsia noted. “The impact of these events at a group level for many private banks is still ongoing; however the long term growth story in Asian wealth markets remains intact. The COOs and operations executives interviewed reveal that Singapore has a solid corps of seasoned and highly capable professionals in senior roles in its private banking sector. They are a strong collective asset to the ongoing development of Singapore as a private banking hub.”

Source: Finextra, 06.07.2009

Filed under: Asia, Banking, News, Risk Management, Services, Singapore, Wealth Management, , , , , , ,

China and Taiwan clamp down on risky wealth management products

China is nipping equity exposure in bank wealth management products, while structured product distribution will be treated with a heavier hand in Taiwan.

Following an announcement last week that the Taiwan Financial Supervisory Commission (FSC) is tightening structured product sales, the mainland market is abuzz with talk that the China Banking Regulatory Commission (CBRC) intends to clamp down on wealth management products linked to domestic equities and sold through banking channels.

The CBRC is said to be looking to put a stop to banks issuing wealth management products with A-share equities, unlisted shares or underlying funds, with the reason being that banks have exhibited that they are inadequately set up to manage investment risk. Wealth management products with QDII funds as the underlying assets are not expected to be affected at this point.

The banking regulator’s latest measure will follow its high-profile criticism of the banking industry’s wealth management practices issued in April last year, shortly after a delta-one product linked to a Barings Hong Kong fund and structured by UBS tumbled by half in value and liquidated. The incident caused public embarrassment and mass threats of class action lawsuits against its issuer Minsheng Bank.

The banking wealth management business first went live in China in 2005. Only banks have authority to issue wealth management products — a regulatory quip of terms which differ from fund or insurance policies sold through banks. These are targeted towards China’s newly rich, but largely unsophisticated high-net-worth clients, with minimum sales starting at Rmb50,000 ($7,352).

According to the CBRC’s published statistics, in 2008 alone, domestic and foreign banks sold a total of Rmb3.87 trillion ($567.1 billion) worth of renminbi and foreign currency-denominated wealth management products in China. However, at the end of 2008, all outstanding wealth management products were worth a total of Rmb823.3 billion ($120.6 billion).

How-How Zhang, an analyst at Shanghai research house Z-Ben Advisors, notes the CBRC move will be a reconfirmation of its previous stated policies against high-risk products; and should not bode any near-term danger for bank QDII developments.

At the height of the QDII craze in 2007, international fund execs fought to be taken onto banks’ wealth management platforms. A single deal with a bank at the time often translated into a multi-million boon for the fund managers. The trend failed to die off after the Minsheng scandal. Zhang says wealth management products with underlying structured products have since overtaken fund-linked products as the bankers’ preferred choice.

Since April 2008, banks have been forbidden to pass through QDII products as a mere distributor. Instead, they are required to assume the role as principal and be involved in product design and risk assessment — making banks the final party responsible for the products — although offshore fund houses or banks could be taken on as advisors.

In Taiwan, meanwhile, the familiar scene of the one-man day-trip sales exec will thankfully be put to an end with the implementation of a new law that tightens offshore structured product distribution.

Back in 2005 to 2006, when Taiwan was Asia’s hottest market for structured product sales, day-trip sales execs were often seen clearing billion dollars worth of deals by rolling their suitcases in and out of the airport on the same day. It was a sellers’ market. Product selection committees were largely under-formed. Such a person would only need two friends in any organisation: a senior official who sat on the management committee and a general counsel to make a deal happen.

Commercial banks and insurance companies at the time were often comfortable selling products already existing in the markets, and generally chose issuing investment banks based on factors beyond product risks, namely: quality and speed of execution, precision in settlements, quality in legal documentation, speed in secondary market making and customer communication.

Now the FSC will regulate structured products originating outside of Taiwan in two categories — wholesale and retail. Now wholesale investors must demonstrate sufficient risk management abilities, product knowledge and a minimum asset size of NT$30 million ($913,169).

The regulator will now apply multiple checkpoints for structured products intended for retail channels, to bring it on a level playing field with fund products.

On top of distributor’s internal product selection and compliance mechanisms, structured products must now be vetted by respective industry associations in banking, insurance and fund management before they are distributed to retail customers.

A legally responsible party must be installed onshore to distribute structured products from now on, either in the form of a local subsidiary or a master agent, who would have to put up guarantee deposits with the regulator before initiating sales in Taiwan. As creditors, investors hurt by actions of the issuer will be entitled to compensation from the deposit funds.

Also mindful of the final days of the Lehman Brothers’ mini-bond debacle, the FSC is stepping up the availability of liquidity for such products, as subscriptions and redemptions are now required to be published daily, with bidding and asking prices, available units made public to investors. Issuers need to get the central banks’ approval before they remit funds into and out of Taiwan.

The FSC will advise little beyond prudence and self-discipline for wholesale investors, hoping industry players will have the ability to self-assess and regulate., 30.06.2009 read article here

Filed under: Asia, Banking, China, News, Risk Management, Services, Wealth Management, , , , , , , , , , , , , ,

HNWI: The world’s rich part with $7.9 trillion in assets – CapGemini Merrill Lynch Wealth Report 2009

The global financial crisis has caused the assets of the world’s high-net-worth individuals to fall by an unprecedented 19.5% to $32.8 trillion.

Download: Capgemini Merrill Lynch 2009_World_Wealth_Report

Everyone knows 2008 was an extremely tough year, with the global financial crisis shaving off hundreds of billions of dollars in global wealth. The latest World Wealth Report attempts to measure those losses, at least for the world’s richer population which bore the brunt of the impact of the crisis.

The wealth of the world’s high-net-worth individuals (HNWIs) fell by 19.5% to $32.8 trillion in 2008 from $40.7 trillion in 2007. That’s an unprecedented decline in HNWI assets in the 13 years that Merrill Lynch and consulting firm Capgemini have collaborated on this report. All regions suffered losses in HNWI assets, with North America (down 22.8%), Asia Pacific (down 22.3%), and Europe (down 21.9%) leading the decline. The US remains the single largest home to HNWIs, with a population of 2.46 million in 2008 (down from 3.019 million in 2007).

Also a record is the 14.2% drop in the population of HNWIs worldwide to 8.6 million in 2008 from 10.1 million in 2007. North America also suffered the most in terms of the number of people that fell off the rich list (down 19%), followed by Europe (down 14.4%) and Acsia (down 14.2%). The fate of the ultra-rich was much worse, with their population down by 24.6%.

Stock market losses were largely responsible for the loss of wealth. Although HNWIs have a diversified portfolio that includes financial assets from property to art, the bulk of their wealth has been diverted to equities over the past years. Global stock market capitalisation plunged 49% to $32.6 trillion in 2008 from a historic high of $63.4 trillion, which is a flashback to levels last reached in 2003.

Valuations of equities “turned from challenging to extremely distressing” in 2008 and how share prices perform from here on will have a major effect on wealth trends because the relationship between HNWIs and stock markets is “very correlated”, says Francis Liu, market managing director for Greater China at Merrill Lynch Global Wealth Management.

This latest report brings the HNWI asset and population levels back to their end-2005 levels, virtually wiping out any collective gains made in 2006 and 2007 when stock markets worldwide were mostly in a state of delirium over their extended rallies. Merrill Lynch defines HNWIs as those with net assets of at least $1 million (excluding primary residences and consumables) and ultra HNWIs as those with net assets of at least $30 million.

There are two things to note with this report.

First, despite expectations of continued volatility in stock markets worldwide — which is clearly the main source of wealth of the people that fall within this elite bracket — and despite the fact that no one has a crystal ball that can predict exactly how the global economy will recover from the crisis, Merrill Lynch and Capgemini are confident that HNWI assets will grow by 48% to $48.5 trillion by 2013, which translates to a projected annual growth rate of 8.1%.

Second, there is the question of how accurate the findings are to begin with. They are, after all, based mainly on best estimates using publicly available data. The methodology starts with a macro look at the total wealth of a country before making assumptions on a micro level. So while the figures presented in the World Wealth Report reflect an earnest attempt to show a picture of the assets and population of the world’s HNWIs, they could very well be an under-representation of what’s actually out there. The report notes, for example, that China had 364,000 HNWIs in 2008 (down from 413,000 in 2007). Does that reinstate the belief that only a minority of China’s more than one billion population hold the key to the nation’s wealth; or is it an inability to capture the value of the wealth that’s out there?

Liu points to previous growth figures to back-up the 2013 forecast. He notes that HNWI assets grew by around 8% to 9% from 2002 to 2007 even with the financial problems during that time. Clearly optimistic about the future, he expects the five-year period from 2008 to even things out.

North America (mainly the US) and Asia-Pacific (mainly China) are expected to lead the growth in HNWI assets and population over the next five years, backed by expectations of higher US consumer spending and an increased autonomy of the consumer-led mainland economy. Asia-Pacific is expected to overtake North America in terms of HNWI assets by 2013, thanks in large part to China’s relatively robust growth.

With regard to the quality of the data, Liu concedes that the HNWI asset and population figures used in the World Wealth report are likely “conservative” and “understated”, but when used consistently over the past 13 years, still paint a pretty good picture in terms of growth trends.

Wealth trends in Asia

Looking specifically at Asia, the region’s HNWI assets fell 22.3% to $8.3 trillion in 2008 from $10.7 trillion in 2007. Its HNWI population fell 14.2% to 2.4 million from 2.8 million.

Still highly dependent on exports, Asia was also severely affected by the crisis as global demand for products dried up, particularly towards the end of 2008.

In terms of the stock market, those with the largest gains in the region in 2007 led the losses in 2008. China’s market capitalisation was down 60% in 2008 after a surge of 291% in 2007, while India’s was down 64% in 2008 after jumping 118% in 2007.

Merrill Lynch and Capgemini declined to reveal the complete details relevant to Asia, opting to reveal the full report on the region’s wealthy individuals separately in October.

However, snippets of information reveal that China — with its 364,000 in HNWIs — has overtaken the United Kingdom as the fourth highest ranking market worldwide in terms of HNWI population. This marks another step up for China, which overtook France in the rankings in 2007. Japan, with a HNWI population of 1.366 million, is still firmly second to the US.

Hong Kong and India suffered the most in terms of the number of people who can no longer call themselves US dollar millionaires. The HNWI population fell by a whopping 61.3% in Hong Kong to 37,000 in 2008 from 96,000 in 2007, and by 31.6% in India to 84,000 in 2008 from 123,000 in 2007.

Hong Kong’s poor showing in this year’s report can be explained by the 50% fall in stock market capitalisation and the 12.6% average decline in property prices in 2008. Add to that the fact that the majority of Hong Kong’s HNWIs just barely made it to the list to begin with, as many of them fell in the $1 million to $5 million range. Being borderline HNWIs meant that last year’s stock market losses were enough to change their overall fortunes.

Like Liu, Stephen Corry, Asia-Pacific investment strategist at Merrill Lynch Global management, also prefers to look at the bright side. He notes that investor sentiment has already improved, with the Hang Seng Index up 27% so far this year and property prices recovering somewhat thanks to low interest rates and higher liquidity. Another thing in Hong Kong’s favour is its role as a conduit for investors interested in gaining exposure to the China market.

India also suffered from a hefty drop in stock market capitalisation (it was down 64.1% in 2008) and a steep decline in demand for its goods and services.

Japan, which accounts for more than 50% of the HNWI population in Asia-Pacific, suffered a relatively mild 9.9% decline in HNWI population. Japan’s relative resilience has to do with the fact that the rich list has grown that much over the past two years and the individual asset levels are higher compared with other markets, allowing the Japanese to survive stock market losses better than most in the region.

In terms of asset allocation in Asia and worldwide, wealthy individuals took cover in fixed-income and cash-based investments, making up 50% of overall portfolios of HNWIs in 2008. HNWIs also retreated to home markets, going back to investments they were familiar with and had more confidence in. They also returned to real estate, with this asset class making up 18% of overall portfolios of HNWIs in 2008.

Impact on wealth management industry

The global financial crisis has most certainly taken its toll on the wealth management industry. It has shaken the trust and confidence that HNWIs previously placed on markets, regulators, financial institutions and even the principle of portfolio management, according to Capgemini.

“Mainly due to the loss of trust and confidence, more than 25% of HNW clients surveyed withdrew their assets from a wealth management firm or completely switched over to another firm in 2008,” says Arvind Sundaresan, head of sales for Asia-Pacific at Capgemini Hong Kong.

Sundaresan says the switching trend was more prevalent among individuals below the age of 45 as well as those who earned their wealth rather than inherited it.

To prevent client attrition and strengthen retention, Capgemini says financial advisors and wealth management firms must pursue more open and transparent client communications, provide more risk-related information, and improve client services.

Source: 26.06.2009 by Rita Raags De Ramos

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