This week’s World Wealth Report from consulting firm Capgemini and financial services group Merrill Lynch provides some fascinating insights into the global population of high net worth individuals (HNWI) – and not just because it reveals that there are now 10.1 million individuals on the planet with more than $US1 million in financial assets (that is, assets other than collectibles, consumables, consumer durables and primary residence).
The report’s insights into the investment strategies and spending habits of the world’s HNWI are also required reading for anyone who follows the behaviour of highly successful business people.
Chasing after the rich is a bit like chasing down an exotic species of bird. Often you get to look at the feathers of one or two birds and sometimes even a small flock, but rarely do you get a sense of the size and scope of the whole population. The World Wealth Report, while based on calendar 2007 figures, provides a profile of the world’s rich that cannot be matched by Forbes’ billionaire’s list or any country’s rich list.
The big-picture numbers from the report are impressive. Despite the sub-prime crisis and resultant global economic turmoil in the second half of 2007, the world’s rich did very well, with the total amount held by HNWIs increasing 9.4 per cent to $US40.7 trillion. For the first time, the average amount held by each individual crashed through the $US4 million barrier.
Big deal, you might say – it’s not that impressive to have $US4 million these days. Consider, then, that the number of people in the group called ultra-HNWIs – those with more than $US30 million in financial assets – has grown by 8.8 per cent and in terms of accumulated wealth by a stunning 14.5 per cent.
The biggest HNWI population gains were in the Middle East (up by 15.6 per cent), Eastern Europe (up by 14.3 per cent) and Latin America (12.2 per cent). The BRIC nations – Brazil, Russia, India and China – are starting to dominate the list and posted in aggregate a 19.4 per cent increase in HNWI population and a massive 21.5 per cent gain in accumulated wealth. India led the world in HNWI population growth, rocketing ahead 22.7 per cent (after gaining 20.5 per cent in 2006) thanks to the strong performance of domestic equity markets. China ranked second in HNWI population growth, jumping 20.3 per cent, more than two-and-a-half times greater than its 2006 pace.
The report also examines the investment strategies of the HNWI population. Not surprisingly, the rich were quick to move into the safest asset classes, even before the sub-prime crisis took a decided turn for the worst in the early part of this year. The percentage of assets held in cash/deposits increased from 14 per cent to 17 per cent while the percentage held in fixed interest assets increased from 21 per cent to 27 per cent.
The world's rich also provide a good clue about what us ordinary punters should avoid: property. The proportion of HNWI assets held in property dropped sharply from 24 per cent to 14 per cent. Given the outlook for the global property sector and the tight credit conditions prevailing in most markets, it’s a fair bet that the cautious stance taken by many of the wealthy will continue for the next 12 months or so.
As to where the HWNIs are parking their money, Europe and North America remain the safe havens, despite concerns about the economic outlook in both regions: 42 per cent of the assets of the rich are parked in North America (just down from 43 per cent last year) and 25 per cent of assets are in Europe (unchanged from last year). Latin America is a new area of interest for many HNWIs, with the proportion of assets held there increasing from 7 per cent to 9 per cent.
You will also be pleased to know that the turmoil on equity markets and worsening economic outlook hasn’t stopped the wealthy spending money on what the Wealth Report calls "passion investments”, including luxury items, sporting teams, race horses, wine and travel. Luxury collectables (including automobiles, boats and jets) and art remain the most popular big-ticket items.
If you are one of the many Australian investors facing financial year investment losses for the first time in seven years, Capgemini and Merrill Lynch have some good news. They predict the total wealth held by HNWIs will hit $US59.1 trillion by 2012, which will represent an annual growth rate of 7.7 per cent – good times must be just around the corner.
The secret to this strong growth rate, according to the Wealth Report, is diversification. "As HNWI portfolios continue to grow more diversified over the long term, spread across international boundaries and asset classes, their investments become increasingly mobile. Thus, as growth in one region or market slows, HNWIs can move freely, reallocating their funds to other areas, often more quickly than the troubled market itself can react and recover.”
It’s a concept that every investor – rich or otherwise – should note.