Ahead of the curve: How the super rich made money despite global slowdown

World Wealth Report reveals the richest investors made a timely switch out of equities
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The Independent Online

Few things in life are more galling than the spectacle of the rich becoming richer. Though it happens every year, you might have thought that 2001, with its economic slowdown, war, terrorism and plummeting stock markets, would at least dent the fortunes of the wealthy.

Few things in life are more galling than the spectacle of the rich becoming richer. Though it happens every year, you might have thought that 2001, with its economic slowdown, war, terrorism and plummeting stock markets, would at least dent the fortunes of the wealthy.

But, even after a year like 2001, which saw the pensions of ordinary people shrink disastrously in value, the rich came out on top.

The World Wealth Report, the annual study of "high net worth individuals" (HNWIs) from Merrill Lynch and Cap Gemini Ernst & Young, published yesterday, found that affluence cushions people from all manner of catastrophes.

HNWIs saw their wealth, and their number, grow by 3 per cent last year. Their combined wealth swelled to $26.2 trillion (£17.7 trillion) last year – that is almost three times the GDP of the United States. By comparison, the World Bank estimated GDP for the whole world in 2000 at $31.5 trillion.

Although internet paper millionaires were high-profile casualties last year, some 200,000 people actually joined the ranks of HNWIs – defined as those with financial assets of $1m, not including the house they live in. There are now 7.1 million people in the world with such wealth, including 345,000 in the UK. The worth of even richer people, the 57,000 known as ultra high net worth individuals, those with financial assets of more than $30m, saw their wealth also increase 3 per cent to $8.4 trillion.

The findings of this study certainly show a slowdown in the rate of wealth accumulation: in 2000 the increase in HNWI wealth was 6 per cent, while 1999 – the height of the technology boom – saw this group gain 18 per cent.

In fact 2001 produced the worst times for the wealthy since the methodology of the Merrill Lynch-Cap Gemini report started being devised in 1986. Falling stocks markets were the big problem. Last year saw the S&P 500 index of leading US stocks drop 11.9 per cent, while France's CAC 40 ended the year down 20 per cent, Germany's DAX 30 declined 19.8 per cent and the UK's FTSE 100 lost 16.2 per cent. So any positive return for last year is pretty attention-grabbing.

Christopher Humphry, vice president at Cap Gemini, said: "People are surprised at the growth [in wealth] last year but they really shouldn't be. Most family businesses, for instance, made money last year. Although GDP growth was slack, it was in positive territory."

A striking feature of the World Wealth Report is the increasing sophistication that the wealthy employ to nurture their assets. There is a popular stereotype of the indolent wealthy, simply lying back and taking advantage of their position. But this is not the picture that emerges from the World Wealth Report, which is of a class of people who still work, and so add to their wealth, and also actively manage their assets. HNWIs have moved away from a reliance on equities to bonds, "structured products", and it was apparent last year that they put more money into physical assets such as gold and property.

A whole industry of so-called private bankers exists to serve the wealthy in managing their assets. The hefty fees charged by these banking aristocrats ought to buy some good advice and, judging by this year's performance, it appears to work. Furthermore, the report points out that while the main indices lost ground, many smaller stocks did well in what is termed a "stealth bull market". For instance the S&P index of 600 small stocks was up 5.7 per cent at the end of 2001. While retail investors tend to be late into bull markets, and late out when the market turns, the rich act more smartly with the greater information and advice at their disposal.

"If you had a balanced portfolio and shied away from technology shares and you had good stock pickers, it was possible to make money last year.... They [HNWIs] are ahead of the curve," Mr Humphry said.

And, the rich have many more products and choices at their disposal – they might choose emerging market corporate bonds, for example. The structured products offer a level of security. One popular product called "principal protected notes" guarantees the sum of cash invested and then pays out any upside.

There were big regional variations last year. While HNWIs gained 1.7 per cent in North America to hold assets of $7.6 trillion, and European HNWI wealth was stagnant at $8.4 trillion, it was emerging markets that did best. Asia, which makes up a fifth of the HNWIs, saw growth in worth of 7.1 per cent to $5.1 trillion, while Latin America's wealthy gained 8 per cent to $3.5 trillion. This came despite the economic turmoil in Argentina – the region's millionaires were protected by their propensity to invest more heavily in dollar-denominated bonds and other fixed-income products rather than in equities.

In Asia too, the wealthy invest a smaller proportion of their worth in equities and, having learnt the lessons of the regional economic crisis of 1997, diversified their portfolios and they save a greater part of their income than HNWIs in other regions. The big negative was Japan again, but the region was buoyed up by the impressive performance of several local stock markets – South Korea's rose by 31 per cent in dollar terms, Thailand's by 23 per cent and Taiwan's by 18 per cent.

Although this report is the story of the rich getting richer, certainly in more developed countries, the rest of us are gaining too. Mr Humphry said that, given how commonplace HNWIs now are, there may be a case for raising the required wealth to enter the category. Indeed, private banks feel the need to use several other terms to denote others who are well off without being quite this rich, such as the "affluent" segment (worth $500,000 to $1m) and the "mass affluent" or "emerging affluent" to label those with disposable assets of, say, $100,000.

"There is a democratisation of wealth. Everyone's getting wealthier," Mr Humphry said.

Although the rich do not seem to have suffered unduly in 2001, they can look forward to better things to come. According to Merrill Lynch-Cap Gemini, their wealth will notch up growth of 8 per cent a year for the next five years, reaching $38.5 trillion by the end of 2006.

OLD WORLD, NEW WORLD AMERICAN MILLIONAIRES ARE MORE GENEROUS

Europe and North America together make up 61 per cent of the world's high net worth wealth, with roughly equal contributions from the two regions' rich. But the Merrill Lynch-Cap Gemini report paints a picture of two different types of millionaires.

The European rich do not emerge from the study looking very attractive. Europeans are much more likely to have inherited their wealth. And Europe's millionaires account for more than $2,500bn of the $8,500bn in total HNWI wealth that is held offshore – North Americans have less than $1,000bn offshore. The report suggested that this is part of a culture of secrecy among Europe's wealthy – most of this money is held in Switzerland or Luxembourg. A less charitable interpretation would attribute this to an attempt to avoid paying tax.

The European wealthy appear to love going to see their private bankers in Geneva or Lugano – for them the cachet of the Swiss bank account (where private banking was born in the 15th century) seems undiminished. While the North Americans are focused on capital markets, the Europeans are more banking led. Entrusting money to bankers for protection is deeply ingrained in the culture of the European wealthy, who have witnessed far more social and political upheaval over the centuries than their American cousins.

Americans are generally more aggressive in their investment style, using hedge funds, for instance, to a much greater extent. But North American HNWIs are much more philanthropic and likely to give to charity, helped by clear tax incentives to do so. Figures suggest that America's rich are between two and five times more likely to donate to good causes.

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