Global private wealth spiralling
Private wealth funds have flourished in the year gone by even as globalisation of wealth creation continues. OER reports

The US accounts for nearly half of the wealthiest investors in the world, says a report by International Financial Services London that analyses the size, structure and key developments in the international market for private wealth. It focuses largely on the market for high net worth individuals (NWIs) with at least US$1 million in investable assets, but also includes some analysis of the broader private wealth market. Wealthy investors provide substantial opportunities for a wide range of service providers such as those based in London.

Market size and trends
The annual World Wealth Report 2007, published by Merrill Lynch Capgemini, estimated that in 2006 the value of funds managed on behalf of 9.5 million high NWIs with over US$1 million in investable assets was US$37.2 trillion. Having grown at around 7-8 per cent a year in the three previous years, global private wealth assets rose by 11 per cent in 2006, the biggest rise for seven years. Rising stock market values along with sustained economic growth in many countries have underpinned the increase in private wealth. Also, the 11 per cent rise was more than the 8 per cent increase seen in the number of investors.

Similarly, BCG, in its annual report, Global Wealth 2007, estimated that the total value of assets managed on behalf of all investors rose by 8 per cent in 2006 to reach US$97.9 trillion, following the 5 per cent growth seen in 2005. According to it, the last two years have seen a return to more stable growth for the broader population of wealth investors. Greater exposure to equity markets means that the affluent mass benefited from double-digit growth in assets in 2003 and 2004, after having experienced losses in 2000 and 2001. BCG includes only conventional assets, such as equities, fixed interest securities and cash and deposits, in its survey. MLCG by contrast also includes alternative investments, such as hedge funds, private equity and real estate.

Asset allocation
MLCG estimates that equities accounted for 31 per cent of investments in 2005, with fixed income securities making up 21 per cent and cash 14 per cent, while conventional investments accounted for 66 per cent of assets invested during the year. The remainder was divided between alternative investments (10 per cent) and real estate (24 per cent). Alternative investments fell out of favour in 2006, with their share of assets halving from 20 per cent the previous year after investors moved out of this sector to seek higher returns available on real estate investments. In fact, real estate investments jumped to 24 per cent from 16 per cent share in earlier recent years. This, in all probability, represented a short-term tactical move, with allocations to alternative investments expected to have recovered in 2007, as some of those gains from real estate were liquidated. Fixed income and cash accounted for 35 per cent of investments in 2006 in line with the three previous years, but down from their 55 per cent share of 2002, when equities were out of favour. Equities’ share edged up to 31 per cent in 2006.

Alternative assets include private equity, hedge funds, structured products, such as index trackers, and equity derivatives. They have become a preferred form of diversification because they are less correlated with stock market performance and overall have enjoyed higher returns since 1997. Hedge funds have, on an average, generated positive returns every year since 1997. And, though they have performed less well than equities in three of the last four years, they have generated much higher returns over the past decade. Bonds too have achieved steady returns since 2000. Average global return on equities picked up from 5 per cent in 2005 to 16 per cent in 2006. Positive returns over the past four years have helped make up the heavy losses experienced between 2000 and 2002. The market value of all domestic companies worldwide rose by 162 per cent from US$22.8 trillion at end-2002 to US$59.7 trillion in September 2007.

Investor segments
The value of assets under management is concentrated amongst the highest net worth individuals. MLCG estimates that $13.1 trillion, or over a third of the US$37.2 trillion of high NWIs is accounted for by 95,000 ultra-high NWIs, with over US$30 million of assets, who account for only 1 per cent of the population of high NWIs. The number of ultra-high NWIs rose by 11 per cent from 85,300 in 2005 while their wealth rose by 17 per cent from US$11.2 trillion the previous year, indicating that wealth is becoming more consolidated in this group.

Regional distribution
The MLCG breakdown indicates that in 2006, North America and Europe accounted for 30 per cent and 27 per cent, respectively, of total wealth of high NWIs, while Asia Pacific accounted for 23 per cent, Latin America 14 per cent and Africa and the Middle East 6 per cent. These shares had changed little over the past few years. The number of investors in general was proportionate to the value of wealth, with the exception of Latin America. Private wealth per high NWI was over US$3 million in North America, Europe and Asia; nearly US$6 million in Africa and the Middle East; and over US$12 million in Latin America. MLCG estimates that Latin America’s 14 per cent share of global wealth originates from just 5 per cent of high NWIs worldwide. Consequently, the average wealth for each high NWI in Latin America was about four times that of most other regions. the analysis indicates that polarisation of wealth in Latin America was much greater than in other countries.

The MLCG report showed that the US accounted for nearly half of the wealthiest investors in the world: 4.6 million millionaires out of the global total of 9.6 million and 371 billionaires out of 793. Japan and the UK followed with 830,000 and 610,000 millionaires, respectively. China had the fifth largest number, with 310,000 millionaires. The spread of billionaires was more skewed in emerging markets. The share of billionaires in the developed countries, with the exception of the US and Germany, therefore tended to be lower than their share of billionaires. Thus, Russia, India, Turkey, Hong Kong and Brazil had a relatively large number of billionaires. Only the US and Germany had more than Russia did.

Sources of wealth
The main source of growth in private wealth originated from those involved in building successful businesses. These included senior executives in large companies, who had substantial earnings supplemented by stock options and other bonuses; entrepreneurs who had become millionaires from successful floatations and IPOs; and private families that had received the proceeds from selling to larger international groups. The total value of wealth owned by the 400 wealthiest individuals in the US, as listed in the US Forbes 400, rose by 23 per cent from US$1,250 billion in 2006 to US$1,540 billion in 2007.

IFSL’s sector analysis of the US Forbes 400 for 2007 indicated that the share of those involved in financial services and management of investments increased from 24 per cent in 2006 to 27 per cent in 2007, continuing the steady rise from 16 per cent in 2001. The share of wealth of a number of other sectors was unchanged in 2007: these included software and oil, each at 8 per cent; internet businesses such as eBay, Yahoo and Amazon at 5 per cent; and hotels and computers, each at 3 per cent. Media and real estate were each down slightly at 10 per cent and 6 per cent, respectively, although the biggest faller was retailing, whose share nearly halved from 7 per cent to 4 per cent. The share of gambling doubled to 4 per cent, while that of sport and transport was included for the first time at 1 per cent each. Hedge funds, also identified in this survey for the first time, were a growing component of financial services, accounting for 3 per cent of the wealth amongst the Forbes 400 in 2007.

A broad range of manufacturing activities, including electronic and medical equipment, cosmetics, food and drink, clothing and shoes, continued to provide opportunities for wealth creation making up an 11 per cent share. The share of inherited wealth fell to 7 per cent. Wealth in some sectors, particularly software, internet, and gambling remained heavily concentrated in the hands of a few individuals.

Private banks
Private banks were major providers of services to wealthy investors. In Scorpio Partnership’s annual private banking benchmark study of assets under management at end-2006, the largest bank was UBS with US$1,608 billion, marginally ahead of Citigroup with US$1,438 billion. Assets managed by Merrill Lynch also exceeded US$1 trillion, at US$1,209 billion. These were followed by Credit Suisse, JP Morgan and Morgan Stanley. The five largest banks accounted for half of the US$10.8 trillion assets managed by 180 banks for which comparative data were available. This represented a 14 per cent increase in base currency terms compared with the previous year. The survey covered 180 private banks, 73 earlier, with this sector’s share of total assets among the surveyed firms growing 28 per cent.

Onshore and offshore centres
The main centres for onshore investment were the major financial centres of the world, notably London, New York, Singapore, and Hong Kong. An estimate of the size of offshore centres shows Luxembourg, with investments of US$2,350 billion, was the largest centre based value of bank deposits and portfolio investments managed on behalf of non-residents. It was followed by the Caribbean with US$2,094 billion and Switzerland with US$1,744 billion. Other key centres included UK offshore (including Jersey, Guernsey and the Isle of Man), Hong Kong and Singapore.

The study found that a number of factors had raised the relative importance of onshore investment over offshore centres: these included steady reduction of tax rates in many countries, improved political stability and international measures to combat tax evasion and money laundering. EU policies affecting offshore banking centres included tax amnesties and capital repatriation programmes and intergovernmental withholding tax agreements.

Emerging economies had the highest share of assets offshore, with the primary drivers being political instability and an underdeveloped local financial sector. Therefore, the global average of just under 7 per cent disguised wide variation in the share of funds invested offshore. Investors in the Middle East & Africa and Latin America invested around 30 per cent of their funds offshore. In contrast, North American and Japanese investors placed only 2 per cent and 1 per cent of assets offshore.

Other regions fell in between, with European investors locating 8-9 per cent of their assets offshore, other Asian countries 10 per cent and the BRIC nations as a group 15 per cent. BCG estimated that offshore funds’ share of the total wealth was likely to decline from 6 per cent in 2007 to 6.3 per cent by 2011, not least because nearly half of offshore deposits were held in cash, which generated a lower return than bonds or equities. In addition, some regions such as the Middle East, whose residents hold a high proportion of wealth offshore, were developing attractive opportunities for domestic investment.

Despite the falling asset base, well-regulated offshore centres will continue to fulfil a role for wealth that is created in nil or low tax jurisdictions or where for historic or other reasons wealth has legitimately been managed offshore.