Wealthy Investors Raise Cash Slightly and Take Profits in Real Estate
Alternative Investments, Including Private Equity, Also Increase Slightly;
Hedge Funds Cool, While HNWIs Continue to Diversify Internationally
London (June 9, 2005) â High net worth investors (HNWIs) remained well-diversified and took a "hold and see" posture in 2004, adopting a slightly more conservative approach during a year that saw interest rates begin to trend upward and stock market returns moderate from the previous year.
According to the 2005 World Wealth Report, published today by Merrill Lynch and Capgemini, equities continued to represent the highest percentage of HNWI portfolio assets but were reduced slightly to 34% in 2004 from 35% in 2003. HNWIs are individuals with financial assets of at least US$1 million.
Fixed income investments were the next largest percentage of HNWI portfolios, increasing to 27% in 2004 from 25% in 2003. Cash also increased over that period, from 10% to 12%, as did alternative investments including private equity, from 13% to 14%.
The biggest change was seen in real estate investments, which decreased from 17% to 13% -- an indication that HNWIs took some profits in 2004 after several years of strong returns in an investment class that includes direct real estate investments and REITs.
"High net worth investors and their advisors try to anticipate rather than follow market trends and get ahead of the curve in their investing strategies. The asset allocation changes that we saw in 2004, while subtle, are slightly more defensive and are also consistent with the kind of anticipatory behavior we have seen from HNWIs in the past," said James P. Gorman, Executive
Vice President, Merrill Lynch & Co. Inc.
"While HNWIs remain well diversified worldwide, there are clear regional differences in asset allocation. Wealthy investors in North America remain the most committed to equities, while Latin American HNWIs maintained the lowest average percentage of equities in their portfolios. Real estate investments in Asia-Pacific and Europe remained higher than the global average, and investors worldwide lowered their exposure to the U.S. dollar," said Petrina Dolby, Vice President of Capgeminiâs Global Wealth Management Practice.
Among alternative investments, private equity attracted renewed interest, with substantial investment flows into this asset class during the second half of 2004. HNWIs were attracted by strong performance, as the US private equity index outperformed other market indices in 2004.
Many financial advisors interviewed for the 2005 World Wealth Report said that their clients reduced their rate of investment in hedge funds from 2003 to 2004, consistent with a declining rate of return in this asset class over that time period. Increasingly, hedge funds are viewed as a source of portfolio diversification rather than generators of out-sized returns.
HNWIs continued to use foreign investments to diversify their portfolios. While North America remained the preferred destination for investment, high returns generated in the emerging markets drew investment to the Asia-Pacific region.
Foreign exchange â already a focus of institutional investors â is expected to grow in popularity among HNWIs as a way to enhance returns and hedge risk. With daily transactions of $2 trillion, the FX markets are still at a relatively early point in the HNWI adoption cycle.