NEW YORK - The monied continued to make money as the number of high-net-worth individuals and their investment assets continued to swell in 2004, according to the annual World Wealth Report released by Merrill Lynch and Capgemini at Merrill's world headquarters on June 9th.
This elite group, with the entry requirement of at least $1 million financial assets, has increased 7.3% from 2003, bolstered by 600,000 new members to a global total of 8.3 million people.
Exceptional Global Market Boosts HNWI Assets 7.3%
The rich and the very rich around the world gained 7.3% in assets and now jointly account for roughly $30.8 trillion. The growth rate in the number of high-net-worth individuals (HNWIs) and their wealth came in line with the exceptional global economic performance in 2004, the highest in 20 years. The jump was higher than the 2002 growth rates of 2.7% and 7.7% in 2003 and is expected to grow at a slightly slow path of 6.5% compounded over the next five years, reaching $42.2 trillion by 2009, according to the report.
Consequently, "the opportunities for financial advisory firms, despite what some people might have predicted several years ago, remain very robust and will for the next several years," said James P. Gorman, executive vice president of Merrill Lynch and the head of Corporate Acquisitions, Strategy and Research.
The World Wealth Report, which is generally very predictive, monitors the rich and their financial advisers in 68 countries that account for over 98% of global gross national income and 99% of world stock market capitalization.
Even though high-net-worth individuals possess the resources and resilience to grow assets during the periods of different economic cycles, good national and international economic health is essential to help create wealth-generation opportunities.
"The two main drivers of personal wealth creation - economic growth and market capitalization - worked together to generate the strongest growth in high-net-worth wealth we've seen in more than three years," Gorman said.
These, in addition to the low interest rates in certain regions of the world, drove the new bubble of people into this elite segment of the population, he continued.
The growth rates of 2004 materialized high expectations for the year. North America and Asia-Pacific drove the pace with, according to Gorman, the "given the phenomenal micro and macro economical environment throughout 12 months," growth rate of 10% to 2.7 million HNWIs and an 8% increase to 2.3 million millionaires respectively.
U.S. Market Defies Oil Prices
In the United States, the increase was helped by moderate stock market performance in spite of surging oil prices, healthy GDP growth of 4.4%, the low cost of money and President Bush's Tax Relief Act of 2001. The states saw 226,000 more people join the ranks of the wealthiest Americans in 2004, according to the report.
"Canada grew more on the back of the oil price increase," Gorman said, and gained 2.8% in GDP. The growth of wealth in Asia-Pacific was attributed to the high savings rates - 47.6% in China and 36.9% in Malaysia. Similarly, China emerged as the success story in terms of GDP growth gaining 9.5% and driving economic growth across the entire region.
GDP went up 8.4% in Singapore, 7.6% in Hong Kong and 6.8% in India. The Asia-Pacific region continued increase in exports and marked a strong increase in market capitalization (Singapore - 60.5%).
The news from Europe, on the other hand, was more modest. Slowed down by high unemployment rates and weak GDP growths in Germany, France and Italy, the economic giants that jointly account for over half of the European Union's economic output, constituted half the increase in HNWIs as in Asia-Pacific. Looking back to 2002, there were more HNWIs in Europe than there were in both North America and Asia-Pacific. In 2004, North America exceeded Europe for the first time, both in the number of high-net-worth individuals and their net worth.
Asia-Pacific Growth Continues
At the current rate of growth, Asia-Pacific will also exceed Europe in the next couple of years. Still, the results in Asia-Pacific today could be much higher due to the difficulty in tracking people's wealth and a generally negative attitude towards disclosing that information in China.
The smaller economies of the Middle East and Africa marked the highest accumulation of wealth since the 1970s. Helped by the shock in the oil and other commodities markets, total wealth of the local millionaires increased by 28.9% and 17.3% respectively. The HNWI population went up 9.5% in the Middle East and 13.7% in Africa.
On the very high end, the number of ultra-HNWIs, i.e., the very rich with financial assets of at least $30 million, went up 8.9% as 6,300 new members joined the elite group of 77,500 worldwide.
Mimicking Institutional Investors
Having access to more resources, high-net-worth individuals usually tend to behave differently from the general population. In 2004, HNWIs continued to mimic institutional investment behavior in terms of alternative investments and risk management and remained well diversified.
As interest rates continued to rise, combined with modest stock market performance, these "walking institutions" adopted a "hold-and-see" strategy. With the more conservative mindset, HNWIs decreased their equity standings to 34%, down from 35% in 2003, and bought more fixed income securities, which now account for 27%, up from 25%. Cash/deposits went up 12% in 2004 from 10% in 2003.
The year 2004 also marked an accelerated interest in private equity on behalf of high-net-worth individuals. This type of alternative investment returned 23.5% and reached $200 billion, as the ultra-HNWIs and the institutions remained the primary contributors.
The use of loosely regulated hedge funds declined as they on average returned 7.5%, down from 17.2% in 2003. The investment vehicles for the rich are now more often considered an integrated part of a well-diversified portfolio, as opposed to the main generator of the legendary "absolute" returns.
"Given the speculation of how we're in the bubble, real estate is where money is being put off the table," Gorman said. HNWIs globally decreased their real estate standings from 17% to 13%, illustrating that they realized some profits and now are careful to decrease their market exposure.
Continuing the institutional-like behavior, HNWIs continued investing in emerging markets which returned 24.3% in 2004. Meanwhile, they kept a substantial presence in the most popular destination of the safer havens of North America. HNWI's were also noticed to increase foreign exchange investments, fearing the softening of the dollar.
Key Challenge of the Mid-Tier:
Managing the Managers'
According to the report, this year about 9% of HNWIs fit in the category of the so-called "mid-tier millionaires" (MTM), those with financial assets between $5 million and $30 million. The majority of MTMs earned their wealth, as opposed to inherited it, and tend to be the first rich generation in their families.
Today, MTMs face particular challenges in money management and tend to be underserved, being caught up between the so-called "next-door millionaires," those with investment wealth of $1 million to $5 million, and the ultra-HNWIs. Seeing their wealth fluctuate, MTMs responded by entering into complex risk management and return maximization strategies by hiring additional advisory staff.
They are not satisfied with a single financial adviser, but at the same time, cannot afford family office services. As many of the MTMs now have more than three asset management providers, they now face an additional challenge of "managing the managers."
"This, as well as the increase in cost of maintaining their lifestyle overall, places additional pressures on performance exceptions, especial ly in a recovering or stabilizing market such as we have experienced over the past two years," commented the president of Capgemini's global wealth management practice, Petrina Dolby.
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