This article first appeared in Personal Wealth, The Edge Malaysia Weekly on July 22, 2019 - July 28, 2019

High-net-worth individuals (HNWIs) around the world gravitated towards cash and alternative investments such as private equity (PE) between last year and the first quarter of this year due to the high volatility of global equity markets. However, this phenomenon is not expected to continue, says consulting, technology and digital transformation service provider Capgemini.

According to its World Wealth Report 2019, cash and cash equivalents replaced equities as the most significant asset class in 1Q2019, making up nearly 28% of HNWIs’ financial wealth. Equities slipped more than 5% to second place, making up nearly 26% of their financial wealth.

The report says the shift towards more conservative asset allocations was due to HNWIs becoming more risk-averse in preparation for a potential market downturn and loss of equity portfolio value.

Chirag Thakral, deputy head of global financial services market intelligence strategic analysis group at Capgemini in New York, tells Personal Wealth in a phone interview that the wealth of HNWIs fell last year as a result of holding more cash and cash equivalents as well as the lower value of their equity portfolios due to the decline in global markets. “So, the combination of these factors caused cash to automatically become number one in some parts [of the world].”

Thakral says this phenomenon has happened in the past and that it generally occurs when there is market volatility. “HNWIs tend to move towards less riskier or alternative assets and investments. They typically move to things like cash, fixed deposits or alternative investments such as a hedge fund when the market is volatile.”

The report notes that unfavourable market conditions throughout 2018 spurred an increase of nearly 4% in allocations to alternative investments globally, at 13%.

Thakral says the slight upward trend in alternative investments last year was due to investors seeking other opportunities in the market as they moved away from equities. “The two most popular alternative investments over the years have been hedge funds and PE. In today’s world, PE has been trending a lot over the past few years — not in terms of investments, but we have seen a lot of traction around start-ups. We hear a lot of anecdotes of how people are investing in the PE space.”

He adds that the percentage allocated to alternative investments is usually the smallest or second smallest in investors’ portfolios.

However, while there is a trend towards alternative investments, it is not expected to overtake equities as the leading investment option in the long run, says Thakral. “Equities are still a mainstream [investment option]. Investors moving away from equities now is a temporary [measure]. As the markets grow and become more stable, people will come back to equities.

“Most invest in [equities] for the long term and over the years, it has been one of the more trusted asset classes. But having said that, there are new avenues opening up in alternative investments such as PE.”

Asia-Pacific accounted for half the decline

The report says the global wealth of HNWIs declined by 3% for the first time in 2018 after seven years of consecutive growth. This was primarily driven by “a slump in equity-market performance and slowing economies in key regions”.

“After a stellar 2017, stock markets faced turbulence in 2018 as global market capitalisation declined by 15% amid high volatility,” it adds.

HNWIs in Asia-Pacific and Europe saw a significant decline in their wealth last year. Asia-Pacific accounted for 50% of the decline in global wealth, with China contributing to half of that amount.

“Chinese markets lost more than US$2.5 trillion in market capitalisation due to the uncertainties over US-China relations and pressure on the yuan,” says the report.

This did not come as a surprise, considering the declining markets and decelerating economic growth, especially in Asia-Pacific, it adds. The region has been a global powerhouse for the last seven years, with an overall growth of 92% since 2011, compared with the global growth of 62%.

“Other major economies to show a decline in HNWI wealth were Japan and India, with negative growth rates of around 3% and 6% respectively. India declined slightly as its economy slowed in 2018 and struggled to create jobs as unemployment rose to its highest in recent years,” says the report.

It adds that Hong Kong has been consistently sensitive to equity market movements over the years and experienced the highest gains and declines in HNWI wealth in a bull and bear market respectively.

“In line with that behaviour, the market experienced the steepest declines in HNWI wealth (13%) and population (10%) in 2018 across the globe. Decelerating GDP growth and declining market capitalisation also drove wealth down,” says the report.

Equity allocations in Asia-Pacific ex-Japan declined 5% to reach 22%, the lowest across all regions, says the report. Meanwhile, allocations to alternative investments increased 4% last year.

“Given the significant market volatility, HNWIs in Asia-Pacific are gradually moving towards alternative investments, particularly PE and venture capital. With a large volume of start-ups and fast-growing early-stage companies in Asia-Pacific, alternative investments have become an attractive option,” says the report.

It noted that like last year, countries with the highest population of HNWIs were the US, Japan, Germany and China. These countries represented 61% of the global HNWI population.

“Among the top three countries in HNWI population, the US improved its dominance slightly with around 1% growth while the HNWI population growth in Japan and Germany declined by half of 1% and slightly more than 1% respectively. China’s HNWI population dropped the most with more than 5% negative growth,” says the report.

As for Malaysia, Thakral and his team are still in the midst of finalising the numbers for an Asia-Pacific-focused report to be released at a later date. However, based on a rough estimate, the decline of HNWI wealth in the country has been moderate. The HNWI population has increased by about 1% while its overall wealth has decreased by about 2.5%.

“This is pretty good compared with other Asia-Pacific economies. The reason behind that is that while the market dropped pretty significantly in Malaysia, it was still the second best performing market after Indonesia in Asia-

Pacific in 1Q2019. The real estate market was stable and the economy was still growing,” says Thakral.

UHNWIs the hardest hit segment

The ultra-HNWI (UHNWI) and mid-tier millionaires accounted for 95% of the overall decline in the wealth of HNWIs while UHNWIs alone accounted for 75% of the decline. Mid-tier millionaires made up 20% of the total global decline.

The report says the UHNWI population and their wealth fell 4% and 6% respectively last year, compared with almost flat growth in the overall HNWI population and 3% decline in HNWI wealth.

Compared with 2017, UHNWIs experienced the broadest change in population and wealth growth — down by more than 15 percentage points — while the millionaire-next-door segment (which makes up almost 90% of the HNWI population) was affected the least last year.

“Population growth was virtually flat, with only a slight decline, and wealth dipped by less than half of 1%, signifying that nearly all the declines in HNWI wealth and population were driven by the UHNWI and mid-tier millionaire segments,” says the report.

“Despite being a relatively small HNWI market, Latin America accounted for the highest share (28%) of global UHNWI wealth. Latin America, along with the second largest UHNWI market, Asia-Pacific (which experienced an almost 10% decline in UHNWI wealth), fuelled the overall global decline in UHNWI wealth.”

In the report, HNWIs are defined as those having investable assets of US$1 million or more, excluding primary residence, collectibles, consumables and consumer durables. For the purpose of the analysis, Capgemini separated HNWIs into three discrete wealth bands: those with US$1 million to US$5 million in investable wealth (millionaires next door), those with US$5 million to US$30 million (mid-tier millionaires) and those with US$30 million or more (UHNWIs).

Wealth managers need to step up their game

Although 2018 saw a volatile economic environment and shifting industry landscape, satisfaction and trust in wealth management remained strong. However, HNWIs continued to demand more value from wealth management firms. A key concern was fees as clients wanted personalised offerings with a focus on value creation.

“As the wealth industry evolves and HNWI expectations shift, key opportunities exist for wealth management firms to better meet rising client expectations regarding personalised offerings, service quality and fee transparency. Better clarity regarding fee structure may allay client concerns as only 62% of HNWIs said they were comfortable with their primary wealth manager’s fees. HNWIs also said they wanted personalised offerings that focus on value creation,” says the report.

Fees were less of an issue for HNWIs in Asia-Pacific ex-Japan, where 77% were comfortable with their fee structure. However, there was a significant decline in their net promoter scores (NPS). “This implies that key issues remain when it comes to client engagement and experience,” says the report.

In contrast, Japan — which witnessed an increase in NPS — cited low comfort (43%) with wealth management firm fees, implying the need for fee transparency. “As

HNWIs desire more transparency in transactions, fee-based models may gain more acceptance. With a new generation of tech-savvy HNWIs, technology will help wealth managers become more transparent, improve user interfaces and beef up client engagement.”

NPS is a metric for measuring customer satisfaction. It calculates the likelihood of a customer recommending a brand to a friend or colleague.

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