12/01/2003
It has been a terrible three years. But don’t give up hope. That’s the message to be gleaned from several recent surveys of the investment performance of high net-worth investors.
The scope of the bad news is astonishing. The erosion of wealth last year claimed $1.9 trillion from affluent investors, according to the Boston Consulting Group’s Winning in a Challenging Market—Global Wealth 2003. Since January 2000, declining markets have erased almost $5.3 trillion of these investors’ wealth, the report states.
Despite those losses, cumulative wealth actually grew 3.6 percent last year, to $27.2 trillion, boosted by growth in Europe and Asia, according to Merrill Lynch and Cap Gemini Ernst & Young’s World Wealth Report 2003.
North American investors’ wealth decreased 2.1 percent last year due to the poor showing in the equities markets. But European HNWI wealth in dollar terms grew 4.8 percent, partly due to the appreciation of the euro and British pound sterling against the dollar. The fastest growth was in Asia, where HNWI wealth grew 10.7 percent, supported by relatively high savings rates and Gross Domestic Product growth in China, South Korea, and Australia.
The market bloodbaths, corporate scandals, conflicts of interest in equity research, and accounting irregularities in 2002 all had a profound effect on investor confidence, according to Merrill Lynch and Cap Gemini. “Investor paralysis became the norm, and HNWIs renewed their demand for expert guidance from financial advisers.” The report states: “The likelihood for HNWIs to make an investment-related decision without consulting professionals declined to 45 percent in 2002, from 55 percent in 2000.”
Even so, investors still want a firm grip on the steering wheel. “…The change in demand for increased guidance was not indicative of a return to the pre-1990s “manage it for me” approach. Rather HNWIs looked for advisers who took a “manage it with me” approach characterized by collaboration, transparency, reliability, and high service levels,” the Merrill Lynch/Cap Gemini report states.
Despite the gloom, the surveys assure us there will be better days ahead. Looking forward, Merrill Lynch and Cap Gemini forecast that HNWI wealth will grow by an average of 7 percent a year during the next five years, reaching approximately $38 trillion by year-end 2007.
A third survey, this one by the Greenwich, Connecticut-based market research firm NFO WorldGroup, shows that the number of U.S. millionaires at mid-year 2003 stood at 3.8 million, an increase of 14 percent over the year-earlier figure. However, the firm’s confidence index barely budged over the same period, meaning that, overall, investing styles will most likely retain a conservative cast for some time.