High earners turn to alternatives
High net-worth individuals are turning to alternative and structured products to preserve their wealth in a difficult environment for traditional equity investments.
'In the past, people would talk about cash, fixed income, equities and real estate as the four major asset classes. What has now changed is the new category of alternative funds - going from structured notes to . . . specific directional plays or equity arbitrage,' said Clive Bannister, chief executive of group private banking at HSBC Investment Bank.
'Our Asian clients are enormously interested in equity-linked notes and currency-linked notes which trade between ranges and have a degree of capital protection,' he said. 'They want products which allow them to make a return even if markets go down.'
Those with more than US$1 million in investable assets began to shift their portfolios in favour of fixed income, cash and deposit holdings as early as 2000, according to the latest World Wealth Report from Merrill Lynch/Cap Gemini Ernst & Young released this month. Property has also offered a safe haven due to a series of interest-rate cuts. Volatility, economic uncertainty and depressed equity markets prompted a rebalancing away from growth stocks and in favour of quality, value counters.
Last year, the wealth of high net-worth individuals worldwide grew a mere 3 per cent to US$2.6 trillion, just managing to outpace inflation, the report said. Asian clients, however, outperformed the average, with wealth rising 7.1 per cent thanks to relative strength in Asian stock markets outside Japan and high savings rates.
In the United States, high net-worths saw wealth grow by 1.7 per cent with Europeans edging up a mere 0.1 per cent.
Mr Bannister said alternative funds had 'grown enormously' as an asset class, with business volumes up almost 50 per cent year on year. HSBC has US$200 billion in private banking assets under management with US$10 billion, or about 5 per cent, invested in alternative funds.
Private banking clients were also having to assess their currency positions with a softening US dollar and a euro which was 'looking more plausible', Mr Bannister said.
'If people's reference currency has been the dollar and that is weakening then you have to work out how much of your worth you want in dollars,' he said. 'We must never forget what is tactical. There are always short-term volatilities against longer-term objectives for a family and their wealth, either in one lifetime or the next.'
HSBC has seen a 20 per cent year-on-year rise in lending to private banking clients. Clients in Singapore and Hong Kong have also shown strong interest in incorporating life insurance policies with trust structures.
In Japan, the introduction of a 10 million yen (about HK$646,000) limit on bank deposits had brought increased business as clients sought to diversify their deposits, Mr Bannister said.
Monica Wong, chief executive of private banking Asia for HSBC Republic, said clients based in China tended to be more conservative with their investment choices but were learning quickly. Due to capital controls, the bank can only deal with high net-worth individuals who have income-generating businesses outside the mainland.
She said the market potential was big, with more than 100,000 people in Beijing worth more than US$10 million, according to market sources.
