Wealthy profit from imaginative investments

The rich are not only getting richer, they are getting more imaginative in terms of how they invest their money, according to the tenth edition of Merrill Lynch and Capgemini's World Wealth Report.

Last year the wealth of high net worth individuals (HNWIs), defined as people with financial assets of at least $1 million excluding their main residence, grew by 8.5 per cent. There are now 8.7 million of these individuals in the world, a 6.5 per cent increase on the number in the millionaires' club in 2004.

The report does not include data specific to the Republic of Ireland, but Nick Tucker, head of Merrill Lynch's Global Private Client division in the UK and Ireland, says that based on the performance of the property market and the wider economy here in 2005, the increase in the number of Irish HNWIs is likely to exceed the 7.3 per cent recorded in the UK.

Although gains were lower than those secured in 2004, HNWIs held on to their property investments in 2005, according to the report. However, Tucker anticipates that HNWIs will begin to reduce their property investments this year. "There are early signs in Ireland of that - on the margins," he said.

Ten years of analysing the investment patterns of the rich and the super-rich has confirmed that they are ahead of the pack.

Ultra HNWIs - people with financial assets of more than $30 million - make investing decisions ahead of market trends. "The clear and consistent message is that the ultra HNWI is often the trendsetter," says Tucker.

The World Wealth Report found that ultra HNWIs, over 85,000 of them, allocated a greater percentage of their assets to alternative investments, exhibiting a taste for complex investment products such as hedge funds, private equity and investments in their own businesses.

The ultra HNWIs also had more geographically diversified portfolios than their HNWI counterparts and greater exposure to emerging markets in the Asia-Pacific region.

According to the report, HNWIs are increasingly embracing international investments and lifestyles.

In the year 2000, alternative investments made up just 3 per cent of HNWI portfolios. Last year, they made up 20 per cent. "As people's appetites for cash and fixed-income assets declines, some of the money is going into equities, but more of it is now going into alternative investments," says Tucker. "In 2003 and 2004 it was all pouring into hedge funds. In 2005 it was private equity."

Low returns meant HNWIs continued to shift investments away from North America in 2005, despite a stronger dollar than in 2004.

The Asia-Pacific region overtook Europe to become the second most popular region for international investment: globally, Asia-Pacific investments represented 23 per cent of the total assets held by the world's HNWIs last year.

So what is the source of all this wealth?

Ownership of a business was the primary source of wealth for 37 per cent of the millionaires. Income accounted for 24 per cent and inheritance was the origin of wealth for 18 per cent.

Meanwhile, the cost of maintaining the lifestyle to which the average millionaire would have become accustomed is not accelerating as quickly as it once did.

Forbes' Cost of Living Extremely Well Index (Clewi) measures the cost of a basket of luxury goods and services, including cars, jets, yachts, champagne, designer clothes and accessories, holidays and stays at spas.

The World Wealth Report uses the Clewi to track HNWI living costs over time, pointing to research that has found that the "admission and maintenance charges" to a life of privilege cannot be overlooked with discussing impacts to HNWI wealth.

While the Clewi used to race ahead of the standard Consumer Price Index (CPI), it is now only marginally ahead, increasing by 4 per cent in 2005 compared to a 3.6 per cent rise in the CPI.

The combination of the 8.5 per cent growth in their wealth and the decelerating prices for luxury goods led to a more affordable HNWI lifestyle last year. "That's the good news, but the bad news is that it is more expensive to live a HNWI lifestyle in Europe than it is anywhere else," says Tucker.

As expectations of what constitutes "living extremely well" rise over time, the basket of goods measured by the Clewi is likely to change, he adds.

Millionaires are an ageing group: 61 per cent of all HNWIs are over the age of 56.

"Managing the generational transfer of wealth is becoming more and more important. There is a demographic bubble. They have to begin to make these decisions now," says Tucker.

And it's not as simple as just finding tax-efficient ways to leave all the cash to the kids.

According to Tucker, many of today's super rich are following Bill Gates' lead and giving long-term financial support to charitable, educational and other philanthropical causes.