Seven habits of highly effective investors

In the world of private bankers, a million dollars (Dh3.67 million), five million or 25 million can tilt the scales from being merely wealthy to high-net-worth (HNW) or ultra-high-net-worth (UHNW). In The Wealth Report 2012, released in March, Knight Frank, the global property consultancy, and Citi Private Bank define a high-net-worth individual (HNWI) as someone with more than $25 million of investable assets.

Merrill Lynch Global Wealth Management and Capgemini's World Wealth Report 2012 puts the number of ultra-high-net-worth indivduals (UHNWIs, with investable assets worth more than $30 million) in the Middle East at 4,000 in 2010. This made up 0.9 per cent of the HNWI population in the region.

The UAE is home to 526,000 HNWIs, defined as those with investable assets of $1 million and more — the standard classification for HNWIs.

Booz and Co.'s GCC Private Banking Report released last year puts the number of wealthy households — not individuals — in the GCC, with combined total investable assets of $1-$1.2 trillion at 1.1 million. In 2010, the UAE was home to 200,000 to 220,000 of them.

For Booz and Co., wealthy is any household that has stable investable assets of more than $200,000. The HNW segment begins at $1 million of investable assets and the UHNW category at $50 million.

Behaviour pattern

The differences continue when comparing the investment behaviour of HNWIs and retail banking customers. "The most obvious difference is in risk profiles — the more money you have, the more willing you may be, depending on your mandate, to take risks. That is the main difference," says Yusuf DeLorenzo, CEO, Riverbend Consulting and the Chairman of Dow Jones Islamic Market Index Sharia Supervisory Board. "The corollary to this is that the simple investor with a lot of money is not going to be able to afford the best kind of investment advisors, whereas HNWI investors would be able to afford the fees of better investment or asset managers."

The HNWI investor, says Tamer Rashad, Head of Middle East, Merrill Lynch Wealth Management, is quite the citizen of the world. "The higher you go in the world the more intertwined you are with the global economy and there is less variation in investment style."

Having said that, analysts maintain that there are several unique factors at play in the UAE HNW landscape. Family businesses, large expatriate communities, the desire for Sharia-compliant investment products and the need for both onshore and offshore offerings characterise the UAE investor. According to Booz and Co, GCC investors house 50 to 60 per cent of investments offshore — among the highest rates in the world.

Among HNWIs elsewhere, becoming risk averse was one of the first fallouts of the global financial crisis. Rashad says, "Generally speaking, there is less investment in alternative investments today than, let's say, 2007, as a percentage of investment."

On the other hand, there are those who say that risks are still magical and the excitement of a new project or idea often holds sway over investment decisions. Once fear is past, some experts tell us, greed takes over.

Glen Ward, Business Development Manager, ICM Capital — headquartered in London with an administrative office in Dubai — which provides a trading platform for individuals with access to FX and CFD markets, says HNWIs have recently discovered the benefits of trading on retail platforms. "They are attracted by risk. Our platform gives them the opportunity to trade on the markets directly and not put their trust in hedge funds. We see HNWIs trading off the news headlines as much as anyone, in fact more so," he says.

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Quest for balance

Restructuring their portfolio to increase transparency, improve liquidity and, yes, reduce risk is one of the most important concerns of HNWI investors today, experts say. "Rebalancing the portfolio as far as geography, irrespective of the asset class, is what I would like to stress upon," says Rashad.

Today this includes both geographic diversification and investing in a variety of different asset classes.

"Many of the region's wealthiest families were previously overly invested and leveraged in the local/regional markets, be it equities or real estate," says Bruno Daher, Head of Private Banking, Middle East, Africa and the Indian Subcontinent, Crédit Suisse. "The crisis has highlighted to them the importance of asset allocation and diversification. Regional HNWI investors are today increasingly aware of the importance of the need for diversification, not just in terms of asset allocation but also geographically."

When traditional diversification proves to be volatile, innovative risk spreading may be the answer, according to the Wealth Report 2012. "We identify opportunities for our clients that are market- or sector-neutral. Asset classes don't have to be mainstream — for example, we have helped some of our clients invest in the carbon emissions market. This was less to do with the outlook for that particular market at the time and more about the timing of the investment, utilising market dislocations and market volatility," says the report.

Generally, a well-balanced HNWI portfolio should contain equity, fixed-income bonds and cash, which are the traditional asset classes, and alternative investments such as hedge funds, private equity and real estate.

"If you have 30-50 per cent of your portfolio in stock, depending upon what risk you want to take, globally you would put a vast bulk of that in the US and very little exposure to emerging and frontier markets," Rashad says.

Wealth managers, he says, are diversifying this equity component among select stocks in the US, select stocks in sectors and select stocks within Europe despite the overall macroeconomic trends. The pick from emerging markets includes the Bric countries (Brazil, Russia, India and China), as well as frontier markets such as Indonesia or Vietnam. Since diversification is the buzzword, Australia and Canada are also a part of the picture.

"You can do equity, but you can also do fixed income. We have more and more clients now, compared to precrisis — 2008, who are looking for fixed-income places in Asia and emerging markets," says Rashad.

Crédit Suisse recommends a medium-term investment strategy that is overweight on equities and alternative assets, particularly real estate, commodities and hedge funds. "At the same time, we are underweight in fixed-income assets and cash. In our view, investments in emerging market equities remain attractive and we are also advocating going overweight on US equities over Eurozone countries," says Daher.

The Arab Spring and its effect on regional markets provide the clinching argument for geographical diversification of all assets. "Our grandmothers always told us not to put our eggs in one basket, which is the same theory as asset allocation," says Jahangir Aka, Managaing Director, SEI Capital.

While he is bullish on emerging markets, he says, "the biggest overweights in our portfolios at the moment are the developed markets. And the biggest within that is the US, because valuation is very attractive. And we have slight underweight on Europe for obvious reasons. On the fixed-income side, we like the high-yield space and the emerging market debt space. Our top pick on the equity side is US developed, larger cap. Our top pick on the fixed-income side is high-yield debt."

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Focus shifts towards growth markets

Call them emerging markets, growth centres or thriving economies, globally the centre of business is shifting. According to the Wealth Report 2012, the London School of Economics professor Danny Quah forecasts that by 2050 the world's economic centre of gravity, a theoretical measure of the focal point of global economic activity based on GDP, will have shifted eastwards to lie somewhere between China and India. Professor Quah calculated that in 1980 it was in the middle of the Atlantic.

Among the emerging economies there are many favourites. "From an investment perspective, key emerging markets in Asia, Latin America, Eastern Europe and Africa are attractive. Driven by their need to satisfy domestic consumption growth and control inflation in an environment of weak export markets, emerging markets are likely to see a greater level of nominal currency appreciation in the future. In Crédit Suisse's view, the potential for nominal currency appreciation is the largest in non-Japan Asia," says Daher. He cites a recent Crédit Suisse study, which holds growing urbanisation responsible for creating investment opportunities in key emerging markets. "The study found that per capita economic activity increases 10 per cent with every five percentage point increase in urban population. The emerging market countries providing the best investment opportunities from an urbanisation perspective include China, Egypt, India, Indonesia, Nigeria, Pakistan, the Philippines, Thailand and Vietnam."

Aka recommends spreading across all markets at all times because "yesterday's leader is not tomorrow's leader," he says. "Emerging markets are heading in the right direction." Mature economies that have the advantage of multitiered systems and complex products answering various investment needs should not be underestimated.

The US is often the point of discussion. Rashad says: "This year we are back to advising our clients to focus on the US market after decreasing a little bit in the past couple of years. Selective sectors and companies in Europe are attractive as well. There are still good opportunities in the UK market, particularly."

In an election year, US, France and Russia could have a decisive bearing on equities. Daher says, "Since the beginning of the year, key US equity indices such as the S&P 500 have performed well. Over half of the 30 companies in Crédit Suisse's Top 30 portfolio are US-based, and this allocation has helped to drive its recent outperformance. From a strategic point of view, many factors augur well for the performance of US equity. The first is the pickup in merger and acquisition activity this year with proposed deal volumes reaching $212 billion globally to date. The second factor is the continued resilience of the US economy, and by extension that of corporate America. The US housing market is stabilising, the jobs market awakening and consumer spending is steady."

DeLorenzo believes the same will hold true for Islamic investments. While countries such as Egypt show high potential, markets with much smaller minority Muslim communities in Europe and the US may lead the way. "They are more aware about finance. Those consumers are more educated and demand proficiency, good service, transparency and responsibility," he says. "As a result companies in those countries will develop best practices and corporate governance practices that will lead the way for Islamic finance in other parts of the world. Products, services and processes will then translate to the Muslim world."

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Constructive outlook for equities

Some reports say that investor allocation to equities has significantly declined. The Wealth Report 2012, which puts the net change in the number of investors at -77 per cent, says: "Thirty-year Swiss yield less than 1 per cent. Yields on other bond markets look positively toothsome by comparison. Thirty-year US treasuries and UK gilts yield a couple of percentage points more than their Swiss counterparts. Against all expectations, yields have fallen sharply over the past 12 months.

"Indeed, yields have continued to fall in recent months even as equities have rallied. Falling potential growth rates mean that equities are likely to continue to be downgraded over time."

In this too, geography lessons come in handy. "At 11, the cyclically adjusted price-to-earnings ratio (price to the past 10 years of profit) for European equities is half that of their US counterparts. European shares trade at book value. In the US they are trading at twice book," the report says.

Rashad concedes that the post-crisis outlook for equities was not too good, but maintains that the first quarter of 2012 has seen them pick up.

"We have seen equities declining significantly post the crisis in terms of percentage, but it is picking up again almost to precrisis level. There is inflow in equities this first quarter," he says.

Crédit Suisse too is happy to recommend that investors who have not yet established a strategic overweight in equities gradually build one.

Says Daher: "Despite the prospects of choppier markets in the near-term, our outlook for equities is constructive. Over the next six to 12 months, we recommend an investment strategy that is overweight in equities. According to Crédit Suisse's valuation models, stock markets are at or above fair levels. However, with central banks unlikely to prematurely end their expansive monetary policy, benchmark bond yields still generally low, and financial markets facing a liquidity overhang, investors are likely to more strongly look for opportunities to enter stock markets."

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Gold, oil and commodities remain attractive

For investors in the region, gold shines brighter than any other asset class in terms of investment allure. There was a particularly active period when it was priced between $1,200 and $1,600 per ounce. Interest waned when it hit $1,700 per ounce, says the World Wealth Report 2012.

But gold alone is not enough. "Economic indicators suggest that the cyclical environment for commodities is improving. Metals — both industrial and precious metals, with the exception of silver — look attractive. Industrial metals should particularly benefit from the gradually improving economic sentiment and attractive valuations," Daher says. "Gold prices have struggled recently, weighed down by higher US bond yields and negative seasonal effects. However, the trend is still positive and gold will remain attractive, especially in an environment of low interest rates."

Oil is also proving to be attractive when interest rates do not promise a high return on investment. Ward says, "We are seeing more interest in gold and oil post the global financial crisis." He says the added attention provides liquidity to the products and also receives more news coverage, which clients trade off.

There are clear regional differences here. "For example, if you live in Venezuela where oil is its main product, the price of crude is in the news all the time, so they will trade because of that factor. If you live in Brazil, coffee will be the headline article. As customers become more sophisticated, they learn to just trade volatility," Ward says.

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Real estate: Diversification is the name of th e game

The first home, called the primary residence, is for you to live in. The second may be just that, a second home, and perhaps a third may make the cut. But when HNWIs look to buy more property, wealth advisors put it under a magnifying glass to see if it meets all criteria of a good investment.

Even so, 67 per cent investors polled in the World Wealth Report 2012 cited lifestyle as the most important factor in picking a second home. About 40 per cent said they were looking for a safe haven for their investments.

Real estate as an asset class is seeing considerable diversification. Rashad says, "Our clients are buying property in London, New York and Turkey."

London, in particular, is still one of the few places where the real estate market is doing much better than before the crisis.

Best bets

Commercial as well as residential real estate in the US is the parking destination for dollars from many of Asia's entrepreneurs. Crédit Suisse favours prime offices in Australia as well as many US and select German cities. "For specialist investors, we recommend outright exposure to commercial real estate in Australia, Germany, France, Canada and select US and Latin American markets. Rental yields for real estate remain attractive in what remains a low-interest rate environment," Daher says.

According to Knight Frank's Prime International Residential Index (PIRI), cited in the World Wealth Report 2012, the latest results point to the increasing influence of political as well as economic drivers when it comes to price changes in residential property.

Monaco may still be the most expensive real estate in the world, but prices there, along with the French Riviera, fell in 2011. "It is no coincidence that the only two European cities in our PIRI that recorded price increases last year were London and Zurich — both outside the Eurozone," says the report.

Middle Eastern buyers are expected to be among prime property buyers over the next five years along with Chinese, Russians and Latin Americans.

With $20 million to spend, a buyer, says the World Wealth Report 2012, can see that "the wider prime market has outposts in most countries, but the superprime market is still fairly limited. In Europe the list is contained really by London, Paris, the Côte d'Azur, Monaco, the French and Swiss Alps and Geneva — though you might include Evian and some of the Italian hotspots.

"Outside Europe you are looking at New York, Miami and Los Angeles in the US. Sao Paulo is now on the list, although arguably struggles in attracting foreign purchasers. The rest of the world includes Hong Kong, Singapore, Moscow and, in the Caribbean, the Bahamas, Mustique, Barbados and the British Virgin Islands."

The report compiled a list of countries where property prices have undergone significant changes since 2011. With 25 per cent appreciation since last year, Kenya is on top of that list. New Zealand saw 5 per cent rise in prime Auckland due to an increase in Asian buyers, particularly from China and Singapore, looking for security and stability.

In China, the report says, mainstream prices have been falling across the Tier I Chinese cities. Prices in Beijing's luxury sector rose by a healthy 8 per cent in 2011, but this was largely due to a strong performance in the first half of the year.

Despite a 3.4 per cent fall in 2011, Shanghai prime prices are still 37.5 per cent higher than they were in early 2009. In India, prices in Mumbai fell by more than 18 per cent last year due to a rise in interest rates. Jakarta's strong performance in 2011, up by over 14 per cent, was a result of steady growth of Indonesia's domestic economy.

Geographic spread

If the world is not quite the HNWIs' oyster yet, with properties in the home country tugging at the heart strings, lessons from the past few years will drive home the point.

"Buying an apartment in Dubai and buying an apartment in Bahrain may sound diversified, but it is not. And we saw that during the Arab Spring all the markets went down the same way because of the contagion effect," Aka says. "At the time nothing happened in the US because it had nothing to do with the US. If you are trying to diversify, choosing the same asset in a different country in the same region is not diversification."

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Surge in luxury spending

Investments of passion and luxury spending are the most visible expressions of HNWI wealth. Whether it's a sports team or luxury cars, yachts, private jets or haute couture, it's always newsworthy.

"The Middle East tends to be the number one in the world of investment in jewellery and luxury watches," says Rashad. "There is growing interest in buying luxury yachts. There is much less investment in antiques here compared to the rest of the world."

It's sensible for HNWIs to ensure that their passion is a sound investment. According to the Wealth Report 2012, "While an equity portfolio can lose most of its value overnight, investments of passion, in common with prime property, are more tangible — even if their value does fall, they can still be enjoyed. Art and sport — so-called investments of passion — are enjoying growing popularity among investors and, according to the results of The Wealth Report Attitudes Survey, saw a sharp rise in demand in 2011."

The proportion of HNWIs expressing a greater interest in fine art investments rose by 25 per cent compared with 2010. And the expensive business of investing in sports teams showed no real overall decline in popularity.

And private banks are alert to this. "If you are investing in an asset class that is a passion, you have to enjoy it as well, without destroying it," Rashad says. "If you are investing in art, for instance, you could store it all in a storage room. Or you could display them in the right place, whether partially in your residence, in a gallery or collaborating with a museum."

Quality artists with a long-established track record are particularly appealing to investment-minded collectors. The Wealth Report says, "The credentials of art as an asset class are also growing. Last year the influential Mei Moses World All Art index grew in value by over 10 per cent and has consistently outperformed equities since 2000."

Sports teams are another passion — all except 50 most valuable sporting franchises compiled by Forbes are owned by wealthy individuals and families.

Private bankers find themselves advising clients who wish to combine their love of the game with financial returns, even if they are in the "super-ultra-high-net-worth category," says Rashad, inventing a term.

"We have seen a trend in the past four to five years in the Middle East, Russia and even in the US that people have a passion in owning teams. In the UK there are a few well-known cases of UHNWIs who own teams. That should be treated as an asset as if you are holding a company. That is an investment. You don't invest in it for fun."

He syas an individual must ensure he is paying the appropriate fair market value for it. And that the emotional value is not pushing him to pay a premium that cannot be regained.

As far as luxury spending is concerned, market research and analysis firm Euromonitor International's reports say that the luxury goods segment in the UAE is "expected to grow by just over 30 per cent in real terms between 2010 and 2015 to reach a value of Dh10.8 billion. Total annual consumer expenditure is expected to grow by 52 per cent in real terms between 2009 and 2020."

The Wealth Report 2012 cites Verdict Research data that global spending on luxury goods rose by an estimated 17 per cent in 2011 and is now exceeding precredit crunch levels.

While designer clothing and footwear lead the market, electronic gadgets and fine grapes are the fastest-growing categories, according to research reports. The luxury jewellery and timepieces category, which slowed during recession, is picking up again.

Men drive the sales of luxury accessories not least because theirs are priced much higher than women's.

"Consumer behaviour is driven by the search for social status. Traditionally, status was all about having or buying the biggest, the best, the fastest, the shiniest objects. But for many consumers, status symbols are being redefined to include new concepts such as generosity (philanthropy), experiences (such as travel), skills, eco-credentials and even online status," says Henry Mason of UK-based Trendspotting.com.

Emerging markets drive this growth. Officials from luxury retailer Harrods in London were quoted saying that sales climbed by 40 per cent after they installed Chinese bank card terminals. 

 

Fact Box

Islamic investments

 

1. Sukuks are important and growing.

2. Commodity investments across the board continue to be attractive. Gold has certainly shown resilience.

3. Equities represent a great opportunity for investment at this point because the markets will come back in a cyclical manner. Investors have to be patient. Investments today can be made at significant discounts through value. There are real opportunities in the market now, like there are in any depressed market.

4. Equipment leasing can be a very lucrative investment for the right opportunities.

— Yusuf Delorenzo, Chairman of Dow Jones Islamic Market Index' Sharia Supervisory Board