DR.CHENJIAZI ZHONG

The 2013 World Wealth Report was released earlier this summer. Here are some of the highlights:

• Investor confidence in the wealth management industry has improved, and the level of trust in wealth managers has risen slightly compared to the previous year.
• In 2012, one million individuals joined the world HNWIs club, which stood at 12 million, up 9.2% from 2011.
• Global HNWIs’ wealth increased by 10% in 2012, led by the global recovery in the equity and real estate markets.
• North America reclaimed its crown as home to the largest HNWI population, after overtaken by Asia-Pacific in 2011.
• Latin America decelerated in 2012, largely due to a growth rate of only 4.4% in GDP and contraction in the Brazilian and Argentine equity markets. Mexico was a bright spot, with 6.6% in its HNWI population.
• Asset allocation trends followed “the preservation model,” with nearly 30% of HNWI wealth held in cash and deposits.
• The volume and pace of regulatory change is the single largest challenge facing wealth management firms; it has created significant and increasing costs related to both compliance and non-compliance, and constraints in delivering an integrated client experience.
• The market for art and diamonds remain upbeat. HNWIs are motivated to acquire investments of passion (IoP) by more than financial considerations; however, such investments will continue to play a role in HNWIs’ portfolios going forward.

Investments of Passion

Investments of passion (IoP), such as yachts, luxury cars, coins, antiques, art, jewelry, and wine have become increasingly popular for investors. IoP enables them to pass on to their heirs not only money, but also rights, responsibilities, privileges, and securities. Such form of investments is more than a traditional financial investment in that:

1. Investors can achieve ambition, enthusiasm, new experiences, desire, and excitement through IoP.
2. IoP allows investors to benefit from favorable tax treatment.
3. IoP offers a quasi-financial return in terms of communication benefits, relations, knowledge, and special access rights.
4. IoP has a significant and long-term vision that traditional financial investments do not always offer.
5. IoP guarantees a return on the investment, whether a financial return, a return in terms of enhanced reputation, privileges, special access to information, places, exceptional people, or a return from participating in the project. The risk diversification of passion investments is achieved via exposure in different compartments.
6. IoP is less subject to economic cycle or fluctuations, and the so-called “non-renewability.”
7. IoP are based on tangible assets with strong emotional connotation, themes, and sectors that are strongly uncorrelated to the markets.
8. IoP bet on expertise and prestige, while meanwhile privileging profitability and pleasure.

“Wealthy young investors from emerging markets have been an especially powerful force behind many of the classes of passion investments.” Asia-Pacific IoP categories have grown significantly since 2011, and they constitute nearly one third of global IoP market today:

• China and Hong Kong have recently overtaken the U.S. as the world’s largest market for art and antiques; the increasing interest is pushing up the value of historical works, as evidenced by the over 20.0% increase in the World Traditional Chinese Works of Art Index in 2012.
• Singapore Diamond Exchange Private (SDX) offers diamond portfolios which range between US$250,000 and US$1 million.
• Acquiring sports teams is another growing trend by wealthy investors, particularly in China and India.
• In 2012, nearly 23% of Asia-Pacific HNWIs preferred wine bonds, 24% in fine art and collectibles, 14% in Jewelry, and 11% in sports teams.
• A Chinese bowl bought for a meager $3 sells for more than 2.2 million. The abstract painting “Abstraktes Bild (809-4)” by Gerhard Richter, the German artist, acquired by Eric Clapton for $3.2 million in 2001, fetches $34 million in 2012. Those are the returns that are difficult to find by investing in the stocks for funds.

As an alternative asset class (if you call it an “asset class”), not all passions can be considered investments. On one hand, IoP are subjective; on the other, arts are visual, which means that an investor may know more about an art than what they think, but they are not sure about this. The differences between investing in stocks and collectibles lie in the evaluation of market value, profiles of investors, liquidity restrictions, risk tolerance, and most importantly, regulation – there is no “SEC” in the IoP market.

About The World Wealth Report Methodology

According to RBC Wealth Management, the World Wealth Report analysis is rooted in a market-sizing model that evaluates the size and growth of investable wealth in different regions using Lorenz Curve methodology. It is a three-step process:

1. Estimate total wealth by country, using national account statistics from IMF and WB
2. Estimate the distribution of wealth across the adult population in each country, based on formulized relationships between wealth and income
3. Quantify investable wealth as a proportion of total wealth, using statistics from countries with available data to calculate financial wealth figures, and extrapolate these findings to the rest of the world

Reference: 

2013 World Wealth Report by Capgemini and RBC Wealth Management