Insight: UK. Investing for High Net Worth

The recent market setback is a concern to many. With the potential of a trade war, rising interest rates and late cycle economic nerves, it is little wonder HNW investors feel unstable. But is this serious? Is it even justified? Will this create new opportunities?

It seems much of the decline may be attributable to its own behavioural weight. Said simply, fear and greed have a habit of exaggerating market cycles – against what is known as well as esoteric– and the recent setback is more likely to reflect an unwinding of excessive optimism rather than anything fundamental.

WEAK LINK?

According to sources, Brexit uncertainty, sterling strength and some downcast economic activity are all weighing on sentiment. This is most prominent for the FTSE 100, which continues to attract a lot of attention for its poor run. By numbers, it is now down another 2% in March, meaning it is now down just over 7% year-to-date and virtually flat over one year.

1. Leonardo Braune, Managing Director of consultancy firm Intercorp Group, explains that the short-term impact of the UK referendum is just a bump in the larger global trend towards more transparency and international tax cooperation. He discusses the changes that Intercorp is seeing in its work thanks to the conversation around ultimate beneficial ownership, and explains how Britain's non-dom process will continue to attract HNWIs to its shores.

Furthermore, the weakness in the UK is by no means insulated. In fact, the global all-share universe has experienced widespread falls too, down by more than 4% in March alone in sterling terms, and has also wiped out a material portion of its gains over the past year.

According to a recent white paper from foreign exchange specialists Moneycorp, which examined trends and opportunities for HNW investors, many investors’ equity portfolios are currently heavily weighted in the major developed economies. However, with increasing uncertainty in the UK and US, other country investments are now looking much more attractive.

“Good international investment opportunities are always available and long-term currency trends can turn unattractive locations into decent options for high net worth investors’ equity portfolios. Looking back over the last year, even with a sterling devaluation of around 15%, many international stock markets more than offset a loss in the pound’s value with substantial gains in the main market index.”- David Hillier, associate principal and executive dean at Strathclyde Business School.

PROFILING THE UK HNW INVESTOR

The source of UK HNW wealth is dominated by entrepreneurs. Entrepreneurs account for 50% of the UK’s HNW population, 63% of HNW Entrepreneur Women, but earned income and inheritance are also importance sources of wealth. A diversified market still requires a focus on entrepreneurs and business owners. Many HNW individuals have built their fortunes through financial services.

Some UK wealth managers prefer to target expats, who account for 6.8% of the UK HNW population.

The vast majority of HNW expats live in France, Germany, and the US. The expat population is likely to be affected by the government’s changes to taxation of the non-domiciled. Some HNW expats invest in the UK as they do not plan to return to their home countries. Increased capital requirements for investor visas have impacted the flow of HNW individuals from outside the EEA.

Discretionary management is strongly preferred by UK HNW clients, who hire professional wealth managers in order to save time. Demand for execution-only platforms is very limited.

Equities and bonds are major components of UK HNW investors’ well-diversified portfolios. Only a few significant changes to asset management strategies are forecast, although wealth managers should prepare their clients’ portfolios for shifts in the Bank of England’s monetary policy.

“Wealth in the UK: HNW Investors” report analyses figures of HNW Investors.

Ø First-generation entrepreneurs and family business owners account for half of the UK HNW population. Financial services is the most significant driver of UK HNW wealth,

Ø 75% of UK HNW expats come from France, Germany, and the US. HNW expats living in the UK want to stay in control of their investments,

Ø UK HNW investors do not have enough time to manage their money on their own,

Ø 78% of HNW assets are managed in discretionary mandates,

Ø UK HNW portfolios feature equities heavily,

Ø UK investors allocate more liquid assets to equity funds,

Ø Similarly to Western Europe, in the UK only 1% of portfolios is allocated to commodities,

Ø 8% of HNW investments is estimated to be allocated to alternatives,

Ø UK HNW individuals will possibly show increasing demand for investment property advice.

Companies covered: Barclays, Coutts, Kleinwort Benson, MASECO Private Wealth, RBS.