HNW Asset Allocation Trends 2018

Table of Contents

1. EXECUTIVE SUMMARY 2

1.1. Providers must prepare investors for an inevitable market downturn 2

1.2. Key findings 2

1.3. Critical success factors 2

2. REGIONAL ASSET ALLOCATION TRENDS 9

2.1. 2018 promises to be an eventful year for wealth management and the wider financial services industry 9

2.2. Asset classes with strong performance are a natural lure for HNW investors 9

2.2.1. The global HNW portfolio remains relatively diversified 9

2.2.2. HNW investors move their investable assets where the growth is 10

2.2.3. No significant changes to HNW portfolios are forecast in the short term 12

2.3. HNW investors seek balance between liquidity and direct market exposure 13

2.3.1. ETFs are becoming increasingly popular 13

2.3.2. Equities: funds and ETFs outweigh direct holdings 13

2.3.3. Bonds: while the average HNW fixed-income portfolio is well-diversified, direct investments dominate 14

2.3.4. Cash and near-cash products: local currency deposits prevail as part of HNW investors’ cash investments, but there are exceptions 16

2.3.5. Property: offering REITs is a must in the HNW space 17

2.3.6. Alternatives: hedge funds are the preferred alternative investment product among HNW investors 18

2.3.7. Commodities: funds and ETFs are the go-to investment, but gold captures significant demand 19

2.4. Local conditions significantly influence HNW investors’ asset allocation preferences 20

2.4.1. HNW investors in North America are significantly exposed to risk 21

2.4.2. European HNW investors remain cautious regarding equities 22

3. HNW INVESTMENT DRIVERS 24

3.1. Providers need to take the reins while investors sit on the fence 24

3.2. HNW investors are waiting to see how current events play out 25

3.2.1. Wealth managers need to prepare clients and their portfolios for more uncertainty 25

3.3. Capital appreciation opportunities remain the number one asset allocation driver 26

3.3.1. Volatility will cause customer churn, meaning now is the time to act 27

3.3.2. The hope of capital appreciation opportunities will ensure stable equity allocations in the West, but a more diversified approach should be taken 29

3.3.3. Precious metals will serve as a hedge in uncertain times 30

3.3.4. The lack of capital appreciation opportunities as a driver for cash and near-cash investments is a concern wealth managers have to address 32

3.4. Diversification is increasingly important as volatility picks up, but once again wealth managers have to take the lead 33

3.4.1. Achieving diversification is becoming an increasingly challenging endeavor 34

3.4.1. Risk assets will win the battle of diversifiers, but clients need to understand the potential pitfalls 34

3.4.2. Minimizing risks through the use of multiple wealth managers has become a popular approach 36

3.4.1. Geographic diversification has to become more important in homogenous markets 37

3.5. Clients’ aversion to risk is limiting wealth managers’ earning potential in Asia Pacific 38

3.5.1. Risk aversion driving demand for cash and near-cash investments creates retention issues 39

3.5.2. A perception of safety is driving real estate investments as clients remain uneducated about risks 41

3.6. The predictability of returns is set to become a more important driver if volatility persists 42

3.6.1. Wealth managers should put an increased focus on dividend stocks and funds 43

3.6.2. Weak rental yields in the developed world call for a reshuffle of investors’ property portfolio 44

4. APPENDIX 45

4.1. Abbreviations and acronyms 45

4.2. Supplementary data 46

4.3. Definitions 51

4.3.1. HNW 51

4.3.2. Liquid assets 52

4.4. Methodology 52

4.4.1. GlobalData’s 2017 Global Wealth Managers Survey 52

4.4.2. GlobalData’s 2016 Global Wealth Managers Survey 52

4.4.3. Level of agreement calculation 52

4.4.4. Forecast demand/asset allocation calculation 52

4.5. Bibliography 53

4.6. Further reading 55

List of Tables

Table 1: HNW investment drivers by country: equities, 2017 46

Table 2: HNW investment drivers by country: bonds, 2017 47

Table 3: HNW investment drivers by country: cash and near-cash products, 2017 48

Table 4: HNW investment drivers by country: property, 2017 49

Table 5: HNW investment drivers by country: alternatives, 2017 50

Table 6: HNW investment drivers by country: commodities, 2017 51

List of Figures

Figure 1: The typical HNW portfolio is increasingly exposed to risk assets 10

Figure 2: Global markets grew steadily throughout 2017 11

Figure 3: The IMF’s Global House Price Index has reached pre-crisis levels 12

Figure 4: Direct equity investments constitute the single largest component, but taken together fund holdings dominate 14

Figure 5: Corporate investment-grade bonds form the largest component of HNW investors’ fixed-income investments 15

Figure 6: Local currency products are the most common type of cash investment 16

Figure 7: An increasing proportion of HNW wealth is locked up in property 17

Figure 8: Hedge funds are key to HNW investors’ alternatives portfolios 19

Figure 9: Funds form the largest component of HNW investors’ commodity investments 20

Figure 10: Equities are far more important in North America than elsewhere in the world 21

Figure 11: Capital appreciation opportunities still form the basis of investors’ asset allocation decisions 24

Figure 12: Uncertainty is holding investors back 26

Figure 13: Capital appreciation opportunities drive investments into equities and alternatives 27

Figure 14: A good track record is one of the most important means of client retention 28

Figure 15: Market volatility has the potential to cause higher churn rates 29

Figure 16: Investors in the West are particularly exposed to equity risk, betting on capital appreciation opportunities 30

Figure 17: Commodity indices have a long way to go to return to their peak 31

Figure 18: US Bank educates its client base about the effects of rising rates 32

Figure 19: Bonds are the go-to diversifier, but this is changing 33

Figure 20: Correlations between different combinations of asset classes vary significantly 34

Figure 21: Alternatives are becoming increasingly popular as a diversifier 35

Figure 22: HNW investors work with more than one wealth manager 37

Figure 23: Investors give little consideration to geographic diversification 38

Figure 24: Investors in Asia Pacific are particularly averse to risk 39

Figure 25: Chinese HNW investors are open to new investment ideas, but a lack of knowledge is holding them back 41

Figure 26: With the exception of a few countries, a perception of safety is a key driver for real estate 42

Figure 27: The predictability of returns is an equally strong driver for bonds, equities, and real estate 43

Figure 28: Rental income is of particular importance in Europe and North America 44