For wealthy, equities are on top, but real estate allocation jumps

Being wealthy is equally a function of how much individuals earn and where they invest their earnings. While the World Wealth...

Being wealthy is equally a function of how much individuals earn and where they invest their earnings. While the World Wealth Report 2007 released today by Merrill Lynch and Capgemini shows that the number of high net worth individuals HNWI rose to 9.5 million in 2006, up 7.5 per cent, it is where they invest the money that8217;s interesting.

Together, all HNWIs owned wealth worth 37.2 trillion 8212; a gain of 11.4 per cent over 2005 8212; most of which was held in financial assets in 2006. The asset allocation of the wealthy remains skewed in favour of equities, where 31 per cent of their money was invested.

But the emerging asset class in 2006 was real estate. In terms of allocation, HNWIs increased their real estate weightage by 8 percentage points to 24 per cent. Equities, rose by just one percentage point, from 30 per cent to 31 per cent.

The reason for the shift, the report explains, was the increase in commercial real estate prices accompanied by good returns from real estate investment trusts REITs. 8220;The S038;P REIT Composite Index rose 35.4 per cent compared to 15.8 per cent for the S038;P 500 index,8221; the report said.

8220;HNWIs are well informed of the present and approaching economic conditions and quickly reallocate their portfolio to capitalise on market trends,8221; the report states. 8220;This year, HNWIs liquidated some of their alternative investments to realise significant returns from real estate investment.8221;

At 10 percentage points, that8217;s quite a liquidation. The share of alternative investments 8212; structured products, hedge funds, derivatives, foreign currencies, commodities, private equity and investments of passion luxury collectibles, art collections, jewellery, sports investments 8212; halved from 20 per cent to 10 per cent.

8220;We see this as a temporary tactical move rather than a long term asset allocation shift. Therefore, we project a greater allocation to alternative investments in 2008,8221; the report states. The allocation is expected to increase marginally to 13 per cent in 2008.

IT8217;S EXPENSIVE TO BE WEALTHY

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In 2006, we found the cost of luxury goods and services rose nearly twice as fast as the cost of everyday consumer products. The cost of luxury items tracked by the Cost of Living Extremely Well Index CLEWI rose 7 per cent while the cost of consumer goods and services as monitored by the Consumer Price Index CPI rose 4 per cent.

This represents a larger increase over 2005 when the CLEWI rose 4 per cent and the CPI by 3.6 per cent. All else kept constant, the higher price increases reported in the most recent CLEWI signals that demand for luxury goods is outpacing the demand for everyday consumables. In a year of worldwide economic growth, expanding emerging markets and an increasing number of HNWIs around the world, the demand for luxury consumables has grown along with their cost.

Source: World Wealth Report 2007