How Are the Ultra-Rich Investing?
Money makes the world go round. It’s a common phrase used across the globe, with the assumption that money is at the root of anything and everything. For the majority of investors, generating capital is at the heart of all investment plans.
Achieving the ‘ultra-rich’ status is often both the motivation and goal of investing, and with 520,000 people in the world now classed as ‘ultra-high-net-worth’ individuals, how do they maintain their wealth?
Who Are the Ultra-Rich?
As you’d imagine, the definitions of wealth are based on net worth. High-net-worth individuals are considered to be those worth over US$1 million, which also includes their primary residence. On the other hand, achieving an ultra-high-net-worth individual (UHNWI) status is considerably more challenging, used to describe individuals with a net worth over US$30 million.
As money continues to be a strong motivator, the population of UHNWIs is slowly, but surely, growing. With the economic struggles brought about by Covid-19, it would be logical to assume that this population had taken a hit during 2020 as a consequence. However, the global pandemic has largely seen the rich get richer and the number of UHNWIs has increased by 2.4%.
But where are these UHNWIs from?
Over the years, certain countries across the globe have become renowned for their affluence, with the likes of America dominating wealth reports time and time again. Lower interest rates and additional tax incentives have been a significant driver behind the recent growth of the global UHNWI population. While this is evident within the likes of North America and Europe, Asia has benefitted the most.
Not only did Asia’s population of UHNWIs expand by 12% in the midst of a pandemic, but a further 39% increase is expected within the next five years. Surpassing the 27% global average, Asia could soon rival the US for the most UHNWIs across the world.
Although many countries were able to withstand the challenges of Covid-19, the ripple effects of the global pandemic have also caused many UHNW populations to decline. Latin America, Russia and the Middle East have seen considerable drops in the number of UHNWIs, which has been attributed to a combination of currency shifts and struggling economies.
How Have the Ultra-Rich Invested in Previous Years?
Achieving an ultra-rich status is one thing, but how do UHNWIs maintain their wealth? More often than not, some form of investment will be at the centre, allowing the UHNW population to not only sustain their fortunes, but to build upon them further.
There are various different investment routes to choose from, each of which suit different financial plans and goals. Property has long been a desirable asset amongst investors, along with ‘physical’ investments such as land and gold. While over 40% of respondents during a 2018 survey perceived property to be the most aspirational asset, land and gold followed closely behind with around 20% of participants working towards these investments.
Classic cars, fine wines and antiques have also become desirable investments over the years, but whether these avenues are used to sustain an individual’s ‘ultra wealth’ is a different matter.
In 2019 alone, over £532 billion worth of investment was poured into commercial and residential property, whereas retail and hospitality real estate lagged significantly behind as an investment asset. Not only did the mass amounts of investment into both residential and commercial property highlight the popularity of this avenue, it also offered an idea of what to expect from wealth reports in the years to come.
As well as providing considerably more opportunities to generate wealth, the diversification value of property has consistently made this investment more desirable, especially amongst UHNWIs. In a survey of UHNW investors, 24% diversified their investment portfolios with equities, while 36% – the largest proportion across the research – had previously used property to broaden their investments.
Practical and reliable investments, property and equities are renowned for their competitive returns. While precious metals and collectables are often a passion for some, only a small portion of investors used these assets to diversify their portfolios. With 6% of investors choosing collectables and just 4% diversifying with precious metals, the reliability of an investment asset is seemingly a strong motivator for UHNWIs.
Has Covid-19 Impacted the Ultra-Rich?
The overall growth of the UHNW population suggests that the global pandemic has not been as challenging for this demographic as it could have been, especially for those in Asia and the US. While Covid-19 hasn’t completely halted the rise of UHNWIs, when compared to 2019 statistics, it has slowed this growth considerably. With the UHNW population expanding just 2.4% during 2020, this rate of growth is virtually one-third of what it was two years ago.
The smaller growth in the global UHNW population can be attributed to the discrepancies between countries. As we have seen over the past 18 months, certain economies have weathered the storm better than others. While Asia and the US saw an increase in UHNWIs, Greece and the UAE did not experience the same luxury. In fact, the UAE saw a 22% decline in the demographic, Greece topped the report with a fall of 33%.
With the luxury of hindsight, many investors have re-evaluated their assets and financial plans going forward. According to the Knight Frank wealth report, 43% of UHNW investors are now more conscious of external factors, with an increasing focus on environmental, social and governance investments.
As investors continue to emerge from the pandemic more informed and with new objectives, the changing attitudes towards ‘tech-disruption’ are also likely to influence investment habits for the years to come. With the rise of Zoom and Amazon hitting new heights over the past 18 months, 50% of UHNW investors now recognise this area as an opportunity for capital growth.
Many UHNWI are leaving lockdown wealthier than they started and it can be attributed to some common themes. Diversification, property and equities have been recognised as three common factors behind investors’ increasing affluence over the past 18 months. Combined with established long-term strategies, these trends have allowed investment portfolios to not only survive the global pandemic, but to thrive.
As Covid-19 continues to ease, and new investment trends continue to materialise, David Bailin, Chief Investment Officer at Citi Private Bank, says: “We are entering a new economic cycle and the prospects for wealth creation and growth are huge”.
How Will the Ultra Rich Invest in 2021 and Beyond?
With reports forecasting a 27% increase in the global population of UHNWI by 2025 – bringing the total number of this demographic to 663,483 – how will the ultra-rich invest in the coming years?
The resilience of property has been highlighted time and time again, with the performance of many residential markets during Covid-19 only strengthening this further. As well as being at the centre of almost all successful investment portfolios, this asset is set to be a target for the majority of UHNWIs in the years to come.
Although property is already the ‘largest single element’ in the standard UHNW investment portfolio, contributing 27% according to Knight Frank’s Attitudes Survey, it is expected to continue growing. With the ability to influence total wealth levels, over a third of family offices surveyed claimed that PRS is becoming more popular. More specifically, 17% and 15% of these showed a strong interest in student housing.
Premium handbags have long been a desirable investment, with many evergreen brands offering investors a one-way ticket to high resale values. From Chanel and Louis Vuitton, to Dior and Hermes, certain classics have seen consistent growth in value.
While the Hermes Evelyne bag saw a 45% increase in resale value from 2019 to 2020 alone, the Chanel Classic Single Flap grew 53% in the same period. With Dior and Louis Vuitton also seeing 30% and 19% increases, the strong performance of luxury handbags is undeniable.
2020 was no exception. In the Knight Frank Luxury Investment Index, Hermes handbags saw a 17% price rise in the midst of Covid-19, dominating this segment of the report.
With national lockdowns and stringent government guidelines, many auctions were forced to put their digital foot forward, which was seemingly beneficial for the luxury handbag market.
Combined with the need for luxury ‘pick-me-ups’, it’s no surprise that Hermes recorded notable price increases throughout the pandemic. Highlighting the market’s resilience, it’s likely that handbag UHNWIs will continue investing in this asset, regardless of external factors.
Pink, blue and yellow – which would you choose? Luckily for investors, the average prices of all three of these coloured diamonds have been climbing since 2010. While the combined growth of coloured diamonds surpassed 75% in this period, the value of pink diamonds saw an increase of 116%, unlike the 20% for yellow diamonds and 81% for blue.
However, unlike luxury handbags, coloured diamonds weren’t as popular amongst UHNW investors. While the sentiment of pandemic ‘pick-me-ups’ may have been apparent, logistical issues made this asset difficult to obtain. Not only did transactions take longer to conclude, but the shipping of diamonds itself was increasingly difficult with Covid-19 guidelines.
As a result of this, prices of coloured diamonds significantly declined. However, as Covid-19 restrictions continue to loosen, there is the potential for a rebound this year. According to Miri Chen of the Fancy Colour Research Foundation, many UHNWIs are now keen to compensate themselves for 2020.
Over the years, rare and maturing whiskeys have become renowned as potentially lucrative investments. Not only has the value of scarce bottles and casks increased by 20% within the past five years, but a Macallan single malt distilled in 1926 once sold for £1.5 million.
While the undeniable rise of whiskey highlights the investment opportunities that come with rare whiskeys, the Knight Frank Whiskey Index has highlighted the volatility of this asset. The global pandemic has made rare whiskeys 40% riskier when compared to 2018 statistics. Although this was largely secluded to ultra-rare, luxury bottles, this inevitably had ripple effects across the market as a whole.
The lack of demand for ultra-rare whiskey was particularly evident at UK auctions, which saw bottles for more than £5,000 become less desirable amongst UHNW individuals. Causing significant drops in prices, 2021 could see the UHNW population continue to look for alternative investments.
While investing in fine wine is the definition of a long-term investment, the track record of this asset has attracted a significant number of investors over the years. To be specific, a £100 investment in the fine wine market would now be worth over £420,000, indicating the desirability of this asset as an investment.
After a strong performance throughout 2020, the wine market is still on an upward trajectory. Seemingly a key investment over the past 18 months, prices reflected this positivity. Not only did Champagne prices increase by 14%, but Burgundy was up 11.5% and the value of Bordeaux grew by 5.8%.
Climate change is expected to propel this market further, with global warming having detrimental effects on classic wine regions. Making 2014 and 2016 vintage classics more affordable, professionals have suggested that this could be a prime investment period for fine wines.
Classic cars are an expensive investment, but the returns on this asset typically reflect these high entry prices. Knight Frank’s Luxury Investment Index highlights a strong performance between 2012 and 2016, and while the market has since seen momentary dips, the long-term average has remained above 12%.
Compared to this usual performance of classic cars, 2020 was sluggish, to say the least. According to the HAGI Top Index, the value of classic cars fell by 7%, despite cars more generally securing third place in the Knight Frank Luxury Investment Index.
While Ferrari experienced a 14% rise in value, prices are expected to normalise in 2021 as auctions and car events gradually resume, which would make the values of classic cars stabilise.
Edward Aldersley, CEO of prime property specialist Aldersley London, said: “High net worth individuals obviously invest in an array of different assets, depending on their personal preferences and investment goals. However, the most common of these will be property.
“While we often think of our homes as simply a home and less as an investment – although we will of course hope that it will appreciate over time, a high net worth individual will more often than not look at their home from both angles from the outset – with less emotion when purchasing.
“Those looking to purchase in prime central London often want to use it as their home but they will choose an area within prime central London that is in high demand and is likely to remain in the highest demand in future so that when they want to sell it on, they will gain significantly from it.
“The main reason behind this is that prime property, despite any minor fluctuations in the market, will generally hold/increase its value, because it will always be in demand; pitched against comparative prime markets across the globe, property in prime central London represents good value for most high net worth buyers.
“Plus, when prime property appreciates in value, no matter how small the percentage, that percentage is always worth significantly more in real money terms than the average UK property offering a higher proportionate capital appreciation.”