Published September 10, 2008

Singapore wealth story continues

It has the greatest concentration of millionaire households while region posts fastest wealth growth in 2007, reports GENEVIEVE CUA

WEALTH in Asia Pacific ex-Japan registered the fastest growth of 13.6 per cent in 2007 alongside Latin America, the latest wealth report by the Boston Consulting Group has found. Singapore has emerged as the market with the greatest concentration of 'millionaire' households - defined as those with AUM (assets under management) of at least US$1 million. They account for an 'astounding' 10.6 per cent of all households here, said BCG.

The region's growth is even higher when expressed in US dollar at 19.8 per cent, thanks to a weak US dollar. While Asian clients have been gradually raising their equity allocations, their preference for cash suggests that they may have been able to preserve value through the current bear market.

BCG, which released its 2008 global wealth report last week, says that wealthy households globally have been shifting their allocations from equities into more conservative instruments since the financial crisis deepened in early 2008. BCG expects the Asia Pacific ex-Japan region to expand at the fastest clip over the next five years, growing its share of global AUM from 12 per cent in 2007 to 16 per cent in 2012.

Between 2002 and 2007, the region's compound annual growth in AUM was 17.4 per cent. The expected compound annual growth for 2007 to 2012 is 11.4 per cent. Entrepreneurs are the region's most prominent clients. 'They tend to have a high appetite for risk and to be speculative. At the same time, however, they trust cash more than any other type of asset,' said the report.

Clients are also brand conscious. While they value personal interactions with relationship managers, they are not particularly loyal and typically spread their assets among five or six private banks. 'In fact, they are keen to see private banks compete against one another on price and performance.' BCG notes that the region's private bank market has matured in recent years as a small group of global megabanks take leading positions. Increased competition has strained the supply of skilled RMs. 'Some players have lost credibility owing to substandard service, the result of having too many inexperienced RMs.'

In terms of asset allocation, BCG said that the proportion invested in equities among Asia ex-Japan clients has risen from 26 to 35 per cent between 2002 and 2007. Conservative products such as cash and deposits remain popular, although low interest rates have prompted a shift to other assets. Last year, the proportion allocated to structured products was three times higher in the Asia Pacific than in Europe, for example.

Last year was a sweet spot for structured products, as the notional volume more than doubled to between US$210 billion and US$220 billion. But as most of the issuance was equity-linked, the instruments may have hurt rather than helped clients' portfolios. Clients who were persuaded into equity accumulators, for instance, are typically stuck in a 12-month structure. They are sitting on losses, and also forced to pick up shares at a significant premium to current market values.

On clients' asset allocation, Jennifer Tay, Citi Private Bank (Asia Pacific) head of portfolio counselling, says: 'Definitely risk aversion has gone up this year. Some clients have moved into cash, but we don't think that's the best place to be because of inflation. 'There are still alternative investments such as hedge funds that work well in a difficult environment. For clients who prefer to stay in cash, we recommend liquidity funds or money market notes as alternatives.'

Chew Soon Gek, Deutsche Bank Private Wealth Management chief investment officer (Asia), says the bank advocates a core/satellite approach to investments. 'In a difficult and volatile environment, these core portfolios have provided stability more closely related to the client's investment objectives.'

The bank's most widely adopted mandate is its core balanced portfolio with allocations into equities, bonds, cash and alternatives such as commodities and hedge funds. In the current year to end-July the portfolio is down by 4 per cent. The portfolio, she adds, has outperformed its peers due to a 20 per cent allocation to hedge funds and 10 per cent to commodities.

Overall, global wealth measured in local currencies grew 4.9 per cent to US$109.5 trillion in 2007 in the sixth consecutive year of expanding wealth. But the outlook for many markets is clouded by the financial crisis. Even in 2007, the gathering storm began to take its toll on the North American wealth market where the growth rate more than halved to 3.8 per cent compared with 8.9 per cent in 2006.

Measured in US dollars, global wealth rose 9.9 per cent. BCG said distortions caused by the weakening dollar became more pronounced last year. The Brazilian real was up 20.7 per cent against the greenback; the Canadian dollar 17.9 per cent; and few currencies depreciated.

The currency effect accounted for about half of the 9.9 per cent rise. Market growth, that is, the growth of the equity, bond and cash markets accounted for 2.8 percentage points of the growth. Increased savings accounted for another 2 percentage points.

BCG's report included a highlight on how institutions can respond to the crisis. Banks are likely to see margins drop as clients move into more conservative instruments, and the volumes of existing and new AUM have shrunk as well. BCG says the turmoil presents a chance to capture clients and assets. The average client is served by about three banks, giving wealth managers a chance to differentiate themselves against competitors. Banks could also embark on internal improvements, becoming leaner and more cost effective, for instance.