GENEVA | Tue Oct 4, 2011 11:28am EDT
(Reuters) – The world’s wealthiest families have embarked on damage limitation rather than seeking to boost their fortunes as financial turmoil erodes their riches, with some so worried they are putting their money in ‘catastrophe’ portfolios.
“We have to explain to our clients, it’s not about making money these days, it’s about keeping wealth,” said Ivan Adamovich, head of the Geneva operations of Swiss bank Wegelin.
With inflation eating away at people’s nest eggs and rock-bottom interest rates making living off capital increasingly difficult, many rich people are taking new risks just to stand still, private bankers said.
“We have already inflation higher than interest rates in many markets … Unless you take some risk you will not achieve a level of return just maintaining (wealth),” Pierre de Weck, head of Deutsche Bank’s private wealth management business, said at the Reuters Wealth Management Summit in Geneva.
Adamovich said a model portfolio designed to protect people’s wealth in the face of global catastrophe has attracted more interest as financial turmoil spread in recent months.
The “catastrophe portfolio” allocates one third of money to gold, one third to defensive and internationally diversified blue chip company shares and a third to the debt of ultra safe developed countries.
Adamovich said interest in the portfolio is still limited to the most “paranoid” clients but interest is rising, particularly among people who have seen previous episodes of societal breakdown and financial collapse in Europe.
“It’s people who have been listening to their grandmother … They are not necessarily that old. It’s people who are really afraid,” he said.
In less specialized portfolios, Wegelin recommends its clients are underweight in stocks and overweight in cash, though instability of the banking system raises challenges in terms of where to keep that cash.
Other bankers said they have also advised clients to be underweight in stocks, with suggested allocations of 25 to 30 percent of their portfolio compared to 40 percent or more prior to the financial crisis.
In southern Europe, where the financial crisis is at its most fierce, and the Middle East where the Arab Spring has heightened the sense of political risk, rich people are now sending more money abroad, bankers said.
The trend marks the end of an era in which tycoons in both regions kept much of their wealth at home, attracted by high rates of return from frothy property and stock markets before the turmoil set in.
Among the assets most favored, particularly by Middle Eastern investors, is top-end residential and commercial property in London, said James Fleming, head of the international business at Coutts, the private banking arm of Royal Bank of Scotland.
“They can see and touch a building. It gives them stability,” he said.
Fleming added that while Arab billionaires were adding to already established property portfolios in London, they have also started moving investments to other European capitals such as Paris.
Enrique Marazuela, chief investment officer at the private banking business of Spain’s BBVA, said the first round of the financial crisis in 2008 had driven many of Spain’s wealthiest people into stocks and bonds outside Spain for the first time.
“(Previously) It was very difficult to sell diversification to Spanish customers,” he said.
In an interview last week, the head of Deutsche Bank’s Spanish business said he did not expect wealth creation to resume in Spain for the next two years, driving many of his clients to look abroad for new opportunities.
A long property boom and a surge in mergers and acquisitions fueled an equities bull market throughout much of the last decade which kept much of Spaniards’ personal wealth at home, he said.
Spain’s blue chip equities index, the IBEX 35 has halved since reaching an all time high in late 2007, before the market was decimated by the global financial crisis.
“In today’s world everybody is worried about everything. That is why diversifying makes sense,” said Pablo Garnica, head of private banking for Europe, the Middle East and Africa at JP Morgan.