Summit Notebook

Rich seek ways to sit on the hedge

Rich investors are taking more precautions than ever in their wealth, and instruments once seen as complex and exotic are becoming more commonplace in their portfolios, wealth managers said at the Reuters Private Banking Summit.

Asset classes such as foreign exchange, gold, oil and industrial commodities are beginning to have specific and identifiable hedging roles in portfolios, beyond the broad brush “diversification”.

That is a far cry from three years ago, when investors spread money around asset classes and managers in the vague hope that broad enough diversification would help them make money in all market conditions, or at least preserve wealth.

That notion disappeared during the financial crisis, along with around $12 trillion of market value.

Investors still want exposure to emerging markets, but they fear leveraged investments in volatile equities markets, where they were badly burned during the crash.

But, their hunger for growth unabated, this time investors are plumping for emerging markets bonds.

They are also looking to protect themselves against the vagaries of the economy.

High level tourism wins some wealthy fans

While wealthy clients remain ultra-cautious about real estate, some are being tempted to snap up trophy properties that promise to throw off a healthy amount of cash.

On the fringes of the Reuters Global Private Banking Summit, Banco Santander executives said they had been involved in six to eight large real estate transactions including the sale of a Miami marina in this year.

In another deal, a Mexican client snapped up a chunk of distressed commercial real estate in Spain from a seller seeking to cut leverage. The properties were returning more than 6 percent in cash flows, a healthy spread over the buyer’s 4 percent borrowing costs.

More recently Santander private banking unit Banif assisted a client in the sale of the Valderrama golf course in Spain to Australian golfing legend Greg Norman.

Valderrama was the site of the first ever Ryder Cup to be held outside the United States or the UK in 1997, when Europe’s top golfers defeated their U.S archrivals.

Diversified cash flows were the major attraction of this type of property, said a Banif executive, citing membership fees to the golf club and rentals of the club’s real estate and subscriptions to related services.

 “There is still demand for high level tourism,” he said.

Trusts can help women win back their fair share

Investment trusts, financial constructions often associated to clever tax structuring, can actually help women inherit their fair share in countries were they are discriminated by law, a top private banker says.

“In countries where Shariah law is applied, being a woman is not as advantageous as being a man. In that situation, the trust allows the structuring to have children taken care of,” says Karen Simpson, the Swiss-based Head of Private Banking at Royal Bank of Canada, the world’s No.1 bank player in the trust business.

But that is true only for the very wealthy, as these types of constructions are uneconomical to set up below a certain amount, tax lawyers say.

In a world where rich people are becoming increasingly globalised and the number of non-traditional families are rising, trusts are a good business to be in.

“It is a growth area,” says Simpson, whose bank serves several royal families. 

“It’s not really about taxes. If you have significant wealth and you are dealing with a lot of jurisdictions, that kind of structure makes a lot of sense”.

Rich prefer to give money away than enjoy art, wine?

Private bankers are focussing on helping their clients give away their money rather than indulge themselves with expensive treats like fine art and vintage wines.  

“There have been various attempts across the industry on a sporadic basis over the last ten years to offer art advisory services and other assets such as wine buying,” said James Fleming, head of international business at Coutts, which lists Queen Elizabeth II among its clients.

“You seem to hear a lot about these services when they are being launched but then you never really hear much about them again.”

Following the example of high-profile, billionaire philanthropists like Bill Gates and Warren Buffett, there is a significant and growing demand for good advice on how the rich can return some of their wealth, private bankers told a Reuters summit in Geneva.

Coutts has one of the longest established philanthropy divisions among British private banks, a service more deeply established in U.S. wealth management.

“Our philanthropy forums, where we have very eminent from the philanthropic world are always incredibly well attended – they are oversubscribed,” said Fleming.

Fear factor driving gold higher

“Gold is not an investment. It doesn’t pay you interest and it doesn’t increase wealth,” complained one investment advisor recently as he perused exploding client demand for the yellow metal.

“It’s just a cautious asset for scared investors,” he grumbled as he waved a chart showing prices had once again hit an all-time high.

Some anecdotal evidence suggests he may have a point.

Bankers at this week’s Reuters Private Banking Summit said investors were loading up on gold to the tune of some 7 to 10 percent of their portfolios.

The traditional motive of hedging against inflation was conspicuous by its absence.

The wealthy were buying gold because they were worried by the possibility of deflation, by a collapsing dollar or by the threat of prolonged financial turmoil.

Many were getting exposure through gold-backed exchange traded funds or gold stocks related stocks.

You can’t avoid the taxman, but there may find a friendlier one in the Alps

With the German government hot on the heels of untaxed wealth stashed in Swiss bank accounts, and the U.K. government taking a tougher stance on clawing back bonuses, rich folks will likely head for the hills – or the Alps to be more precise – senior private banking executives said in Geneva. 

“People are going to arbitrage different tax jurisdictions. We are going to see European clients moving to Switzerland, very large families,” said Alberto Valenzuela, deputy chief executive of Societe Generale Private Banking (Suisse) SA.

JP Morgan, which specialises on clients with $20 million to invest, is hoping to tap into the pool of wealthy exiles.

“We are seeing an affluence of international people moving to Switzerland and we want to develop a practise that can serve families,” said Pablo Garnica, head of private banking for Europe, Middle East and Africa at JP Morgan.

How rich is rich?

How rich is rich? For most people, the answer is simple: ”not me.” But for private bankers keen to handle the assets of the well-heeled from Moscow to Malibu, that question is a slippery one. Sometimes a simple number won’t do, either.

Just about every executive at Reuters Global Private Banking summit in Geneva has a different standard for what those in the business call “ultra high net worth individuals”, the really rich that are the industry’s prime catch.

For example, Britain’s Coutts & Co, which counts Queen Elisabeth II among its clients, likes at least 30 million pounds in total net worth and 10 million pounds in liquid assets.

At UBS, it’s $50 million in investable assets. JP Morgan’s private bank sets the bar at $20 million. UniCredit demands 30 million euros. Citibank wants $25 million. 

Afraid your bank account doesn’t make the grade? Don’t despair. Sometimes potential is enough to go “ultra”

Alberto Valenzuela, deputy CEO of Societe Generale private banking in Switzerland, says the sophistication that a client shows could put him or her among the ultra-wealthy years before a defining ”cash event”. Getting 100 million euros in a will, he says, can make you a wealthy client, but not necessarily a sophisticated one.

Below the “ultras” — way below — banks stake out an area for ”high net worth individuals”. At Coutts, that’s 5 million pounds in total net worth, for Societe Generale 5 million euros. Rock-bottom entry to private banks is for the “affluent” — 500,000 euros at UniCredit. At Spain’s BBVA, it’s 300,000 euros, sliding to $100,000 or clients in China.

Crisis-hit rich wanted cash they could count on

The credit crisis prompted a well-documented exodus of client money from risky assets into safer ones like government bonds, cash and gold. But some rich clients of private banks would have preferred to take their money and run. They were so rattled by the threat of financial instability to their wealth that they wanted the reassurance of having as much of it as possible in a form they could hold in their hands and count: banknotes. Wavering confidence in the financial system led some to consider taking out their entire cash balance and holding it in banks’ vaults in physical notes, said James Fleming head of international business at British private banking blue-blood Coutts. “That was a request on three or four occasions at the height of the crisis when everybody was concerned about the balance sheets of the banks generally, not us specifically,” Fleming said. “We cautioned against holding cash in the vault,” he said, adding: “They didn’t do it.”

Private bankers must show restraint in Europe

Private bankers remain in demand in some key European markets, but they will have to live with lower salaries if they want to continue to be part of this business. Top wealth managers told the Reuters Global Private Banking summit that they have stopped offering the huge packages seen in the run up to the financial crisis of 2008-2009. “We are not offering packages that are outlandish. And I do not see the other banks doing that either,” said Samir Raslan, General Manager of Citibank (Switzerland). Raslan said the structure of banker’s salaries had also changed. Relationship managers who form the backbone of a private bank’s workforce were getting higher fixed salaries than before, but no more huge bonuses. “We see more rational hiring, rather than aggressive, open cheque-book hiring,” said Raslan.

That’s rich. I meant the wine.

What do gold and wine have in common?

Price.

Well, too high of a high price, according to Jeffrey Rubin, director of research at Birinyi Associates, the stock market research and money management firm.

Rubin told the Reuters Investment Outlook Summit on Tuesday that he thought gold prices were “certainly a little frothy” at current levels and that he would rather be a buyer of the gold miners such as Newmont Mining Corp, Barrick Gold Corp, or Freeport-McMoRan Copper and Gold Inc. Gold hit an all-time high  above $1,250 an ounce on Tuesday as investors piled in due to fears that European credit contagion could lead to a double-dip recession.

Rubin isn’t expecting a double-dip U.S. recession, saying the chances are slim. He also felt stock prices were likely near a bottom. Not so for the price of a wine? A good year is already priced in, so to speak.

In the spirit of austerity, we asked Rubin what personal spending he might curtail. For a wine collector with a 1,500 bottle collection, the answer was bitter.