Private wealth returns to global equities

High-net-worth investors continue to shun alternative investments, as private banks increasingly favour in-house product, according to research by Scorpio Partnership.

Private banks have shifted client money back to equities, but continue to avoid most alternative investments, according to a survey by London-based consultancy Scorpio Partnership.

Scorpio, which tracks the private-banking industry worldwide, surveyed 33 private wealth-management institutions that manage a combined $7 trillion of high-net-worth money. These include arms of universal banks, private banks, private-client asset managers and family offices. The survey was done in the fourth quarter of 2009.

Of these institutions, the equity allocation of balanced portfolios has risen to 49%, up from 37% during the first quarter of 2009. Scorpio says 42% of institutions say they will increase their equity weightings during 2010.

Scorpio estimates the entire wealth-management industry manages $14.5 trillion (down from its $17.4 trillion peak), suggesting the size of the equity pool is $7.11 trillion and set to grow. The industry also manages $4.79 trillion in bonds, $1.6 trillion in cash and $870 billion in structured products.

Fixed-income allocations rose from 29% in early 2009 to 33% at the end of last year. Cash allocations also increased slightly, from 10% to 11%.

But in the alternatives space, allocations plummeted from 24% to 7%. Given that this took place within a year, it was a staggering vote against hedge funds, funds of funds, and private equity.

The only alternative asset class to remain largely flat in terms of allocations was property. Most wealth managers (77%) say they'll retain the same allocation to property in 2010, with 20% planning to add to it and 3% saying they'll reduce their exposure. Scorpio says property is a traditional hedge against inflation.

A fifth of wealth managers say they will increase exposures to cash and equities this year, as already mentioned, with a minority (13%) saying they will reduce their equity allocation in 2010.

The biggest losers in 2010 are likely to be structured products and fixed income. Nearly a third (29%) say they will reduce their allocation to structured products, while 71% will maintain their position. And 39% of wealth managers intend to reduce their fixed-income exposure, while 55% will hold steady and 6% will add.

Third-party fund managers also look set to lose out this year. Scorpio reports that use of in-house products rose over the course of 2009, from 22% to 40% of product, most notably in lower-margin sectors, as firms have adjusted their competitive models. Scorpio attributes this to institutions trying to protect diminishing returns.

But the story is different in equities. The wealth-management industry outsources $3.54 trillion of equity mandates to third-party managers, estimates Scorpio, and as rich clients seek to invest more in equities, the scope for mandates will expand this year.

Sebastian Dovey, managing partner at Scorpio, says this trend will also be driven by wealth managers' desire to prove their ability to add value in volatile conditions.

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