Geneva - 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 already have 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 it 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 specialised 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% of their
portfolio compared to 40% or more prior to the financial crisis.
Foreign ventures
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 return rates from
frothy property and stock markets before the turmoil set in.
Among the assets most favoured, 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 finacial 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
fuelled 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.