Personal Finance

Smart Money: Understand the rich, and you’ll have a leg up

The new “World Wealth Report” for 2015 was released last week from Cap Gemini and RBC Wealth Management. The focus is on the population of high net worth individuals, or HNWIs as the report calls them. The report, based on a survey of more than 5,100 wealthy people in 23 major markets, is packed with fascinating data and graphics.

You’re probably familiar with some key themes and findings:

▪ Tremendous amounts of wealth have been accumulated during the past five years.

▪ Much of this wealth is concentrated in the top 1%; and most of that wealth is concentrated in the top 1% of the 1%.

▪ The very wealthy have a disproportionate impact on policy, investing and the economy.

29%Percentage of the world’s high net worth individuals in the U.S.

No big surprises, but some of the specific data points were intriguing:

▪ The total global HNWI population is 14.65 million, with total wealth of $56.4 trillion.

▪ The U.S. HNWI population is 4.68 million, with total wealth of $16.23 trillion.

▪ The U.S. as a region is ranked first for HNWI wealth and second for HNWI population, behind the Asia-Pacific region.

Here are a few other points worth considering:

Asia rising

Asia-Pacific overtook North America to become the region with the largest HNWI population at 4.69 million. While the two regions have swapped leadership roles before, the report notes that the growth of the Asia-Pacific region is more of a structural shift than in the past. That implies it is more likely to retain its leadership over the U.S. in terms of the number of wealthy individuals. Asia-Pacific is also likely to surpass North America in total wealth by the end of this year.

HNWI wealth expanded in Asia-Pacific somewhat slower (6.7%) than in North America (7.2%) in 2014. These were the second slowest rates of growth during the past five years. These two regions were the only ones that outpaced their five- year (2009 to 2014) annualized growth rates of wealth held by the richest people.

Interestingly, India was the fastest-growing market for wealthy individuals in 2014, climbing 26%, and jumping five places to rank 11th globally.

Ultra-HNWIs

The 1% of the 1% now account for 35% of the wealth held by the richest people.

Wealth grew even more concentrated last year. Just two nations, the U.S. and China, helped drive more than half the global population growth of the wealthiest people; the next 10 markets expanded by less than the global average.

Perhaps the most significant data point regarding global wealth is the forecast: Wealth held by the richest people will rise 7.7% a year to $70 trillion by 2017.

Investments

Perhaps the most significant news is that the wealthy now have more capital invested in stocks than any other asset class. The report notes that “equity allocations moved slightly ahead of cash as the dominant asset” in the portfolios of the rich. Wealthy Japanese and Latin Americans increased their equity holdings the most. Note that this is based on surveys, not actual portfolio data.

It is intriguing to consider that despite the strong rally in equities — especially in the U.S. since 2009 and in China since 2014 — cash was still the top holding a year earlier. It is unclear if the increase in equity holdings came about through an increased allocation to stocks or through appreciation. I suspect it may be the latter.

The disproportionate amount of cash is intriguing as well. The top two reasons respondents gave for holding so much cash were 1) as a hedge in case of market volatility and 2) lifestyle needs. This suggests the scars from the financial crisis linger, but that the willingness of the rich to spend on luxury goods won’t end.

Finally, the disproportionate impact the 1% has on just about everything is something to keep in mind. If you want to better understand much of what is going on — from policy to investing to the economy — what the wealthiest investors do tells us a lot about where the world is headed.

Barry Ritholtz, a Bloomberg View columnist, is the founder of Ritholtz Wealth Management. He is a consultant at and former chief executive officer for FusionIQ, a quantitative research firm. britholtz3@bloomberg.net, www.ritholtz.com/blog

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