High net worth individuals are taking advantage of uncertainty in global financial markets by investing in art and other tangibles, which is causing valuations to climb in the insurance sector. This trend is due to the lack of attractive alternatives and continuing market uncertainty, both of which are contributing to a lack of confidence in financial markets, according to Datamonitor.
2008 was a disastrous year for the world’s wealthy: stock markets experienced unprecedented falls in value; alternative investments such as hedge funds and private equity turned out to be highly correlated with the markets and nose-dived; and then, Mr Madoff’s elaborate Ponzi scheme was exposed, bringing down the fortunes of many wealthy people, says Susan Ellis, financial services senior analyst with Datamonitor.
It is little wonder that confidence is in scarce supply and there is a touch of disillusionment with the wealth management industry, which has failed to deliver the service and security that clients pay for.
So what can the wealthy do with their money? For the most defensive of investors there are still the safer investment options, such as cash, deposits and government bonds. However, there is still plenty of concern about the safety of banks, with the fear that individuals’ claims on investments may not be honored. Furthermore, safer investment options are not that attractive, as deposit rates are low, and ongoing market volatility is making investors battle-weary.
A reasonable response is to invest in something one can keep in one’s hand. As The Economist has noted: “Some investors want savings that they can caress.” For high net worth individuals, investing in tangible assets, such as art, gold bullion, jewelry, antiques and collectable cars, is the equivalent of putting money under the mattress. Aside from the see-sawing financial markets, a further driver of increased demand for tangible assets is the bargain prices attached to some of these investment items. The fine art market, for example, has declined 35% this year.
However, not all collectables are available at cut-down prices. There has just been a real market test when a rare blue 7.3 carat diamond went up for auction in Geneva, with an estimated price tag of between USD6.2 million and USD9.0 million. After a 15 minute battle, it sold for USD9.5 million. As always, the wealthy will pay top dollar for something unique.
As wealthy investors see the increased attraction of collectable assets to safeguard their wealth, this is having a knock-on effect in the insurance industry, which is witnessing climbing valuations. Jamie Kearney, ultra-high net worth underwriting manager for Chubb Insurance, says: “In the past year, we’ve insured more GBP1 million to GBP6 million-plus fine art, jewelry and car collections than in the previous year.”
Following the loosening of regulations around what can be held within a self-invested personal pension these tangible assets can now form part of people’s pension portfolio; and what better way to enjoy a pension fund before it is cashed in. Susan Ellis says: The wealth management industry should use this experience to get back on track, with wealth managers needing to hone their skills concerning investment choice.
L.D.