HNWIs leaning into value over growth: Capgemini

Amid current market volatility, wealth managers have been prioritising portfolio mix resilience for their high-net-worth clients, increasing cash and cash equivalent allocations and decreasing equities shares, according to a new report.

Capgemini’s World Wealth Report 2023, which surveyed over 3,000 high-net-worth individuals (HNWIs), almost 100 wealth management executives and wealth managers, and 800 relationship managers across North America, Europe, and Asia-Pacific, found concerns over market uncertainties had led HNWIs to shift their investment emphasis from growth to value.

Globally, HNWI wealth dropped by 3.6 per cent in 2022, with the population declining by 3.3 per cent - the steepest drop in the last decade. 

North America saw the steepest decline, with total HNWI wealth falling by 7.4 per cent, although it continues to hold the top wealth spot.

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Given current market conditions, HNWI investors are prioritising wealth preservation, with almost 70 per cent considering it a critical objective. This, in turn, has led to shifts in portfolio asset allocations. 

Equities shares in portfolio mixes declined  to 23 per cent, down by nearly six percentage points. 

Meanwhile, cash and cash equivalents rose by almost 10 percentage points to 34 per cent as of January 2023. The report noted rising interest rates and high inflation made returns on these assets less risky and more attractive. 

Fixed income allocations like bonds, which are typically viewed as shock absorbers amid volatility, fell nearly three percentage points to 15 per cent. According to the Total Bond Index, which tracks US investment-grade bonds, it fell 13 per cent in 2022 - the largest decline in the 50 years since the index was launched.

“Clients are conservative during uncertain times, with priorities focused on preserving wealth through diversified investment strategies and an eye to the future,” noted James Dunlop, general manager of private banking and advice at ANZ.  

Interestingly, although category allocations shifted, the share of alternative investments in the portfolio mix remained static in 2022. 

“While many HNWIs are enthusiastic, wealth management firms are cautiously proceeding when beefing up their portfolios’ ratio of alternative assets, including digital assets,” the report stated.

Shares of foreign exchange fell four percentage points in 2022 while commodities and hedge fund assets within alternative investment allocations fell two and three percentage points respectively.

Only a third of the 95 wealth management executives said they plan to increase allocations in alternatives in the coming year. 

Interest in private equity (PE) appears to be growing, with HNWIs demonstrating more interest in this than other alternative investment asset categories throughout 2022, according to the nearly half (46 per cent) of the over 800 relationship managers surveyed.

“In addition, 2022’s private market repricing and valuation corrections to mitigate elevated financing risk may boost HNWIs’ appetite for private equity investments in 2023,” the report said.

“We expect PE to experience another round of market corrections in the next 12 months, boosting their attractiveness among investors.”

ESG investments also garnered sustained interest, with 40 per cent of HNWIs saying their returns from ESG-linked assets were similar to those from non-ESG-linked assets. While wealth preservation was identified as a leading goal for these investors, the survey also found ESG impact to rank as a top priority for some 41 per cent of respondents.