ZURICH (Reuters) - Europe’s rich need to take more investment risk to prevent their wealth from being eroded, several private bankers said this week.
Many wealthy families and entrepreneurs are keeping a large portion of their fortunes in cash to shield it from vicious swings in markets largely controlled by policymakers trying to prise the euro zone out of recession.
But with government bonds and money market funds yielding close to zero against a 1.4 percent inflation rate, investors sitting on cash are simply watching their wealth disappear, said Norman Villamin, investment head of Royal Bank of Scotland’s (RBS.L) private banking arm Coutts.
“Clients want to ring-fence a certain amount of assets and preserve purchasing power - and they need to take some risk to do that,” Villamin told the Reuters Global Wealth Management Summit in Geneva.
Investors have had a love-hate relationship with risk assets such as stocks and corporate debt ever since the credit crunch inflicted losses from which they have struggled to recover.
Some have tiptoed back into markets in search of income-generating investment opportunities, but larger proportions of their assets remain idle, bankers said.
“Since the 2008 events, private clients have been behaving in a more risk-aware and cautious manner,” said Coutts Chief Executive Alexander Classen.
“In the past eight to nine months we’ve seen a sharp return to the table. There is less cash in the portfolio than before, but still too much,” he said.
Sergio Ermotti, CEO of Switzerland’s biggest bank, UBS UBSN.VX, also noted a stubborn aversion to risk among clients.
“We advise the world’s wealthiest individuals, and they continue to act with caution. High levels of cash in their portfolios is evidence of that,” Ermotti told delegates at the Deutsche Bank Global Financial Services Investor Conference on Tuesday.
“While short-term market trends may improve trading activity temporarily, we have yet to see a material shift in confidence or asset allocation.”
Catherine Weir, head of Citi’s (C.N) Global Family Office Group, said that cash holdings were still at 20 percent of investable assets but have been edging lower in response to central bank stimulus.
There has been a marginal rise in clients’ risk profile this year, said UBS private banking head Juerg Zeltner, with some cash moving into equities. However, he said the increase in risk appetite in the first quarter was driven mainly by Asian investors buying stocks.
European clients would need to look further afield if they want to preserve the value of their wealth, he said.
“Clients typically have a huge home bias ... (but) the need to diversify to get access to growth has never been bigger. The environment for ‘govies’ (government bonds) has never been less favourable.”
One market bright spot is commercial real estate, said Weir, particularly in what she called “gateway cities” such as London, New York and Frankfurt. Spain, too, has begun to attract investors again after years of plunging prices.
Stable rental returns from these assets are helping investors to offset low returns on cash, Weir said.
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Editing by David Goodman