Demand for art, watches, rare wines, vintage cars and other offbeat investments that set pulses racing expanded in 2010 as wealth levels of the world's super-rich rebounded from the financial crisis, a report said on Wednesday.
But most millionaires are also still playing it safe, keeping much of their money in safe assets like cash and squeezing profit margins for wealth managers, the latest Merrill Lynch CapGemini World Wealth Report. While recovering markets had tempted some rich investors back into riskier assets like stocks, they continued to hold $18.6 trillion, or 43.5 percent of their wealth in conservative instruments such as bonds or cash.
Growing wealth in emerging economies, especially in Asia -- which surpassed Europe in millionaires and wealth last year -- helped spur a revival in markets for art and luxury investments, the authors of the report said.
"The value of many categories of investments of passion rose and HNWIs (high net-worth individuals) made acquisitions for the aesthetic and emotional appeal and their potential to return value," Capgemini and Merrill Lynch said in the report.
In times of low interest rates and volatile stock markets, alternative investments allow investors to diversify by buying assets with little correlation to global financial markets, thus offering potential shelter from market turbulence.
Luxury collectibles such as fancy cars, boats and jets accounted for almost a third of these investments in 2010. Chinese demand for expensive cars made by Mercedes-Benz and Ferrari (part of Fiat ) jumped last year, the report said.
Individual tastes tend to determine whether a millionaire prefers investing in cars, watches or wine, while artworks are more likely to be acquired for their potential to gain value, the authors wrote.
"Newly wealthy Chinese buyers are widely reported to be keen bidders and buyers at galleries and auction houses, especially to acquire the fast-diminishing supply of works from native artists," the authors of the report said.
Art aficionados seemed willing to pay high prices at Art Basel, the world's top fair for modern and contemporary art, last week, suggesting the art market is returning to pre-crisis peaks.
Meanwhile demand for diamonds as well as gold jewellery and coins benefited from rising prices for these raw materials.
"Record prices for diamonds at international auctions in 2010 exemplified the growing trend among the world's HNWIs to see large diamonds as a safe and high-growth investment alternative," the report said, adding Russian and Middle Eastern investors were particularly keen on the expensive gems.
Uncertainty abounds
According to the report, wealth management margins dropped 320 basis points during 2010, adding to a steady decline that started in 2006.
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"This occurred as firms absorbed increased costs from (staff) compensation and regulations while investors remained heavily invested in conservative instruments that generate limited fees," the report said.
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"High net worth individuals remain uncertain that markets will remain stable and that the financial crisis is over and they fear that new and unforeseen systemic shocks could emerge," the report said.
This continued fearfulness among the world's rich reflects in part an ongoing mistrust of markets and regulators, the survey said.
Only 44 percent of rich people have faith in oversight bodies and nearly one third "actively distrusted" watchdogs, it said.
Before the financial crisis, higher margin investment products like hedge funds were popular among wealthy investors.
However, the market crash after the failure of Lehman Brothers and fallout from the Madoff scandal left many investors nursing heavy losses and risk appetite has still not recovered.
Allocations to alternative investments dipped to 5 percent in 2010, from 6 percent the previous year and 10 percent in 2006 before the crisis hit.
But while allocations to relatively risky assets are still well off pre-crisis levels, the survey found millionaires had allocated more of their money to equities during 2010.
By the end of 2010, rich investors held 33 percent of their investments in equities, up from 29 percent a year earlier, the report said, predicting the proportion is likely to rise still further if the global economy continues to recover.
Allocations to emerging markets remained flat but only after rich investors poured record amounts into the sector in the first 11 months of the year before selling to take profits as the year ended