Barclays Wealth Insights

Volume 9: New horizon, new behaviour

In co-operation with the Economist Intelligence Unit

About Barclays Wealth
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December 2008. With offices in 25 countries, Barclays Wealth serves affluent, high net worth and intermediary clients
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About this report

Written by the Economist Intelligence Unit and commissioned by Barclays Wealth, this ninth volume of Barclays
Wealth Insights looks at the responses of high-net worth individuals to the current market environment, with a
particular focus on investor behaviour.

It is based on two main strands of research. First, the Economist Intelligence Unit conducted a survey of more
than 2,100 high-net worth individuals, with investable assets ranging from £500,000 to in excess of £30 million.
Respondents were spread globally, with the highest numbers of respondents from the United States, Hong Kong,
India, Singapore, Canada, Spain, Switzerland, the United Arab Emirates, the United Kingdom and Monaco.
The survey took place between March and May 2009.

Second, the Economist Intelligence Unit conducted a series of interviews with economists, senior executives
and wealth experts from around the world. Our thanks are due to the interviewees for their time and insight. This item can be provided in Braille, large print or audio by calling 0800 400 100* (via TextDirect if appropriate).
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1 30
Foreword
At Barclays Wealth, we are dedicated to providing our clients with the means to manage their wealth
successfully. For this reason, we are committed to investing in research to better understand the value of
wealth and its importance in the future.

In partnership with the Economist Intelligence Unit, we have developed the ninth volume of Barclays Wealth
Insights, a series of research reports which aim to provide a definitive picture of what being wealthy means in
the 21st century.

As well as consulting with 2,100 wealthy individuals globally, the Economist Intelligence Unit worked with a
panel of international experts drawn from academia, industry and financial circles, to provide additional
insights and perspectives.

In this report New horizon, new behaviour, we take a close look at investor behaviour around the world,
following a turbulent and testing 12 months. Over this period, economies, institutions and investors have all
encountered dramatic changes to the financial world. New horizon, new behaviour sheds light on the practical
and behavioural implications of this and examines how investors are adapting to a new landscape.

Whilst it is encouraging to note that investors recognise that there are opportunities out there, there is also a
degree of uncertainty over when to make their move back into the market, and into which asset classes.

I hope you find this report an informative and entertaining read.

Thomas L. Kalaris
Chief Executive
Barclays Wealth

2
Our Insights Panel
Viral Acharya, Professor of Finance at Stern School of Business and London Business School

Dan Ariely, Alfred P Sloan Professor of Behavioural Economics at Massachusetts Institute for Technology

Brad Barber, Maurice J and Marcia G Gallagher Professor of Finance at the UC Davis, Graduate School of Management

Roy Chen, Director of Sterling Private Management Limited, a Hong Kong-based family office

Greg Davies, Head of Behavioural Finance at Barclays Wealth

Florence Eid, Managing Director for the Middle East and North Africa at Passport Capital

Simon Gervais, Associate Professor at Duke University: The Fuqua School of Business

Rory Gilbert, Head of UK & Ireland Private Bank London Region, Barclays Wealth

Daniel Kahneman, Professor of Psychology and Public Affairs, Emeritus at Woodrow Wilson School,
Princeton University

Kenneth Kuttner, Professor of Economics at Williams College

Carol Pepper, Head of Pepper International, a financial advisory firm

Guillaume Taylor, Partner at de Pury Pictet Turrettini & Co, a financial advisory firm

Bart Van Ark, Chief Economist, The Conference Board, a business membership organisation

In addition to our panelists quoted in the report we would also like to extend our thanks to the following people who
provided insight into the development of the content:

Alan Botterill, Managing Director for HR Services Europe at Towers Perrin, a consultancy

Nassib Ghobril, Head of Economic Research at Byblos Bank

Scot Hofacker, Chief Financial Officer, EXEL Americas, a logistics company

Charles Honneywill, a Partner in transactions at Ernst & Young (EMEA)

Miles Templeman, Director General, Institute of Directors, a business membership organisation

Carson Wen, Partner, Jones Day, an international law firm

3
Introduction
After a long, dark winter in the global economy, the arrival
of the new year brought scattered sightings of green
shoots. From Ben Bernanke, Chairman of the Federal
Reserve, to Jean-Claude Trichet, President of the European
Central Bank, there has been a succession of high-profile
policy-makers claiming that the worst of the downturn
may be over. Meanwhile, stock markets around the world
rebounded between March and May 2009, with some
indices rising by more than 30 per cent.

Yet despite this encouraging news, it is clear that there The aim of this report, which was written by the
is still a long way to go before we see a sustained Economist Intelligence Unit and commissioned by
economic recovery. The scale of the imbalances to be Barclays Wealth, is to examine how today’s fast-
absorbed remains significant and a return to solid changing economic environment is affecting investor
growth, particularly in the UK, Eurozone and Japan, is behaviour. Based on a survey of more than 2,100 mass
still a relatively distant prospect. In addition, some affluent and high-net worth individuals, the report
commentators have suggested that the recent strong explores the responses of wealthy investors to the
stock market performance is little more than a bear current period of uncertainty, and draws on insights
rally – a short-lived high that runs counter to a longer- from the world of economics and psychology to assess
term trend of falling prices. It is clear that these remain how a combination of rational and irrational behaviour
challenging times for anyone attempting to read the is affecting their investment decision-making.
market and make the right investment choices.

4
Executive summary
Fear is preventing the wealthy from investing, even The perception that complexity – in the shape of
where they see opportunity. While prospects for most financial assets such as collateralised debt obligations
asset classes and the global economy remain highly – played a central role in the current crisis is only
uncertain, recent market rallies and wider discussion exacerbating this trend.
of the “green shoots” of recovery have raised the
question of whether a turn in the cycle may be Action on the financial crisis has yet to restore trust
imminent. Almost 90 per cent of the high-net worth among investors. Many of the survey respondents are
investors questioned for this report say that the unimpressed with the way the financial crisis has been
current environment offers buying opportunities but, handled by central banks and governments. Investors
crucially, 68 per cent believe that the risk of further from India, Spain and Hong Kong are most likely to
price falls is too high to consider them. In addition, offer a negative assessment of policy-makers’ handling
only a minority of 28 per cent say that they will of the crisis. Even a politician as feted as President
increase levels of risk in their portfolio over the next Obama does not escape criticism: only one-third of
12 months. This widespread sense of caution and wealthy investors in the US believe that his
risk aversion highlights the extent to which wealthy administration’s performance during the crisis has
investors have been chastened by the events of recent been successful. The survey respondents are also
months and suggests that it may be some time before strongly critical of the media, with less than one-
confidence returns to the market. quarter of respondents believing it to have been
successful in its handling of the financial crisis.
High-net worth investors are sticking with the status
quo. Asked how they expected to change their asset Transparency and quality of information are becoming
allocation over the next 12 months, the majority of watchwords for wealthy investors. Due diligence is
investors say that they will make no adjustments at all rising up the priority list for many high-net worth
to the proportions that they hold across major asset individuals, with almost half of respondents saying
classes. For example, 58 per cent say that they will that they intend to increase the amount of time that
make no change to their allocation to domestic stocks, they spend selecting specific investments. Equally,
while 65 per cent say that they will neither increase when choosing a financial provider, the quality and
nor decrease their exposure to hedge funds. transparency of investor information is becoming
Behavioural finance experts questioned for this report much more important as a criterion for selection,
suggested that a pervasive “fear of regret” is impeding along with the financial stability of the institution.
more decisive action among many wealthy investors
and encouraging them to stick with the status quo until
they feel they have a better understanding of the situation.

High-net worth investors are seeking the comfort of

simplicity and familiarity. More than 50 per cent of
investors agree that, in the current environment, they
will only invest in what they know. Where respondents
are seeking greater exposure to specific assets, it
tends to be to the most “straightforward”, with real
estate, cash, government bonds and domestic equities
the most likely beneficiaries of increased allocation.

5
Investor behaviour:
the rational and the irrational
Rarely have finance and economics been so widely discussed
and scrutinised. Just two years ago, concepts such as Libor
rates, credit derivatives and quantitative easing were confined
to the specialist financial press, but today they are the subject
of everyday conversation as retail and high-net worth
investors try to get to grips with a dramatically changed
economy. The speed and severity of the downturn has had a
profound effect on the investor psyche, while the timing and
nature of a future recovery continues to be hotly debated by
both experts and laypeople alike.

What cannot be denied is that the rate of decline in While it is far from certain that these gains will be
the global economy has started to slow, following a sustained, they do suggest that, for investors who are
constant flow of increasingly dire economic news over prepared to take the risks, there are significant
the past 18 months. Moreover, there have been investment opportunities available. Bart Van Ark, Chief
tentative signs of recovery in some countries, most Economist at The Conference Board, a business forum,
notably in China. If it is indeed the case that the green notes that global growth in 2009 “could very well be
shoots of recovery are now pushing through, high-net positive rather than negative”.
worth investors may need to consider changes in asset
allocation as financial markets typically discount a But if the data are showing only that the deterioration
recovery four to six months before it occurs. is slowing after the global economy “fell off a cliff ” in
the final quarter of 2008, a switch from a defensive
The past two months have seen a strong rally in portfolio could be premature. A sustainable recovery in
equity markets that few would have expected at the economic activity is needed to boost corporate cash
start of this year. For example, the S&P 500 has risen flows and underpin valuations. Without this, the
by more than 30 per cent since its low in March, current rally may prove to be short-lived.
while the Shanghai Composite Index rose more
than 40 per cent between January and May.

6
This poses a dilemma for investors that is unlikely to amplified by balance-sheet adjustments as firms,
be resolved quickly. Economic and financial data tend households and banks sell assets to pay down debt
to send conflicting signals at possible turning points. accumulated during the credit boom.
“We will only know how severe the recession will be
over the next six to nine months,” says Viral Acharya, This could leave investors exposed to the risk of a
Professor of Finance at Stern School of Business and double-dip recession and – in the worst-case scenario
London Business School. – a multi-year slump characterised by debt-deflation,
similar to the so-called “Lost Decade” that Japan
Despite evidence supporting a more bullish asset experienced in the 1990s. “If consumer expenditure
allocation, there is still plenty of cause for concern. picks up very quickly in the second half of this year,
Unemployment is rising and is bound to continue on this could lead to a rapid recovery that might be more
an upward path for much of 2009. Job losses, than business conditions can bear,” says Mr Van Ark.
combined with pay freezes and cuts, will dampen “In turn, that could lead to a double-dip recession.”
consumption and investment. This effect will be

Reasons to be cheerful?

• The run-down of inventory adjustment which • Measures of consumer and business confidence
drove the collapse in industrial output has run its have been improving across the world.
course, and companies now need to rebuild stocks
to meet demand. This is confirmed by recent • Conditions in interbank markets are easing.
encouraging data on new orders.
• There is a nascent revival of primary issuance in
• The collapse in international trade flows appears both equities and high-yield bonds.
to have bottomed out.
• Spreads on emerging market bonds and corporate
• There is some evidence of a pick-up in US housing bonds are tightening.
transactions (although prices continue to fall).
• Emerging market equities are on a substantial
• UK retail sales figures have been better than rebound.
expected.
• Base metals, which are geared to the economic
• China reported GDP growth of 6.3 per cent year cycle, have risen strongly from their recent lows.
on year for the first quarter, slower than the double
-digit rates of recent years but by no means bad.

Opportunities – and fear

None of the scenarios described above – even the There are small regional differences: for example,
more unpalatable ones – would be without investors in the US seem most inclined to view the
opportunities for investors and the high-net worth current environment as one of opportunity without
individuals questioned for this survey appear to fearing further price falls, while those from Monaco
recognise this. Nearly 90 per cent of respondents said and Spain are least inclined to take this view. In general
that there were opportunities in the current market though, there is a very strong consensus that now
but, crucially, 68 per cent of them believe that the risks would be a good time to make certain investments.
of further price falls are still too high to consider them. Yet at the same time, fear is preventing the majority of
high-net worth individuals from re-entering the markets.

7
Which of the following statements best characterises your view on current market opportunities?

Graph 1 - Aggregate response from all participants

There are significant opportunities in the current market 13%

20%
There may be significant investment opportunities in the current
market, but the risk of further falls is still too high

68%
I don’t believe there are significant investment opportunities in the
current market

Which of the following statements best characterises your view on current market opportunities?

Graph 2 - Response by country

US 29% 63% 8%

UK 26% 55% 19%

UAE 21% 71% 9%

Canada 20% 70% 11%

Singapore 12% 59% 29%

India 11% 69% 20%

Hong Kong 11% 79% 10%

Switzerland 10% 86% 5%

Spain 6% 76% 18%

Monaco 5% 82% 13%

0 10 20 30 40 50 60 70 80 90 100

There are significant investment opportunities in the current market

There may be significant investment opportunities in the current market, but the risk of further falls is still too high

I don’t believe that there are significant investment opportunities in the current market

For now, wealthy investors questioned for this survey express the same view. “There is a broad disconnect
say that they have little inclination to take on more between investor perceptions that opportunities are
risk. Just 28 per cent say that they plan to increase the out there, and their ability to rationalise what to do
level of risk in their portfolio over the next 12 months, about it,” says Rory Gilbert, Head of the UK & Ireland
and only 27 per cent plan to increase their willingness Private Bank London Region, at Barclays Wealth. “But if
to make higher-risk investments. Investors from some you have a reasonable investment horizon, this is a
countries appear more willing to take on risk than great time to be starting to add risk at a portfolio level,
others: for example, 37 per cent of UK investors say meaning across a range of asset classes rather than
that they intend to increase levels of risk in their simply picking out very specific opportunities.”
portfolio, while only 16 per cent of investors from India

8
9
“If you have a reasonable investment
horizon, this is a great time to be
starting to add risk at a portfolio level,
meaning across a range of asset classes
rather than simply picking out very
specific opportunities.”
Rory Gilbert, Head of UK & Ireland Private Bank London Region, Barclays Wealth

10
Over the next 12 months, which of the following changes do you expect to make to the following –
Level of risk in portfolio?

Graph 3 - By country

UK 37% 46% 17%

UAE 36% 44% 18%

Hong Kong 33% 42% 25%

Singapore 30% 50% 21%

US 29% 52% 19%

Switzerland 26% 54% 20%

Canada 22% 59% 20%

Monaco 20% 63% 17%

India 16% 49% 36%

Spain 13% 42% 45%

0 10 20 30 40 50 60 70 80 90 100

Increase No change Decrease

Over the next 12 months, which of the following changes do you expect to make to the following –
Willingness to make higher-risk investments?

Graph 4 - By country

UK 32% 44% 24%

US 31% 48% 21%

UAE 27% 51% 22%

Hong Kong 27% 49% 24%

Canada 26% 55% 19%

Switzerland 25% 54% 21%

Singapore 24% 47% 30%

Monaco 20% 56% 24%

India 19% 51% 30%

Spain 18% 39% 42%

0 10 20 30 40 50 60 70 80 90 100

Increase No change Decrease

11
Perceptions of loss

It is clear that high-net worth investors recognise that Kahneman and his fellow psychologist Amos Tversky
the scale of opportunities in the current environment published a highly influential paper that suggested
is significant, yet there is a widespread reluctance to that people are much more sensitive to losses than
dive into the markets. This pervasive aversion to losses they are to gains of the same magnitude. In general,
among high-net worth investors highlights an estimates of the difference in loss and gain perception
important point that goes to the very heart of suggest that losses are felt two to two-and-a-half
behavioural finance thinking. In 1979, Daniel times as acutely as gains.

The rise of behavioural economics

In the wake of a vertiginous boom and bust in the that John Maynard Keynes coined to describe the
global economy, searching questions are now being non-economic, non-rational motives of individuals
asked about the limits of the efficient markets that can cause economies to fluctuate more than
hypothesis and the effect of human behaviour on should be expected.
market prices. The traditional view holds that the
price of a security reflects all known information, Behavioural economics employs our understanding
and that the individuals who invest in it will of psychology to explore how human actions can
carefully weigh up the benefits and costs of a often deviate from the classical rational model.
decision, before choosing the course of action that Rather than making self-interested decisions based
is in their best interests. This concept of a rational, on a careful assessment of cost and benefit, it
self-interested homo economicus has long been at suggests that individuals are susceptible to a whole
the heart of economic theory. host of cognitive biases and flaws that can
influence their actions. For example, they will make
decisions based on heuristics, or rules of thumb,
“Behavioural biases do play a role rather than as a result of a thorough analysis of
costs and benefits and their decisions will be
at the individual level but I’m a affected by the way in which the situation is
presented to them or framed.

little sceptical about whether they

But while there is a strong consensus forming
around the need to take account of behavioural
have a strong impact on, for factors, some commentators advise caution about
the degree to which they affect financial markets.
example, prices or long-term “Behavioural biases do play a role at the individual
level but I’m a little sceptical about whether they
market phenomena.” have a strong impact on, for example, prices or
long-term market phenomena,” says Simon
Gervais, Associate Professor at Duke University, The
Recent events, however, have added to the weight
Fuqua School of Business. “That doesn’t mean that
of evidence that challenges this view, and have led
they don’t exist, but my view is that behavioural
to a surge of interest in the emerging science of
biases should probably be appealed to almost last
behavioural economics. In essence, this means
when we’re trying to explain something that
that, rather than assuming that markets are entirely
happens in the economy as a whole.”
efficient and actors entirely rational, one should pay
greater attention to the “animal spirits” – a term

12
This has important implications in the current “What we see in a boom is a lot of people trading
environment, when investors’ perceptions of their because they seem to think that they have the answer
future prospects and willingness to re-enter the for everything,” says Professor Gervais. “They gain
markets will be heavily influenced by their recent confidence over time and that leads them to trade.”
experiences in financial markets. “It’s a common Perhaps more importantly, investors will start to
heuristic that people believe that the future will bring believe that they would regret it if they do not increase
the same as has been seen in the recent past,” says their allocation.
Brad Barber, Maurice J and Marcia G Gallagher
Professor of Finance at the UC Davis Graduate School
of Management.
An overcautious approach
This phenomenon is seen both in rising and falling
One characteristic of a booming market is the so-
markets. During a boom, rising markets draw investors
called ‘house money effect’. Just as gamblers at a
along in their slipstream and lead to overconfidence
casino, having enjoyed a winning streak at a table,
and an underestimation of risk. Then, when markets
have a tendency to think that they are playing with the
turn, we see a mirror image in terms of investor
house money rather than their own and so increase
behaviour. Risk becomes over-estimated and there is a
their levels of risk, so investors in a bull market will
pervasive lack of confidence. In extreme circumstances,
tend to increase their levels of risk because they do
this situation can last for many years. During the Great
not yet consider the profits they have made to be their
Depression of the late 1920s and early 1930s, a deep
own. “It’s quite easy to take risks when you have been
malaise set in that was so pervasive that it took the
winning,” says Daniel Kahneman, Professor of
outbreak of World War II to transform the economy.
Psychology and Public Affairs, Emeritus at Woodrow
Wilson School, Princeton University. “People tend to
gamble more when they are doing well.”
“What we see in a boom is a lot of
When boom turns to bust, the mirror image of this
people trading because they seem phenomenon – what one might term ‘the anti-house
money effect’ – comes into play. Investors will shy
to think that they have the answer away from risk and exercise a high degree of caution,
even if there are significant investment opportunities.
for everything.” “When people lose money, it takes a while for their
reference points to catch up with their new measure
of wealth,” says Greg Davies, Head of Behavioural
“Part of the reason you get bubbles is that when you Finance at Barclays Wealth. “They are often in a
have a period in which the market goes in a certain situation where they are very reluctant to take on new
direction, people expect it to continue going in the risk and their risk-taking in general decreases.”
same direction,” says Dan Ariely, Alfred P Sloan
Professor of Behavioural Economics at Massachusetts We can see this changing confidence in data on asset
Institute for Technology, and author of Predictably allocation from previous boom and bust periods.
Irrational. “People tend to extrapolate trends based on In their book Nudge, Richard Thaler and Cass
the recent past.” This means that, when markets are Sunstein point to evidence from an investment plan
thriving, investors are likely to increase their allocation administered by the Vanguard mutual fund company.
to booming assets without necessarily considering the In 1992, new participants were allocating 58 per cent
fundamentals. Then, on the way down, they will of their plan to equities. By 2000, at the height of the
expect a continuation of falling prices and will discount dotcom boom, this had risen to 74 per cent, reflecting
the buying opportunities that a falling market significantly heightened confidence in the performance
ultimately brings. of equities. Then, two years later, once the bubble had
burst, their proportion allocated to equities had fallen
to 54 per cent.

13
Nevertheless, previous downturns have not always Sticking to their guns
brought the same degree of loss aversion. Research by
Professor Barber has shown that the weeks following One of the consequences of this sensitivity to loss is
the stock market crash of 1987 saw a higher level of that investors become reluctant to make changes to
buying by individual investors than at any time in the their investment strategy or asset allocation. “Loss
ten-year period surrounding the crash. The 1987 aversion helps produce inertia, meaning a strong
crash, however, was very different from the current desire to stick with your current holdings,” explain
downturn, in that there was a very short and distinct Richard Thaler and Cass Sunstein in their book Nudge.
dip, whereas the credit crisis has been characterised “If you are reluctant to give up what you have because
by a series of events that have taken place over a you do not want to incur losses, then you will turn
period of many months. “I think it’s that continuation, down trades that you might have otherwise made.”
over a course of weeks and months, that causes
fatigue among investors and a reluctance to ‘call the
A notable finding from the survey is the high
bottom’,” explains Professor Barber.
proportion of investors who, over the next year, plan to
make no change at all to their asset allocation. Across
every single asset class, more than half of respondents
“If you are reluctant to give up what expect to make no adjustment at all – neither
increasing nor decreasing their allocation. For
you have because you do not want example, 58 per cent plan to make no change to their
allocation to domestic stocks and 65 per cent do not
to incur losses, then you will turn expect to change their allocation to hedge funds.

down trades that you might have

otherwise made.”

Over the next 12 months, what change do you expect to make to your allocation to the following assets?

Graph 5 - All respondents

Domestic stocks 20% 58% 22%

Overseas stocks (developed) 14% 63% 24%
Overseas stocks (emerging) 19% 65% 17%
Government bonds 22% 63% 16%
Credit 12% 71% 17%
Commodities 21% 66% 13%
Foreign currencies 14% 69% 17%
Cash 20% 58% 22%
Real estate 25% 58% 17%
Property funds 11% 69% 20%
Hedge funds 14% 65% 22%
Private equity 15% 67% 18%

0 10 20 30 40 50 60 70 80 90 100

Greater allocation No change Smaller allocation

14
15
“The centre of economic, financial and
political power is shifting to Asia and US
economic dominance will soon be a
thing of the past.”
Roy Chen, Director of Sterling Private Management Limited, a Hong Kong-based family office

16
There are numerous possible explanations for this lack At a time when there is still considerable uncertainty
of decisive action. One could be a straightforward fear about how the financial crisis will resolve itself, many
of confronting a difficult situation. Many people, investors seem to have concluded that the best
fearing that they have lost money in the recent turmoil, strategy is to stick with the status quo. Part of the
but being unwilling to accept exactly how much, will reason for this is that investors – with every
simply avoid making the necessary calculations. justification – will find it very difficult to distinguish
between a genuine turn in the market and a short-
Yet given the high degree of volatility and change that term bear rally. “This uncertainty is causing
continues to be seen in the global economy, this level trepidation,” says Professor Barber. “Although there are
of inertia may seem surprising. On the assumption good investment opportunities, the variance of
that the recent improvement in economic data does potential outcomes is still really high.”
herald a recovery in the real economy, a virtuous
cycle could set in whereby rising asset prices boost
consumer and business sentiment, strengthen “If it works and there is a genuine
balance sheets and restore liquidity to frozen markets.
With returns on cash now depressed by ultra-loose turn in the market, that investor
monetary policy, and government bonds looking
expensive unless the threat of deflation proves real,
one might expect investors to respond by moving
would feel very clever, but they’re
out of such safe assets in search for yield.
taking a chance of feeling significant
In fact, this does not appear to be the case among
the high-net worth investors questioned for this regret if the downturn continues.”
research, many of whom are unwilling to take such
decisive action. “One of the responses to a very novel This variance causes a fear of regret that will often
or threatening situation is to freeze,” says Professor influence investors to stick with what they have. “At the
Kahneman. “This has very deep biological roots moment, someone could be very optimistic and invest
– it’s what rabbits do and it’s what deer do and, heavily,” explains Professor Kahneman. “If it works and
to some extent, this is what we all do when we are there is a genuine turn in the market, that investor
in the presence of something that we don’t would feel very clever, but they’re taking a chance of
understand.” feeling significant regret if the downturn continues.”

“This has very deep biological

roots – it’s what rabbits do and it’s
what deer do and, to some extent,
this is what we all do when we are
in the presence of something that
we don’t understand.”

17
A new economy brings a change of focus

Sterling Private Management Limited is a Hong “We believe we are in the middle of a fundamental
Kong-based family office that manages the assets change in the balance of power,” he explains. “The
for members of the Chen family, a prominent Hong centre of economic, financial and political power is
Kong family business that was a co-founder of Hang shifting to Asia and US economic dominance will
Lung, a publicly listed property company, among soon be a thing of the past. Asia today is no longer
other business interests. For most of the past the volatile, cyclical, boom-and-bust economic
decade, Sterling pursued what was essentially an environment that it was 15 to 20 years ago.”
endowment model approach to managing the
family’s assets. The goal was wealth preservation Mr Chen says that Sterling is already exploring
with growth, which was interpreted as a global investment opportunities. “There is no doubt that
balanced portfolio strategy. But in September 2008, things are cheap and valuations are compelling,” he
the Sterling directors, with the advice of Grace says. “The problem is that not everything will come
Financial, which manages the family office's back up. We are looking at a handful of areas of
investment operations, decided that a different opportunity, which will also allow us to protect our
approach needed to be taken, both in terms of downside.” With a longstanding presence in
dealing with the crisis on a short-term basis and property, Mr Chen says that Sterling is particularly
determining its asset allocation over the longer term. interested in real estate, but is likely to be highly
selective. He also believes that the credit markets
“In September 2008, we had a very strong sense look interesting, and that there could be
that the economic crisis was not going to be like opportunities in commodities, but that timing will
previous crashes, not just another boom-and-bust be very important.
cycle,” says Roy Chen, who has been a director of
Sterling since its inception in 1993. Central to the The key point, according to Mr Chen, is that this
change in mindset was a view that, when the global approach will help Sterling to weather the downturn
economy does recover, it will do so in a shape and and emerge as a stronger proposition. Although, like
form that few would recognise today. In order to many family offices, Sterling endured losses in 2008,
align itself with this new model, Mr Chen says that Mr Chen hopes that the office will be well positioned
Sterling will shift its focus from the traditional US to take advantage of an upturn in the economy -
and European markets to look primarily at whatever form this ultimately takes.
opportunities in Asia.

The quest for simplicity

Where investors in the survey are changing their asset Although approaches will differ from one wealth
allocation, the increases tend to be to what might be manager to another, some continue to see the value of
termed the more straightforward asset classes: cash; a cash cushion. “Our clients’ preference for liquidity
real estate; government bonds and domestic stocks. has gone up dramatically in the past year,” explains
Almost one-quarter say that they plan to increase their Carol Pepper, the Founder of Pepper International, a
allocation to real estate over the next 12 months, while multi-family office based in New York City that
22 per cent plan to increase allocation to government manages wealth for several large international families.
bonds and 20 per cent to cash and domestic stocks.
Elsewhere in the survey, 53 per cent of respondents “Many wealthy individuals’ key priority now is to make
agree that, in the current environment, they will sure that they have sufficient liquidity to fund their
invest only in what they know. lifestyle and pay their bills,” she says. “You could call it
‘your sleep at night’ money. With this money secure,
you can take more risk with other assets.”

18
The survey reveals regional differences in expected preference for bricks and mortar investment – despite
changes to allocation. Respondents from the United the scale of the recent property crash in Dubai, one of
Arab Emirates (UAE) are most likely to increase their the Emirates. Meanwhile, the expected increase in
allocation to real estate, while those from the US are allocation to domestic stocks in the US reflects a
more likely to increase allocation to domestic equities. longstanding faith in the equity culture that may not
In the case of the investors from the UAE, one can be as prevalent in other regions.
explain this tendency on the grounds of a strong

Over the next 12 months, what change do you expect to make to your allocation to the following assets –
Allocation to real estate?

Graph 6 - Proportion expecting to increase in next 12 months by country

UAE 31%
Hong Kong 30%
US 24%
UK 24%
Singapore 22%
Canada 22%
Monaco 19%
India 18%
Switzerland 17%
Spain 13%

0 10 20 30 40

Over the next 12 months, what change do you expect to make to your allocation to the following assets –
Allocation to domestic stocks?

Graph 7 - Proportion expecting to increase in next 12 months by country

US 30%
UK 21%
UAE 20%
Canada 20%
India 17%
Switzerland 12%
Singapore 10%
Hong Kong 10%
Spain 5%
Monaco 2%

0 10 20 30

19
Over the next 12 months, what change do you expect to make to your allocation to the following assets –
Allocation to cash?

Graph 8 - Proportion expecting to increase in next 12 months by country

UK 28%
US 23%
Hong Kong 23%
UAE 21%
Canada 18%
India 17%
Singapore 16%
Switzerland 15%
Monaco 13%
Spain 11%

0 10 20 30

In general, investors may also prefer passive funds Part of the reason why investors may be continuing to
over active because of this desire for perceived move into cash is related to inertia. It is one thing to
stability. But as Mr Davies explains, there is a feel a loss on paper, but quite another to sell and
downside to this kind of retreat into familiarity. “For realise that loss. This reluctance to admit that a loss
the people who act now, it is the active managers who has been incurred means that there continues to be a
will often have the most readily available opportunity trickle of individuals moving into cash despite this
to select funds that can add the most value,” he being probably a bad time for them to do so.
explains. Equally, the tendency among some investors
to pull back into domestic equities could have the
consequence of reducing diversification in their “It’s very difficult to satisfy both the
portfolio at a time when this is precisely what is required.

emotional and the financial factors.”

This withdrawal into familiar investment territory is a
trend that is characteristic of all downturns. In the
current crisis, this phenomenon is likely to be even This highlights an important point, namely that
more prevalent because there is a perception that the investment often involves striking a balance between
problems in financial markets have been caused, in emotional and financial considerations. High-net
part, by excessive complexity. worth individuals want their investments to perform
well, but they also want to feel comfortable with their
What is more surprising, perhaps, is the proportion of choices. “It’s very difficult to satisfy both the emotional
survey respondents who plan to increase allocation to and the financial factors,” says Mr Gilbert, “but I think
cash at this point in the cycle. Although the direction the key is to have a very clear methodology which,
of asset classes such as stocks and bonds over the however stressed the market or the investor becomes,
next 12 months is far from certain, one might wonder remains consistent with the original and continuing
why investors are contemplating such a move at a objectives of the investor.”
time when most asset classes have already fallen
dramatically in price and could, according to some
commentators, be nearing a turn in the cycle.

20
Trust and Transparency:
a new era of diligence
In the late 1990s and early 2000s, there was a widely
held assumption that macroeconomic policy had reached
an unprecedented level of maturity. High-profile
economists trumpeted the “death of inflation” while
politicians proclaimed an end to boom and bust. Some
commentators spoke of a “great moderation” whereby
it was suggested that a long-term decline in the volatility
of major economic variables had been achieved.

Ten years on and this picture has been revealed to be It is clear from the survey that there has been a
woefully optimistic. Economic pain, reflected in millions massive erosion of trust in major institutions. Only
of lost jobs and destroyed savings, has entered the a minority of high-net worth investors believes that
political realm, causing some governments to collapse governments, central banks, and the media have handled
and threatening others. Dennis Blair, America’s new the crisis well, suggesting that there is a crisis of
intelligence chief, says that political turmoil from the confidence among the broader population that will take
global recession has replaced terrorism as the country’s significant political and policy intervention to resolve.
biggest security threat. In countries around the world,
searching questions are being asked about the The misgivings of investors differ from one country to
effectiveness of major political, economic and financial the next. Out of the 10 countries for which more than
institutions. To what extent did they fan the flames of 100 respondents took the survey, investors from India
the crisis and how successful were their attempts to are most scathing about the performance of policy-
bring the conflagration under control? makers, despite their region being, relatively speaking,
less severely affected by the financial crisis. Just 11 per
cent of respondents from India say that the handling of
the crisis by their domestic government has been
successful and just 15 per cent rate the handling by
their central bank as effective.

21
How would you rate the handling of the financial/economic crisis by the following institutions –
Central bank in your region?

Graph 9 - Responses by country

UAE 48% 28% 25%

Canada 35% 26% 39%

US 29% 38% 33%

UK 29% 38% 33%

Switzerland 29% 38% 33%

Singapore 29% 37% 34%

Hong Kong 22% 37% 41%

Monaco 21% 29% 51%

Spain 18% 33% 49%

India 15% 35% 51%

0 10 20 30 40 50 60 70 80 90 100

Successful No change Not successful

Across Asia, there are significant differences between fiscal stimulus but first, they are facing a declining
the ability of central banks to formulate a response. population and this is going to lead to an
Consider, for example, the difference between China unsustainable fiscal balance, and second, it is more
and Japan. “China has the capacity to ride out the difficult to spend on infrastructure in Japan in a
crisis because it’s a surplus country,” says Kenneth productive way, because the country already has such
Kuttner, Professor of Economics at Williams College. a high level of public capital.”
“While in Japan, they would like to spend more on

How would you rate the handling of the financial/economic crisis by the following institutions –
Government in your domestic market?

Graph 10 - Responses by country

UAE 41% 34% 25%

US 29% 44% 28%

Singapore 25% 44% 31%

UK 20% 28% 52%

Canada 19% 44% 37%

Monaco 19% 34% 48%

Switzerland 17% 56% 27%

Hong Kong 17% 33% 50%

Spain 14% 33% 52%

India 11% 31% 57%

0 10 20 30 40 50 60 70 80 90 100

Successful No change Not successful

22
Investors from Europe also have few positive words to Among the 10 countries that were most heavily
say about policy-makers, with just 29 per cent of represented in the survey, respondents from the UAE
respondents from the UK rating the handling of the are least critical of the handling of the crisis by policy-
crisis by the Bank of England as successful, and makers, with 48 per cent of respondents rating their
just 18 per cent of Spanish respondents rating the central bank as successful in its actions to stem the
performance of their central bank highly. crisis. “Central banks and governments in the Gulf
region did all that one could have hoped to respond to
the crisis,” says Florence Eid, Managing Director for
“Businesses in Europe are much the Middle East and North Africa at Passport Capital,
a global investment firm. “For example, the
Government in the UAE undertook quite a bold move
more dependent on the banking early on to guarantee all deposits in all banks. They
also recapitalised the banks and extended liquidity
system than in the US and that facilities in a move that was followed by the Saudi
central bank.”
limits the room for manoeuvre
One interesting finding from the survey relates to the
that the central bank has.” perceived degree of success that the new Obama
administration has had in managing the economic
crisis. For the 10 countries in the survey for which
In recent months, there has been criticism of the
there were more than 100 respondents, there was no
European Central Bank for the sluggishness of its
single country in which more than one-third thought
response to the economic crisis, but the ECB also
that the Obama administration’s handling of the crisis
suffers from constraints that can hamper preventative
had been successful. Even in the US, where President
action. “There are limitations to what the ECB can do,
Obama continues to enjoy approval ratings of around
even though they are looking at some instruments
60 per cent, this figure among the wealthy investors in
going beyond the interest rate,” says Mr Van Ark.
our survey rises only to 33 per cent.
“Businesses in Europe are much more dependent on
the banking system than in the US, and that limits the
room for manoeuvre that the central bank has.”

How would you rate the handling of the financial/economic crisis by the following institutions –
Obama administration in US?

Graph 11 - Responses by country

US 33% 43% 24%

UK 30% 45% 26%

UAE 29% 48% 24%

Singapore 27% 45% 28%

Switzerland 23% 49% 28%

Monaco 22% 47% 32%

Canada 19% 55% 26%

Hong Kong 18% 44% 38%

Spain 17% 55% 28%

India 17% 67% 16%

0 10 20 30 40 50 60 70 80 90 100

Successful No change Not successful

23
The role of the media also comes under fire from the This reflects criticism, which has been particularly
survey respondents. Just 30 per cent say that the prevalent in both the US and UK, that the media can
media has been successful in its reporting of the tend towards one-dimensional sensationalism in order
situation, while 33 per cent of respondents rate it as to generate sales. Many commentators have suggested
unsuccessful. Respondents from the UK and US are that, during a bull market, the media is only interested
particularly scathing about the handling of the crisis in building up a good news story about rising asset
by the media, while those from India and Canada offer prices and then, during a downturn, it seeks only to
the least negative assessment. publish headlines about crisis, panic and loss.

How would you rate the handling of the financial/economic crisis by the following institutions – Media?

Graph 12 - Responses by country

India 43% 41% 17%

Canada 41% 28% 31%

Monaco 39% 44% 18%

Singapore 37% 35% 28%

Spain 35% 46% 19%

Hong Kong 33% 28% 39%

UAE 32% 39% 29%

Switzerland 29% 48% 24%

US 28% 30% 42%

UK 23% 23% 54%

0 10 20 30 40 50 60 70 80 90 100

Successful No change Not successful

In an opinion piece in his own newspaper, Financial These are legitimate areas for enquiry, but one should
Times Editor Lionel Barber described how, in the also not ignore a positive outcome from the crisis.
build-up to the crisis, reporters who covered credit Business and financial stories, once confined to a
markets and the shadow banking system “found it media backwater, have taken centre stage and
hard to interest their superiors who controlled space financial journalists have become among the highest-
and who were more interested in broadcasting the profile in the profession. With finance firmly in the
‘good news’ story of rising property prices and mainstream media, one can only hope that, when
economic growth.” Writing in the British Journalism the next crisis comes around, journalists will be
Review, the investigative journalist Danny Schechter more knowledgeable, sceptical and willing to expose
goes further, arguing that some news outlets were the warning signals than they were before the
reluctant to publish bad news stories related to the current crisis.
sub-prime crisis because they feared that this would
alienate key advertising accounts in the property industry.

24
Transparency and due diligence

This erosion of trust is having broader implications of the provider, are rising up the agenda, while past
on the behaviour of high-net worth investors, with performance and fees are becoming less of a
increasing numbers becoming more circumspect consideration.
about the way in which they select a financial provider,
such as a fund manager. First and foremost, high-net “I think there has to be more transparency on what
worth individuals questioned for this research are fees are, and a lot more understanding of the risks of
applying more care to the selection process. Whereas different products,” says Ms Pepper. “Investors also
during a boom, they would have focused on past need to realise that all investment involves risk and
performance and paid less attention to other understand that you have to pay for the returns that
criteria, today they are taking account of a broader you get. And we need a lot more plainly written,
range of factors. The quality and transparency of understandable disclosure of what products are and
investor information and the financial stability how they work: that is critical.”

When selecting an investment from a provider, such as a fund manager, which of the following criteria
were/will be most important to you?

Graph 13 - Aggregate response from all participants

Past performance 28%

42%

Reputation of provider 55%

63%

Performance fees 41%

45%

Financial stability of provider 46%

33%

Quality and transparency of investor information 35%

25%

Size of provider 25%

33%

Quality of management of provider 18%

13%

Provider’s country of origin 18%

17%

Stability of managment at provider 12%

7%

0 10 20 30 40 50 60 70 80 90 100

Priorities a year ago In the year ahead

It is also notable that a high proportion of investors are “I think there has to be more
increasing the time they spend before selecting a
provider. Almost half of respondents say that they plan
to increase the amount of time that they spend on
transparency on what fees are,
selecting investments, while one-third of respondents
plan to increase the time they spend analysing their for example, and a lot more
portfolio. In this respect, there are interesting
differences between the genders. Male respondents understanding of the risks of
are, in general, more likely to increase the time they
spend both on selecting investments and analysing different products.”
their portfolio. They are also more likely to increase
their frequency of trading.

25
Over the next 12 months, which of the following changes do you expect to make to the following?

Graph 14 - Responses by gender

Time spent selecting specific investments
Male 46% 44% 10%

Female 36% 55% 9%

Time I spend analysing portfolio

Male 36% 48% 16%

Female 23% 60% 18%

The number of times I trade in the stock market

Male 29% 54% 17%

Female 19% 68% 13%

0 10 20 30 40 50 60 70 80 90 100

Increase No change Decrease

A longer-term perspective

The current financial and economic crisis has Mr Taylor is a strong believer in responsible
changed the way that investors view their investment. “Investors need to understand the
investments, according to Guillaume Taylor, a notion of ownership,” he says. “When you buy a
Partner at de Pury Pictet Turrettini & Co. Ltd. (PPT), stock, you are part owner of a company, so you
an independent financial wealth management firm should be investing because you believe in the firm
based in Geneva. “Investors today are looking at and in its potential and its impact on sustainability
performance over a much shorter time frame, and issues. It’s not just about financial returns. And to do
are much more concerned about liquidity,” he says. this, you need a longer-term perspective.”
“These are aspects that we need to take into
account when structuring portfolios currently." He believes that there are now plenty of investment
opportunities available, and notes that some
Like many, Mr Taylor believes that investor investors are already starting to invest again. “There
confidence has been badly hit by recent events. are a lot of opportunities around, including outside
“Investors want to have more transparency and of mainstream investing. Investors need to move
better understand what they’re investing in, and away from this notion that the market is only about
they want to have a much closer emotional tie to blue chip stocks.”
their portfolio,” he says. In response to this need,
Mr Taylor notes that PPT, which has around The company is also paying a lot of attention to
US$3bn under management, is paying a lot of international investment opportunities, particularly
attention to how it communicates with investors to in emerging markets. “We think that large
make sure that they have a full understanding of developed markets currently trade at attractive
the underlying risks across different asset classes. valuations, but their economies offer limited
growth potential,” he says. “Emerging markets on
the other hand offer significant opportunities in
terms of growth.”

26
Conclusion
This report has focused primarily on the ways in which
human behaviour can affect investment decision-making.
At a time when the global economy shows some signs
of stabilising, but when investors continue to face
situations that they find difficult to interpret, it is all the
more important to see through the fog of irrational
behaviour and understand how it can adversely impact
future prospects.

Much of the popular discussion on irrational behaviour investors, it is not what happens over the next month
in financial markets focuses on the circumstances that that is important, but what happens over the next five,
lead to asset price booms. We are, rightly, fascinated 10 or 20 years. With an appropriate time horizon in
by why investors will place exorbitant values on tulip mind, short-term fluctuations in market prices become
bulbs or shaky dotcom companies – and then make less important and the real value of investment
these mistakes time and again. What gets discussed opportunities can be more objectively assessed.
less widely is how there is a mirror image of ‘irrational
exuberance’ during a downturn, when investors can Recent academic thinking on behavioural finance is
overestimate, rather than underestimate, risk and let providing a much clearer picture of how human
their recent experience of falling markets cloud their psychology can affect investment decision-making,
assessment of future opportunities. Just as during a particularly at times of great volatility. As this paper
boom, investors can mistakenly extrapolate a trend of makes clear, irrational, herd-like behaviour is as evident
rising prices, so in a downturn they can expect a at the nadir of the bust as during the excesses of the
continuation of falling prices – only to delay re- boom. This is not to say that people are wrong to be
entering the market and find that they have missed fearful or risk averse in the current climate. But the
the turn in the cycle. ability to disentangle the complex mixture of
emotional and objective factors that drive decision-
Volatile financial markets can encourage a short-term making is as important to investors seeking to
time horizon, with investors focusing on daily or optimise their portfolios as it is to students of
weekly price movements and losing sight of their financial crises.
longer-term objectives. For most high-net worth

27
Methodology
Written by the Economist Intelligence Unit on behalf of excess of US$45 million in investable assets) and a
Barclays Wealth, the report examines the behaviour series of in-depth interviews with economists,
and characteristics of high-net worth investors in an business leaders and behavioural finance experts.
uncertain economic environment.
Please note that in some cases, percentages used in
It is based on two main strands of research: a global the report may not equal 100, either because survey
survey of more than 2,100 mass affluent (with up to participants were asked to select multiple choices or
US$1.5 million in investable assets), high-net worth because neutral or “don’t know” responses have not
(with up to US$15 million in investable assets) and been included.
ultra high-net worth individuals (with up to and in

Survey demographic
The 2,100 respondents were recruited from Economist world (30 per cent North America; 30 per cent Europe;
Intelligence Unit databases of individuals around the 30 per cent Asia-Pacific; and 10 per cent Middle East,
world. The survey was undertaken by the EIU between Africa and Latin America).
March and May 2009.
Net worth: 40 per cent between US$750,000 and
Geography: Canada, the United Arab Emirates, Hong US$1.5 million in investable assets; 40 per cent
Kong, India, Monaco, Singapore, Spain, Switzerland, between US$1.5 million and US$15 million; 10 per cent
the United Kingdom and United States were each between US$15 million and US$45 million; and 10 per
represented by more than 100 respondents. Additional cent in excess of US$45 million.
respondents were generated from elsewhere in the

28
Legal note
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accuracy of this information, neither the Economist purposes, and is not intended to be a solicitation or
Intelligence Unit Ltd. nor Barclays Wealth can accept offer, or recommendation to acquire or dispose of any
any responsibility or liability for reliance by any person investment or to engage in any other transaction, or to
on this report or any of the information, opinions or provide any investment advice or service.
conclusions set out in the report.

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About Barclays Wealth
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About this report

Written by the Economist Intelligence Unit and commissioned by Barclays Wealth, this ninth volume of Barclays
Wealth Insights looks at the responses of high-net worth individuals to the current market environment, with a
particular focus on investor behaviour.

It is based on two main strands of research. First, the Economist Intelligence Unit conducted a survey of more
than 2,100 high-net worth individuals, with investable assets ranging from £500,000 to in excess of £30 million.
Respondents were spread globally, with the highest numbers of respondents from the United States, Hong Kong,
India, Singapore, Canada, Spain, Switzerland, the United Arab Emirates, the United Kingdom and Monaco.
The survey took place between March and May 2009.

Second, the Economist Intelligence Unit conducted a series of interviews with economists, senior executives
and wealth experts from around the world. Our thanks are due to the interviewees for their time and insight. This item can be provided in Braille, large print or audio by calling 0800 400 100* (via TextDirect if appropriate).
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1 30
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