FEATURE/Expanded Use of Specialized Investment Products Seen by Merrill Lynch and Cap Gemini Ernst & Young.

Business & Financial Editors

FEATURE...

NEW YORK--(BUSINESS WIRE FEATURES)--May 16, 2001

Merrill Lynch (NYSE:MER) and Cap Gemini Ernst & Young this week reported that the wealth of the world's high net worth individuals rose 6% to US$27 trillion last year. Just how did the wealthy manage to increase the value of their assets in volatile markets?

Emerging investment products, specialized investment vehicles, are attracting greater interest among wealthier investors.

Specialized products span a spectrum of investment vehicles not covered by traditional equities, bonds and deposits. They comprise alternative investments; such as hedge funds, private equity/venture capital and managed futures funds; and structured products, which include hedged stock positions and guaranteed equity notes.

The wealthy's use of specialized products is a feature of the "World Wealth Report 2001," which this week was jointly published by Cap Gemini Ernst & Young and Merrill Lynch.

The report found venture capital funds generated an average return of 41% last year, hedge funds earned an average of 11.3%, and the average managed future funds returned 9.4%. This was in sharp contrast to the 10.5% drop in the Standard & Poor's 500 index in 2000.

This was not just a one-time increase. The average annual return between 1996 and 2000 was 52.1% for venture capital funds, 20.4% for the average hedge fund, and 7.7% for managed futures.

Many wealthier investors already seem to realize the returns from specialized products. "High net worth individuals have an average 9% of their assets allocated to specialized products and ultra high net worth individuals 17%," said Winthrop H. Smith, Jr., chairman of Merrill Lynch International and president of the firm's International Private Client Group (IPCG).

HNWIs are those people with investable assets of at least US$1million, excluding real estate.

Global expansion forecast

The use of specialized products has grown considerably in recent years. For example, in the past 10 years the hedge fund market had grown 13% a year. At the end of 2000, there were 6,000 hedge funds around the world. These funds managed more than $400 billion, an increase of 263% since 1996. Some 80% of these funds were held by HNWIs.

The growth of private equity funds also has increased over the past five years, with the number of such U.S. funds alone increasing 21% a year, reaching 682 in 2000. The amount they raise annually has grown an average 35% to $163 billion at the end of 2000.

Managed futures, totaling about $44 billion in 2000, were also increasingly attracting investors.

The "World Wealth Report" noted HNWI asset allocation "percentages are set to grow over the next three years."

It said: "Another indication that these products will continue their rise in popularity is their high growth potential outside North America. North American investors represent the most advanced market for specialized products, and 86% of alternative investments are currently held in U.S.-based funds. Once the benefits are clear, HNWIs around the world are likely to follow suit, creating an upsurge in demand in their regions."

Keith Stock, global head of financial services at Cap Gemini Ernst & Young, noted: "Until recently, most structured products had features that restricted their use to the upper tier of HNWIs and ultra-HNWIs (those with $30 million in liquid assets) as they required high minimum investments. In addition, many imposed long lock-in periods. That is now changing," he said.

Mr. Gerard Aquilina, co-head of wealth management services and global head of marketing at Merrill Lynch's IPCG, explained the tailored advantages of one popular structured product. "Rising number of HNWIs are receiving large blocks of stocks as executive compensation for businesses they have sold. A typical hedging strategy for such a single stock exposure is a zero premium collar." He said this structured product enabled investors with a concentrated stock position to secure protection against price moves without having to sell their shares. "For example, an investor purchases a price floor (a put option) for the concentrated stock, and finances the cost of this protection by selling a price cap (a call option) on the same stock, locking in a range of stock prices. The concentrated stock position is then a more attractive asset for a collateral loan. The investor can then borrow against the protected stock and convert the value of the single-stock position into a more liquid position."

Mr. Aquilina noted while alternative investors are less individually tailored than structured products, they can potentially help reduce risk and increase HNWI returns.

In the 1990s, alternative investments often outperformed traditional equity investments, the report found.

However, he said, as with any investment client suitability and selecting the right individual product is important."

The benchmark `World Wealth Report 2001,' the fifth annual report, also reported on high net wealth around the world.

                    High net worth wealth by region

Region         rise since 1999       rise since 1986    market share
Africa              steady                 166%               1.9%
Asia                   - 9%                600%              18.2%
Europe                 7.5%                440%              26.8%
Latin America          6.5%                275%              12.3%
Middle East             18%                216%               4.8%

North America            9%                313%              32.7%

Merrill Lynch is one of the world's pre-eminent private wealth management and advisory firms. With a global presence, its financial consultants combine world-class global resources and technology with local expertise and experience to add true value to their clients' wealth management. This individual-focused approach provides each client with personalized service, innovative products and customized solutions.

Merrill Lynch is one of the world's leading financial management and advisory companies with offices in 44 countries and total client assets of $1.6 trillion. As an investment bank, it is the top global underwriter and market maker of debt and equity securities and a leading strategic adviser to corporations, governments, institutions and individuals worldwide. Through Merrill Lynch Investment Managers, the company is one of the world's largest managers of financial assets. Further information about Merrill Lynch is available at www.ml.com.

Cap Gemini Ernst & Young is one of the largest management and IT consulting firms in the world. The company offers management and IT consulting services, systems integration, and technology development, design, and outsourcing capabilities on a global scale to help traditional businesses and "dot companies" continue to implement growth strategies and leverage technology in the new economy. The organization employs around 60,000 people worldwide and reports global revenues of about 8.5 billion euros (2000 pro forma). More information about individual service lines, offices, and research is available at www.cgey.com.