WEALTH MANAGEMENT STRATEGIES 2001.
More than 200,000 Latin Americans now fall in the class of "high net worth individuals" who own more than $1 million in assets -- up 14.8% over the previous year. The statistics are compiled every year by Merrill Lynch/Gemini Consulting.
While these individuals likely count themselves as blessed, they also understand that holding on to these assets and making them grow represents a major challenge. How do they pass their wealth on to their heirs? What kinds of investments should they make? How should they react to uncertain economic times?
Financial institutions in the Americas are positioning themselves to provide the answers with specially tailored private banking services. Private bankers now offer a myriad of services, with a special emphasis on personal, customized solutions.
Following is the second in a series of reports on wealth management strategies for Latin America's high net worth individuals.
HOLD ONTO FAMILY WEALTH BY DIVERSIFYING
Diversification should be the first priority in relation to estate planning for Latin American families or individuals with high incomes.
The adage "Don't put all your eggs in one basket" cautions against making all family investments in the same asset type or in the same geographical area. For example, serious thought should be given before investing the entirety of family capital in the same family company, or only in real estate, or even in the same country. Investing family capital in more than one type of asset should be top priority.
Many families that achieve great wealth due to the blossoming of one industry in a single country during a particular era face problems. Over the years, these families can lose all of their wealth by allowing their company to fall into decay and even bankruptcy.
Another type of catastrophe relates to those who only invest in real estate in a single country. Recession, currency devaluation, expropriation or even rent protection laws can, from one day to the next, create financial crisis as capital is reduced or becomes unavailable.
"Country risk" is incurred when an investor maintains all investments in the currency of his or her country of residence. Country risk relates to the risk of devaluation of the national currency, default or moratorium on external debt payments, confiscation of goods or assets, expropriations and so forth. Examples of these situations exist in almost every country in the region and generally impact the private investor in a negative way.
The examples above demonstrate that those with companies, real estate, stock holdings and other assets in just one country should, after setting aside a budget for daily living, diversify by investing in other markets.
Nowadays, contrary to the situation a decade or so ago, almost all Latin American governments allow their citizens to make investments outside of their home country.
Pablo Aimo is vice president, regional trust & estate planning, Latin America, ABN AMRO Bank.
GLOBAL FIXED INCOME OPPORTUNITIES
JUAN CARLOS ALVAREZ DE SOTO, CFA
Over the past year, we have been reminded that holding well-balanced portfolios with a significant portion of high-quality bonds is key to successful investment over the long term. The low correlation between bonds and stocks in times of volatility has generated decent performance for fixed income investors.
In search of a safe haven, institutional investors started increasing their positions in U.S. Treasuries and high-quality corporate bonds late last year. Individual investors have been slower to react. Fed up with profit warnings, these individuals are ready to throw in the towel on stocks but risk being late for the better performance of bonds.
The U.S. Federal Reserve has carried out one of the most aggressive casing cycles in decades, and you can count on more rate cuts. However, investors should be very cautious. The Fed's policy, together with an expansive fiscal policy, should achieve its objective; the economy should recover, and over the next few months, the market should realize that we are coming to the end of this easing cycle. When this happens. longer-term bonds start discounting higher future rates and their yields increase, making it preferable to be positioned in short-term bonds.
Bonds issued by good quality corporations are still paying historically attractive rates over U.S. Treasuries and offer a good opportunity. As the excesses of the last few years are undone, large corporations reduce costs, trim inventories and are left in a better position to service their debt. Therefore, when looking for improvement in yields, we shouldn't be looking for longer maturities but for shorter-term quality names in sectors such as finance, auto, industrials or telecommunications.
In the Euro Zone, the economic figures arc weak, but Europe does not have the same margin in terms of monetary and fiscal policies. Despite the pragmatic talk of the European Central Bank (ECB), it is still believed that as soon as inflation figures (pushed up by mad-cow disease, euro weakness and oil) confirm their upward tendency, the ECB will look to cut rates further.
As this is not fully discounted by the market, it makes more sense to extend maturities in euro-denominated bonds. As opposed to USD fixed income markets, when looking for higher yields in quality euro paper, it would be preferable to extend maturities than to look for lower-rated corporates.
In summary, bonds will continue to be an important part of well-structured portfolios, offering protection against volatile markets. Nevertheless, one cannot forget that the market is a balance, and the more central banks cut rates, the closer they are to eventually hiking them.
Juan Carlos Alvarez de Solo, CFA, is with Banco Santander Central Hispano Suisse S.A.
ESTATE PLANNING -- A SIMPLIFIED APPROACH
DAVID J. SCHWARTZ, J.D.
Many unsophisticated and sophisticated clients alike are being advised that, in order to alleviate their concerns regarding the protection of their assets from the probate process and possible inheritance taxes, they need to resort to elaborate schemes and structures involving the use of offshore trusts and several layers of offshore private investment companies (PLC). That is not to say that in certain circumstances such structures are not recommended, in particular, when the estate is a complex one involving a wide variety of assets (real estate, investments, etc.), multiple but unequal beneficiaries, or minors. For the majority, however, there may be more simplified and less expensive methods of achieving the same result.
In all cases, clients should be advised to establish a joint deposit account (A and/or B as account holders) with rights of survivorship. Under Florida law, funds held in such accounts pass directly to the surviving accountholder upon the death of any accountholder, without probate. The surviving accountholder need only provide a certified copy of the deceased accountholder's death certificate in order to obtain access to the funds. As additional protection, in particular against the case of simultaneous death of the joint accountholders, the account should be established as "in trust for" (ITF) one or more named beneficiaries. The funds in such account will be released to the named beneficiaries upon their presentation of proper identification together with a certified copy of the last surviving accountholder's death certificate.
This type of arrangement works best for the most conservative of clients who maintain all of their assets in liquid deposits. For those clients who have securities accounts, the rides regarding joint accounts with rights of survivorship still apply; that is, the securities pass directly to the surviving accountholder without probate. If the account is held in the name of time joint accountholders hut with the designation "transfer on death" (TOD) preceding the names of the beneficiaries, the securities held in the account would pass to the named beneficiaries without probate in the same manner as the funds in time deposit account.
As the title implies, this overview is a simplified approach to estate planning for clients who may not want to go to great lengths and expense in the protection of their assets. As each particular circumstance is different, the advantages and disadvantages of each alternative should be thoroughly discussed with the private banker and/or legal adviser as effective alternatives for managing and distributing wealth.
David J. Schwartz, J.D., is first vice president and deputy manager, Banque Sudameris, Miami Agency. He is responsible for private banking and investments.
FIVE WAYS THAT MUTUAL FUNDS ARE BETTER THAN STOCKS
"Never put all your eggs in one basket" has long been the mantra of the mutual fund investor.
At first glance, $1 million spread across a range of asset classes and securities in different sectors may appear to afford some protection against negative market swings. But in the global arena, it doesn't even get you close.
When choosing a mutual fund, there are five reasons for opting for the buying power of a major banking organization: Return, risk, transaction costs, liquidity and tax (though this is only relevant in some jurisdictions).
Investors in these products benefit from economies of scale not obtainable from smaller funds or through individual brokers. Let's compare a private client portfolio of, say, $1 million, with a unitised investment of $1 million -- but where the latter is part of a portfolio worth hundreds of millions of dollars. With the bigger portfolio, you gain exposure to a wider range of opportunities without a proportionately wider risk.
Risk diversification is also a key factor. An investor in a diversified portfolio will not be noticeably affected if one particular security runs into difficulties.
Transaction costs are reduced significantly in a bigger basket. If you are trading shares in a $1 million portfolio, you are essentially a price taker, dealing on private client terms. This can become expensive, particularly if you are dealing through a stockbroker who could charge 1% each way.
In a large diversified investment fund, the trading costs tend to be much lower because you are buying and selling on institutional terms, and the institutions tend to be price makers, not takers. Sometimes it is possible to deal inside the spread, and you are benefiting from very advanced trading techniques.
Investment in a fund is usually highly liquid, whereas individual securities may be less so. You may have to wait 10 working days before your cash is available.
Tax implications -- although this will not be relevant m some Latin American jurisdictions -- may prevent a manager from selling one share and buying another on behalf of a client. Although the new share may look more attractive, the capital gains tax liability that follows from selling the original share may make the deal look less rosy. But if the shares are held in a mutual fund, the investment is in the fund itself and so does not attract capital gains tax.
Camilo Patino is head of Latin America at Coutts Group.
Legal footnote: Issued by Coutts & Co, 440 Strand, London WC2R OQS. Coutts & Co is regulated by IMRO nod the Personal Investment Authority for investment business in the UK. The valor of investments, and the income from them, can go (lawn 05 well as up, and you may not recover the amount of your original investment. Past performance is not necessarily a guide to future performance. The Coutts Investment Programmes are not available to US or Irish residents. Not all products and services offered by tile individual companies which make up the Coutts Group arc available in all jurisdictions, and some products and services may be available only through particular Coutts companies. References in this article to tax are based on our understanding of the current position in the UK, which may change in the future.
NAVIGATING THROUGH VOLATILE MARKETS WITH HEDGE FUND INVESTING
CARLOS E. PADULA
The choppy seas that have characterized the securities market over the last one and a half years have created one big lingering question: What direction do investors take when fear and portfolio losses rule the market? One answer that has piqued the interest of many investors is the alternative asset class known as hedge funds.
In a time when many market indexes have hit significant lows, institutional and private investors alike have been rapidly migrating to hedge funds. In fact, in the year 2000, institutional allocations to hedge funds had reached $400 [billion.sup.*], up from $170 billion in 1996, and growing at a projected annual rate of 26%.
There are good reasons for why investors are giving hedge funds, also known as "absolute return strategies," the green light. The driving principal that applies to today's economic environment is that absolute return strategies are designed to achieve positive returns regardless of market direction. And although hedge funds have been frequently perceived as highly risky, most, in fact, are less volatile than equities.
The following are key characteristics of absolute return strategies:
* They offer low correlations with traditional financial assets, which allows for returns uncorrelated with the performance of the stock and bond markets.
* According to historical data, hedge funds are able to achieve risk-adjusted performance superior to those of equities and bonds. **
* Hedge fund managers are not as constrained as traditional mutual fund managers, meaning they have the flexibility to employ a greater array of investment strategies to generate positive returns in both rising and falling equity and bond markets.
* Many hedge funds are managed by some of the brightest and most disciplined money managers available in the financial universe.
* There is a large variety of hedge fund investment styles, many uncorrelated with each other, that can be used to effectively meet an investor's investment objectives.
It is still important to note that hedge fund investing is not for everyone and some styles of hedge funds carry high levels of risk and volatility. At Deutsche Bank, we define intelligent hedge fund investing as exposure to a broad and well-diversified portfolio of hedge funds managed by disciplined, highly experienced managers with long track records.
In summary, by creating a diversified portfolio of absolute return strategies to complement traditional portfolios, investors can "hedge" against the storm of market downturns, which is especially important today.
Carlos E. Padula is head of private banking Latin America & New York International Desk, Deutsche Bank.
(*.) Source: Klynveld Peat Marwick Goerdeler (KPMG)
(**.) Source: Datastream and Evaluation Associates
The opinions and analyses expressed herein are those of the author and do not necessarily reflect those of Deutsche Bank AG or any affiliate (the "Bank"). No warranty or representation, express or implied, is made by the Bank, nor does the Bank accept any liability with respect to the information set forth herein.
THE INTERNATIONAL INVESTOR HAS BROKEN AWAY FROM THE "TRADITIONAL MOLD"
Those of us who have spent several decades in the exciting and challenging business of international private banking have witnessed the fascinating evolution of the international private banking client.
I can remember when a competitive rate on a certificate of deposit, a checkbook and possibly n credit card, sprinkled with the tender loving care of your neighborhood international private banker, would go a long way to satisfy the needs of the affluent private banking customer. Boy, how times have changed!
Even the word "affluent" has taken on a new meaning. Now descriptions range from "ultra high net worth" ($50 million) and "very high net worth" ($5 million) to "high net worth" ($500,000) and finally affluent ($100,000). The addition of new code words such as "wealth management" and "high net worth" are now used as new methodologies describing the business of private banking.
The unprecedented economic expansion and continued volatility in Latin America has given impetus to a growing number of "new money" high net worth and affluent private banking customers. The latter, coupled with the explosion in technology advances, has changed the traditional profile of the much sought-after private banking client. He or she is now a much more sophisticated investor with needs beyond the traditional framework. Clients are now more demanding, requiring a higher level of sophistication and diversity of products from their relationship managers.
Industry experts claim that virtually one-half of the private banking client base will be derived from new money by 2003.
Private banks and wealth managers are all scrambling to provide a cornucopia of innovative, attractive products and services, while emphasizing "value-added" opportunities and a high level of service, critical in the highly competitive business of private banking. Services now include asset management, tax advice and information technology for overall "wealth planning."
This new private banking client now requires that the relationship manager also break away from time traditional mold. There is an increased requirement for new skills supported by a sophisticated staff. There is an increasing need and dependence on new technologies, a more client-responsive culture encased in a cost-effective and agile infrastructure. In short, we have an exciting new competitive reality!
Ray Juncosa is the director of the Private Banking Division of BAC Florida Bank, a bank that specializes in private banking for Latin American investors.