Sunday, Sep 07, 2008
Dubai: For wealth-watchers everywhere two of the more prominent productions are the Capgemini Merrill Lynch World Wealth Report and The Boston Consultancy Group's annual wealth reviews. For them its official - the wealthy get wealthier whatever the economic weather.
The definition of 'wealthy' varies between reports, and varies between financial institutions. As a generalisation, the wealthy can be defined as those with assets (usually defined as not including collectibles and their primary residence) at above somewhere around $5 million to $15 million. Thresholds vary as target markets vary. One commonality seems to be that the credit crunch; economic slowdowns in the mature economies and market crashes are simply 'sideshows' to their wealth building.
To the average Gulf News reader, the credit crunch is a barrier to their ability to leverage, and market traumas (often induced by factors outside the investor's control) provide unwanted volatility that increases the risk of investing outside of cash. What to do? One way out is to discover what value is about and undertake some of the decision-making yourself.
Route One: Become a Warren Buffett. One of Forbes' richest men, Buffett was born into a modest economic environment. He worked out that a company valued at, say, $175 million, which had property assets at say, $100 million, strong revenue, limited or serviceable debt with $50 million in cash and $50 million in other assets was underpriced.
The first lesson: That market price is not the only factor to consider when looking at the value of an asset. To Buffett-fans 'value' is an aggregate of different characteristics including the cost, the profitability/revenue, liquidity and so on. It is not sufficient to say that Buffett's view on value can be narrowed down to the cost of an investment against its current market price. That's for traders. The Buffett view is more inclined to say that his inward investment is more likely to grow a company over time.
For the Gulf News reader, the point is that 'market pricing' merely reflects the aggregate view of buyers versus sellers of a particular asset on a particular day. The market view has a minimum impact on Buffett's approach, "I've made three mistakes, selling Coca-Cola, selling Coca-Cola and selling Coca-Cola".
To the experienced Buffett, the 'value' of a company remains the aggregate of its assets versus the aggregate of its liabilities and the probability of that difference growing positively. Market sentiment and market pricing is irrelevant.
The Deloitte Report:, Re-connecting for Profit ,is another HNW (high net worth) survey. Its findings suggest that 'market-huggers' should look at non-market assets. The report suggests that HNW's are increasingly likely to utilise the 'Wealth Management' space for only 25 to 30 per cent of their assets, and use an average of 4.7 advisers.
This leaves 70 to 75 per cent of HNW money (to Deloitte over $15 million of assets) in traditional 'illiquid' assets such as property, art and tied company stock.
Whilst the report does not state a victory for non-market stock against market stock, it adds motivation to those that prefer investing in 'private companies' where the aggregate of 'values' is often less than the last-audited statement of value.
So what of the 'artistic value'? The news that blew me away this week was the prospective offer of Man-chester United's Rolando for $240 million!
It could of course be a 'marketing ruse' a cheap way of collecting column inches; or cheap-shot sporting intimidation; but it is backed-up by the purchase already of Robinho and the never-quite-made-it offer on Berbatov (both not known for their commitment to club causes) for a total of around $120 million. Where is the value in this?
Recovery on ticket sales is certainly out. You can get so far away from the stadium action that it's much easier to watch a game on the telly, or big screen.
Recovery on shirts? A bit - $240 million of Ronaldo shirts is a lot of shirts. I remain unconvinced as my wife will not wear the Italian 'Totti' shirt I bought her. It's her colour as well. The underlying 'value' must have something to do with Abu Dhabi United's strategic direction - we hear of potential real estate deals in Manchester; and of personal taste - we hear of Sulaiman Al Fahim's ambition.
Clearly, the extremely HNW's can create value-definitions of their own. If they continue to grow in numbers of members and absolute wealth expect more of this trend. Evidence can already be seen in the art market.
Once-upon-a-time it really was a market for the few. Experts spoke of 'five-year cycles' in art.
Art advisory services
Now the top wealth managers offer 'Art Advisory Services' and the market produces records at the rate of twice a year. Adjusting for inflation and other variables it is awkward to gauge the 'most expensive' piece of art ever. On the one hand, many of the pre- 1,800 works are now museum pieces and are literally priceless.
The market assumes that the Mona Lisa is probably the most highly insured piece of art. Of what can be valued and bought, we are left with the auctions. Depending on what you read you will get different views of the most valuable piece of art. On a no-value Google-raid I would guess Jackson Pollock's 'No 5, 1948' at an inflation adjusted $149 million would be near the top. A value that could buy part of a Premiership defence but only a flimsy attack.
This might be why Roman Abramovich may have included Chelsea in his portfolio, as he is already in the 'top art purchases' list with the acquisition of Francis Bacon's Triptych for a Drogba-like price.
The conclusion: defining 'value' has always been a grey-ish area. The increasing wealth of the wealthy has done little to clear what value actually means.
For the Gulf News reader, the biggest lesson is the awareness that a market price of an asset on a given day is only part of the overall value equation.
The full equation of value rests somewhere between an aggregate of issues, that would, depending on the author include: "worth"; 'utility'; liquidity; cost; capital gain potential and income.
Assessing all of this would also include a myriad of variables including: economics; strategy; finance; religion; ethics and for the extremely wealthy - personal tatse.
- The writer is chairman of Mondial Financial Partners.
By Sean Kelleher
Gulf News 2008. All rights reserved.
