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Tuesday, December 02, 2003

High Net Worth Investors Have Little Faith In Funds

by: Nicole Halsey

Some of the wealthiest Americans may have predicted some of the mutual fund industry’s current problems and made moves to change their asset allocation before it was too late, a new survey by the Spectrem Group Finds.

Way before New York Attorney General Eliot Spitzer filed the first charges against Canary Capital Partners, some of the nation’s Ultra High Net Worth (UHNW) households —investors whose worth $5 million or more---reduced their fund holdings to six percent of total assets. Two years ago, holdings stood at 11 percent.

Instead, these investors began sinking their money into hedge funds, real estate and other alternative investments. When asked why investors would sink their money into hedge funds which have recently come under fire as the probes of mutual fund practices have widened, George Walter, president of the Spectrem Group, told the 401kwire that it’s important to keep in mind that this survey was completed in August, before the various probes began and suggested that ideas about investments overall have probably changed since then.

Catherine S. McBreen, a Spectrem consultant, said the exodus of high net worth individuals from mutual funds is still significant.

"The sharp reduction in mutual fund holdings by the nation's wealthiest investors suggests the industry was falling out of favor even before the scandals that hit late this year," she said. "On top of the scandals that are now roiling the industry, this exodus of the Ultra High Net Worth investor raises some troubling questions about the continued status of mutual fund holdings in the portfolios of U.S. investors," McBreen continued.

Some of the survey’s findings included:
  • Average mutual-fund balances have declined by nearly one-third or 31% over the two-year period to an average of $1.1 million from $1.6 million.

  • Hedge funds are now owned by 15% of UHNW households, up from 6% in 2001.

  • Real estate investments are now owned by 74% of UHNW households.

  • Managed accounts are 26% of the average UHNW portfolio – the largest single product holding -- from 13% two years earlier.  

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