How to Invest Like a Millionaire and Win

Taking tips from the growing ranks of the super rich can be a good way to spot tomorrow’s dead certs, says Kathryn Cooper of London's Sunday Times ...

Nearly 450,000 British investors are now ranked among the world’s wealthy elite, according to a survey out last week, and they have been ploughing their growing capital into exotic investments such as unlisted firms, fine art and commodities.

The number of people in Britain with assets, excluding their homes, worth more than $1m (£550,000) leapt by 7% last year to 448,070, according to the World Wealth Report by Merrill Lynch, the investment bank, and Cap Gemini, the consultant.

Wealthy investors, also known in the trade as “high net worth individuals”, are closely watched by the industry because they often latch on to trends before the rest of us. One reason is that their money buys them direct access to better, tailor-made, advice.

The super rich poured their spare cash into the secret world of private-equity funds last year and were rewarded with a return of 37.2%, compared with 21.8% from the FTSE All-Share, according to the British Venture Capital Association.

Private-equity funds, which provide finance for firms that are not listed on the stock market or are being taken private, have also been a strong bet over the past decade. They have returned 21% a year over three years, 11.9% over five and 16.4% over 10, compared with annual returns of 18.5%, 2.4% and 8% for quoted UK stocks.

Some of the best-known names in British business are in private hands, including retailers such as Topshop, the fashion chain owned by Sir Philip Green, and New Look. Debenhams, the department-store group, is back on the stock market after two years in the hands of private-equity managers.

Top private-equity funds such as Apax and Permira used to require a minimum investment of $25m, which kept them as the preserve of the institutions, but you can now get in for about $100,000, according to Merrill Lynch. Wealthy individuals have therefore piled in, investing a total of $174 billion last year, up 314% on 2004.

The boom has also been fuelled by generous tax breaks. If you invest directly in a private firm under Britain’s enterprise-investment scheme, you could qualify for tax relief of 20% on up to £400,000. In other words, you could get a handout of up to £80,000 from Gordon Brown.

Unlisted firms have even taken over from hedge funds as the favourite alternative investment of the super rich, according to the Wealth Report.

Hedge funds use complex techniques to make money in falling as well as rising markets, but they have failed to live up to expectations in recent months. They returned only 7.1% in 2005, compared with an average gain of 29% in world markets, and their performance has been equally disappointing in the recent downturn.

The typical fund of hedge funds has dropped 3.42% since the market started to fall in May, according to figures from Bestinvest, an adviser. While the Footsie has performed worse with a fall of 6.8%, many hedge-fund investors will have been hoping for positive returns.

Nick Tucker of Merrill Lynch said: “Interest in hedge funds has cooled because of lower returns, higher fees and tighter government regulation. Private-equity funds, which have been a higher-yielding alternative, have gained in popularity.”

While private equity has been a good long-term bet, advisers would caution against piling in now because much of the easy money has already been made.

Jonathan Bell of Stanhope Capital, a wealth manager, said: “We are big fans of private equity in the long term, but at present are sceptical of the returns that will be achieved, given the scale of money being raised by the industry.”

Wealthy investors have not turned their backs on quoted firms completely. They are preparing to dip a toe back into the stock market, having pulled out in favour of cash ahead of May’s downturn.

Tucker said: “Wealthy clients raised cash in March and April, so they have been feeling relatively relaxed in the downturn. They have been watching the market closely, though, and think it is starting to offer better value. Some emerging markets are down by as much as 30% to 35%, and clients are beginning to say it is time to get back in.”

Fine art has been another big beneficiary of last year’s boom in Britain’s wealth, with record prices being set at Sotheby’s and Christie’s almost weekly.

One of David Hockney’s paintings was recently sold for a record £2.9m, for example. Again, however, the easy money may have been made.

Wealthy investors are also cooling on commercial property, which includes shops, offices and warehouses and was one of the hottest sectors in this year’s Isa season. However, returns are expected to run out of steam as interest rates go up.

The sector produced a return of 19.1% in 2005, but this is expected to slow to 8.6% this year and 6.9% in 2007 — still respectable, but much lower than previously.

The super rich are therefore looking for even more exotic ways to beat the market — and one of the latest buzz words is infrastructure investment. This is where investors back joint ventures between the public and private sectors to build hospitals, schools and transport links.

HSBC recently listed the first UK infrastructure investment on the London Stock Exchange, pension funds are getting in on the act and wealthy investors are expected to follow suit.

The super rich do not always get it right, though. Bell said: “High net worth investors are just as fallible as everyone else. At the bottom of the bear market in 2003, when shares offered the best potential returns, they were focused on preserving their wealth and had relatively small holdings in equities.”