Affluent investors fret over U.S. losing its edge
SOPHISTICATED INVESTOR
Overseas competition
Affluent investors fret over U.S. losing its edge
By Thomas Kostigen, MarketWatch
Last Update: 7:32 PM ET May 1, 2007
SANTA MONICA, Calif. (MarketWatch) -- More than half of Americans with more than $5 million to invest believe the U.S. stock market is becoming riskier, and many are shifting to international equities.
In a survey of affluent Americans, the financial institution U.S. Trust found that many wealthy people expect to get bigger gains overseas than they do here in the U.S., with an expected average annual return of 9.66% in international equities versus 8.85% in the U.S. markets.
A majority of the wealthy people surveyed believe hedge funds are good vehicles to provide strong returns and hedge market risks. Still, about three-quarters of this group say a good hedge fund is difficult to find and just as difficult to investigate.
The top financial worries of respondents are that the U.S. is losing its competitive edge in the world economy, U.S. Trust found. In its report, the 2007 Survey of Affluent Americans, U.S. Trust says 74% of wealthy people believe that the budget deficit will affect the economy over the long term. This, they believe, will spill into the international arena as well, and leads them to worry about the U.S.'s role in international finance. With recent market events in China setting off a global ripple, as well as dollar lows, there is certainly ample precedent for their concerns.
And the survey indicates that these concerns aren't limited to the near term. Most wealthy people say that the next generation will have a more difficult time financially. Seventy-two percent of respondents worry that environmental issues will require more government spending and that taxes will rise significantly over the next few years. As well, they believe high taxes will reduce the value of their estates.
With the estate tax laws uncertain after 2010, there is much cause for the wealthy to be concerned.
The estate tax currently exempts amounts under $2 million until 2009, when the exemption amount for an estate rises to $3.5 million. In 2010, the exemption amount is completely lifted, but drops back to $1 million in 2011. Estates with assets above these exemption amounts are currently taxed at a maximum rate of 45%. Because the law is, as you can see, kooky, there is legislation being kicked around in Congress to straighten it out.
Giving takes a hit
So what will the wealthy do to hedge their bets against estate taxes? Well, first they are expected to cut back on philanthropy. In a separate finding, Northern Trust in Chicago finds wealthy people don't like uncertainly and are keeping their money on the sidelines this year when it comes to certain things like giving.
Just 27% of millionaire households are planning to increase charitable donations in 2007, down from 44% last year, due in part to current charitable giving levels, the uncertainty regarding estate tax laws and family care obligations, Northern Trust finds.
Only 28% of high-net-worth households view donations as an important tax-reduction strategy, Northern Trust says, down from.44% last year. With a quarter of millionaires inheriting estates valued over $1 million, tax-reduction strategies are key components to wealth preservation.
Yet, because many millionaires say that they themselves aren't that knowledgeable about tax affairs, worry and uncertainty brew.
Cash and carry
This mentality is manifesting itself in the flight of capital overseas as well as cash holdings.
There's about $2.5 trillion in money-market-fund assets, topping previous years' annual amounts. Indeed, money-market assets have been on the rise over the last two years after dipping from their height in 2001.
That height was reached after the stock market crash. In recent weeks, according to data from the Investment Company Institute, the mutual fund trade organization, retail investors have been pulling more money out of cash, or money market funds. However, at the same time large institutions are increasing their cash holdings.
Big money seems a little scared right now for lots of different reasons, but cash hoarding is a sure sign of market jitters. End of Story
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