The demise of active asset management was much exaggerated, so it seems, and an annual UBS study of single-family offices around the world confirms it. Rising inflation and rates have changed the mindset.
Balanced portfolios and active management are back in fashion as rising interest rates and inflation collide with recent approaches, according to a UBS global survey of 230 single-family offices around the world.
Fixed income is now the most popular source of diversification, as more than a third (37 per cent) of family offices move to high-quality, short-duration bonds for potential wealth protection, yield, and capital appreciation, the Swiss bank said in its study. At this time, increased fixed income exposure reflects general reallocation from a broad mix of asset classes. Over the next five years, those surveyed still foresee greater allocation to risk assets, with 34 per cent planning increases in emerging market equities following a peak in the US dollar and the reopening of the Chinese economy.
Now performed in-house, the UBS study is one of the annual measures of the concerns and approaches of SFOs, a sector once “under the radar” in financial services but now an increasingly visible part of the landscape. Banks such as UBS court family offices as clients, providing them with a variety of services. These entities are often set up by ultra-high net worth individuals who want something different from a bank’s offerings, so banks in turn can retain business which they might otherwise lose by delivering new services.
SFOs in the survey had an average net worth of $2.2 billion.
As shown in last year’s report, there is still a strong trend among family offices for including alternatives to help diversify a portfolio, but they are refocusing their allocations. Hedge fund allocations have risen to 7 per cent from 4 per cent and, in contrast, direct private equity allocations decreased to 9 per cent from 13 per cent. Family offices also plan to cut real estate allocations in the coming year. Collectively, this is due to an increased allocation to private equity funds, private debt, and infrastructure, the report said.
The return to focusing on active management chimes with what this news service has argued here.
“This year’s report comes at a defining moment in time. It’s the end of an era for low or negative nominal interest rates and the ample liquidity that followed the global financial crisis. Against that backdrop, our research shows that family offices are making major changes to ensure they’re positioned for growth and success” George Athanasopoulos, head global family and institutional wealth and co-head of global markets at UBS, said. “While current market and geopolitical trends have prompted a shift to liquid, short-dated fixed income, 66 per cent of family offices still believe that illiquidity boosts returns in the long-term and they're looking to further increase allocations to alternatives like hedge funds, private equity funds and private debt to further diversify their private markets allocations.”
After more than a decade when so-called passive investing was a dominant theme – with clients increasingly reluctant to pay fees beyond a minimum – active management is due to come back, UBS said. Some 35 per cent of family offices are relying more on investment manager selection and active management to enhance diversification. Family offices are confident of hedge funds’ ability to generate investment returns, as monetary policy reduces excess financial liquidity and macroeconomic uncertainty persists. Almost three quarters (73 per cent) believe that hedge funds will meet or exceed their performance targets over the next 12 months.
Overall, 41 per cent plan to raise private equity direct investments over the next five years. While these will be reduced in 2023, this is partially offset by increased allocation to private equity funds, as well as planned increases in private debt and infrastructure. Family offices with private equity investments prefer to invest using funds (56 per cent) as, typically, they deliver diversification and can allow family offices to enter markets where they do not have in-house expertise.