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.

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Looking for diamonds
Looking to the next 12 months, they appear to be hoping for value opportunities, with 45 per cent of family offices with private equity investments planning to over-allocate their portfolios towards the secondary private equity market, anticipating that some institutional investors will be forced to rebalance portfolios following declines in public markets, and as exits remain difficult to achieve through IPOs.

Family offices are cautiously planning to cut real estate allocations in 2023, but over five years, a third (33 per cent) of them foresee moving to higher allocations. This fits a picture of interest rates remaining high in 2023, with some softness in real estate prices, before easier money and lower valuations start to support the asset class once again, the bank said.

Geopolitics on my mind
Overall, family offices were cautious about current markets in the face of an uncertain growth outlook in developed economies, as well as tighter lending conditions and heightened geopolitical tension. Geopolitics overtook inflation as the top concern among family offices globally, followed by a recession and inflation. (The report did not appear to mention specific issues, but common geopolitical worries concern the Russian invasion of Ukraine in 2022, and the possibility that China will attempt to capture Taiwan.)

Family offices are also increasing their allocations in regions that have been less favoured in the past. While they still have almost half of their assets in North America, over a quarter of SFOs plan to increase allocations in Western Europe over the coming five years, and almost a third are planning to raise and broaden their allocations in the wider Asia-Pacific region.

Regions
In the US, the the main purpose of family offices created there is to support the generational wealth transfer (76 per cent), reflecting the relative maturity of this market. Sixty-three per cent have a wealth succession plan in place for family members, but only 38 per cent have created a succession plan for the overall family office. Investment allocation to real estate (21 per cent) and hedge funds (10 per cent) was the highest among global peers. In contrast with other regions, a recession is the greatest concern for US family offices and their cash allocations were the least conservative (7 per cent).

Compared with global peers, family offices in Latin America had the highest allocation to fixed income (30 per cent). Their allocation to real estate was the lowest (5 per cent) and only a fifth (20 per cent) use hedge funds as a portfolio diversifier. 

Family offices in Asia-Pacific had the highest allocation to equities (37 per cent), and almost half (46 per cent) use hedge funds as a portfolio diversifier. Of those with private equity investments, they also make direct investments more than other regions (31 per cent) and 77 per cent of their private equity investments are invested in technology. From an investment perspective, medical devices and health-technology resonate best (76 per cent).

SFOs in Europe, excluding Switzerland, allocated 11 per cent of investments to real estate, with 30 per cent planning to increase allocations in the next five years. Ninety-four per cent manage strategic asset allocation in-house and 75 per cent agree that illiquidity increases returns. 

As for Switzerland, SFOs said the main reason to create these entities is to support generational wealth transfer (73 per cent).