What’s the secret to success? For family offices, success often lies in their investment strategy and the details of their asset allocation.
Following our recent blog post on family offices’ service excellence, we will examine what data can tell us about their success factors and how they differ in style and results from wealth and asset management for ultra-high net worth individuals.
“If you saw one single family office, you saw one” is a well-coined industry phrase and one that we agree with. After all, each setting is individual and should cater to the family’s unique and specific needs.
Successful family office investments
Still, some best practices are common to industry leaders in approaching their investments. The dedicated focus on asset allocation is one of them.
Taking calculated risks, alternative investments, and spotting relevant investment themes are a few more.
Family offices are long-term investors with extensive alternative investment exposure that keep the ability of dynamic choices to react to changing circumstances.
These characteristics go hand-in-hand with a sustainable focus to navigate stressful events over generations.
Read on to learn more about their not-so-secret sauce for successful investment performance.
Family office asset allocation
Asset allocation is an essential constituent of every investment strategy to diversify investments and balance risks and returns. This part of the investment strategy and process is rarely outsourced and core to a family office.
Family offices are long-term-oriented service entities built for and around a family, and they are ideally positioned to understand and define the family’s investment objectives, risk tolerance, and time horizon to preserve wealth over generations.
Strategic asset allocation
According to the UBS Global Family Office Report 2021, the global average family office strategic asset allocation dedicates 32% to equities, 18% to fixed income, 18% to private equity, 13% to real estate, 10% to cash, 6% to hedge funds, and the remaining 3% to gold, precious metals, commodities, and art and antiques.
There are regional variations. For example, in Switzerland and the USA, family offices have higher exposure to private equity (21%), while Asian family offices favor equity investments (46%).
Low interest rates have significantly reduced fixed interest allocations, and the search for alternative diversifiers calls for increasing investments in private equity and hedge funds.
Tactical asset allocation
To avoid the asset allocation becoming static, 72% of family offices deviate tactically to seize short-term opportunities. There seems to be a trend of increased tactical asset allocation activities, presumably driven by the current macro environment since the beginning of 2020.
The role of cryptocurrencies
Interestingly, cryptocurrencies play a role in tactical asset allocation, and 13% of family offices hold cryptocurrencies, and 15% plan to get invested.
Crypto assets may prove their effectiveness to protect against low interest rates, inflation, and macroeconomic scenarios over time.
Although these risks are not on top of family offices’ risk lists, they cannot ignore the continuous growth in the crypto assets field.
With predictable regulation, institutional custody, and trading services, digital assets may also establish their place in strategic asset allocation.
Wealth management asset allocation
The above suggests that a family office typically takes an institutional yet dynamic asset allocation approach with 40% of alternative investments.
The substantial allocation to alternatives may be the most significant difference to wealth and asset managers’ allocations in their model portfolios for ultra-high net worth individuals that already tend to have high alternatives exposure.
As outlined below, this is a decision and a question of the suitability to implement it.
In the next two to three years, family offices will extend exposure to riskier assets.
This is because geopolitical circumstances, the current state of the global economy, rise in inflation, low interest rates, and higher public debts don’t seem too much of a concern for them.
The family’s operating business’s future is neither raising particular concern.
Their only significant problem is high evaluation across asset classes shared by 25% of family offices.
Still, based on UBS’s risk/return simulations, risks are taken in a controlled fashion, another characteristic of an institutional approach, and with a specific focus on currency hedges that pays off.
Low interest rates pose challenges in many ways, drive shifts in asset allocation and have one main consequence: fixed income is on a downward trend while equities, private equity, hedge funds, and commodities will experience higher percentages.
Family office investment themes and regions
The investment themes dominating this decade will mostly be related to environmental and social issues.
Over 86% of family offices will perform equity investments in health tech within the next two to three years, closely followed by digital transformation themes that will attract family office capital.
More than 70% of family offices will invest in automation and robotics, smart mobility, and green tech.
It’s no surprise that the regional focus shifts towards Asia to participate in the robust growth. In particular, more than 70% of Western European family offices target an investment shift to Asia.
In comparison, US families still have the most significant home bias regarding investment location and invest 79% of their assets locally.
Asian families traditionally invested outside of the home region. However, with current holdings of 55% local assets, this is changing now and converting into a home bias and contributing further to Asia’s attractiveness.
Conclusion on family office asset allocation
Let’s conclude on this first part: family offices place high importance on asset allocation, both at a strategic and tactical level.
The allocation approach is institutional yet dynamic, with an impressive portion of alternative investments.
Still, risks are taken in a controlled fashion but will increase over the next few years. Except for actually high valuations from a family office’s perspective, there seems not much to worry about.
Environmental and social issues will drive this decade’s long-term thematic equity investments trends, and Asia is ready to attract additional family office capital from old economies.