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 in the past, and the search for alternative diversifiers called for increasing investments in private equity and hedge funds.
The UBS 2023 data report an average strategic asset allocation of 31% to equities, 15% to fixed income, 19% to private equity, 13% to real estate, 9% to cash, 7% to hedge funds, 2% to private debt, 2% to gold and precious metals, 1% to commodities, 2% to art and antiques and less than 1% to infrastructure.
This means that 55% are allocated to traditional asset classes and 45% to alternative asset classes. Due to the current microeconomic circumstances, substantial ongoing shifts are expected for fixed income, hedge funds, and private equity allocations.
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, driven by a changing macro environment.
The role of cryptocurrencies
While cryptocurrencies in the past years seemed to play a role in tactical asset allocation, 56% of the family offices now invest in digital assets, including cryptocurrencies and distributed ledger technologies. However, 38% of family offices still invest less than 1% of portfolio assets.
35% of family offices investing in distributed ledger technologies plan to increase investments. Specifically, 27% plan to do so in cryptocurrencies and 25% in decentralized finance.
Crypto assets may prove their effectiveness to protect against inflation, and macroeconomic scenarios over time and thus family offices cannot ignore the continuous growth in the crypto assets field.
Wealth management asset allocation
The above suggests that a family office typically takes an institutional yet dynamic asset allocation approach with 45% 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.
The current top concerns of family offices are global geopolitical circumstances, recession, and rising inflation rates. Thus, balanced portfolios with active management seem to be the preferred choice for family offices.
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 posed challenges in many ways in the past. Hoever, more than a third (37%) of family offices are now investing in high quality, short-duration bonds as a popular source of diversification in fixed income.
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.
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.