Family offices are planning the biggest shift in strategic asset allocation in years in light of potential inflection points in interest rates, inflation and economic growth, the world’s leading wealth manager UBS said.
A key shift for family offices is fixed income in developed markets.
Balanced portfolios with active management will come back into favor as near-zero interest rates end, UBS said in its 2023 Global Family Office Report, which surveyed 230 single-family offices around the world with average total net worth for $2.2 billion.
The biggest turnaround that family offices plan to achieve is in developed market fixed income, where nearly four in 10 (38%) plan to increase debt over the next five years after three years of cutting debt.
Fixed income is now the most popular source of diversification, as more than a third (37%) of family offices turn to high-quality, short-dated bonds for potential wealth protection, income and capital appreciation, it said.
Currently, the increase in fixed income exposure reflects a general reallocation across broad asset classes, UBS reported.
Respondents still expect to increase their allocation to risk assets over the next five years, with 34% planning to add to emerging market stocks after the dollar peaks and China’s economy reopens, the report said.
As in last year’s report, there continues to be a strong trend for family offices to include alternatives to help diversify their portfolios, but they are refocusing their allocations.
Allocations to hedge funds rose from 4 percent to 7 percent, compared with a drop from 13 percent to 9 percent for direct private equity allocations. Family offices are also planning to reduce real estate allocations in the coming year. Overall, this was due to increased allocations to private equity funds, private debt and infrastructure, it added.
George Athanasopoulos, global head of household and institutional wealth and co-head of global markets at UBS, said: “This year’s report comes at a defining moment. The era of low or negative nominal interest rates and ample liquidity is over in the wake of the global financial crisis. Against this backdrop, our research shows that family offices are making significant changes to ensure they are well-positioned for growth and success.”
“While current market and geopolitical trends are driving a shift toward liquid, short-term fixed income, 66% of family offices still believe illiquidity improves long-term returns, and they expect to further increase allocations to alternatives such as hedge funds, private equity funds and private debt to further diversify its private market allocations,” Athanasopoulos explained.
Active management is back in favor, with 35% of family offices relying more on investment manager selection and active management to enhance diversification, he said.
Family offices are confident in hedge funds’ ability to generate investment returns as monetary policy reduces excess financial liquidity and macroeconomic uncertainty remains.
Nearly three-quarters (73%) believe hedge funds will meet or exceed their performance targets over the next 12 months, he added.
Overall, 41 percent of respondents plan to increase direct private equity investment over the next five years. While these will decrease in 2023, this is partially offset by increased allocations to private equity funds and planned increases in private debt and infrastructure.
“Family offices with private equity investments prefer to invest using funds (56%) because they provide diversification and allow the family office access to markets in which they do not have in-house expertise,” Athanasopoulos noted.
Looking to the next 12 months, they appear to be looking for value opportunities, with 45% of family offices investing in private equity planning to over-allocate their portfolios to the secondary private equity market, with some institutional investors expected to be forced to rebalance after public market declines portfolio, and exits remain elusive through IPOs.
Family offices cautiously plan to trim their real estate allocations in 2023, but within five years, a third (33%) expect to move to higher allocations.
That would be in line with interest rates staying high into 2023, property prices softening a bit, and then easy money and lower valuations starting to support the asset class again, he added.
Regarding future prospects, UBS said that, in general, family offices are cautious about the current market in the face of uncertain growth prospects in advanced economies, tightening lending conditions and heightened geopolitical tensions.
Geopolitics replaced inflation as the top concern for family offices worldwide, followed by recession and inflation, the report said.
Family offices are also increasing their allocations in areas that were less popular in the past.While they still have nearly half of their holdings in North America, more than a quarter plan to increase their allocations in Western Europe over the next five years, and nearly a third plan to increase and expand their allocations in the wider Asia-Pacific region, it adds.-TradeArabia News Service