For super funds and their advisers

Cash-loading could sink family office returns

•8-David-Bailin

Family office portfolios could see massive underperformance ahead with most well-overweight cash, according to the latest Citi Private Bank global survey of the sector.

David Bailin, Citi Global Wealth chief investment officer, said about a third of family offices in the survey reported cash holdings of 20 per cent or more while a further third allocated 10-20 per cent to the most-liquid asset class.

Bailin said in the report that “the amount of cash held by family offices makes little sense”.

“Allocations to cash in excess of 20% are prevalent, yet over the past decade, such an allocation would have resulted in a 12% net decline in value. In the decade to come, we expect the value of cash to diminish by more than 17%,” he said. “The excuses for holding cash reserves (“waiting for future opportunities” or “seeking safety”) are inconsistent with real opportunities in markets, both public and private.”

Despite the cash-hoarding behaviour the majority of the 156 family offices surveyed across the globe – including 15 per cent in Asia-Pacific – expressed “cautious optimism” about investment return prospects.

“While over three fourths of all respondents expect [annual returns of] 5% or more, interestingly, the outlook is more optimistic for family offices with AUM under $500 million with 30% expecting over 10% versus 19% of Family Offices with AUMs over $500 million,” the Citi report says.

However, to date family offices have eschewed most of the alternative asset strategies favoured by institutional investors such as private equity and real estate, Bailin said, with one exception.

“We do see an accelerating interest in direct private investing and co-investments, areas that present opportunities and challenges for family offices,” he said.

The survey found about 44 per cent of family office portfolios held a quarter or more in direct investments with the smaller end of the market (US$500 million or less of assets under management) skewed higher to direct investing.

“Asia Pacific-based family offices appear to invest a significantly large portion of their portfolio in direct investments to amplify returns with nearly 62%, reporting greater than 25% of their portfolio allocated to this asset class,” the study says.

By contrast, family office portfolios in Latin America, Europe and North America allocated 45, 42 and 39 per cent, respectively, to direct investments.

And family offices have also been slow on the uptake of environmental, social and governance (ESG) investment strategies, the Citi survey found in new questions introduced this year.

Only 10-12 per cent of respondents had aligned over 25 per cent of their portfolios to ESG principles, the report says.

“Even more remarkably, 57% of family offices with AUMs under $500 million report that ESG alignment is not a consideration or are unsure while 45% of family offices with AUM over $500 million report a similar response,” the paper says. “Perhaps this reflects a need for greater engagement especially with the next generation, for whom this is generally a topic of keen interest.”

The majority of family office investors also said they would not accept lower returns in exchange for investing in technologies designed to combat climate change: about three-quarters of large family offices would not consider the trade-off compared to 55 per cent of smaller groups.

“It is possible that larger family offices manage their investment mandates and portfolio strategies distinctly and separately from social investing or link such investments to their philanthropic giving,” the report says.

Citi also broached the investment topic du jour – cryptocurrencies – for the first time in 2021, finding about a quarter had already invested in digital assets while a further 25 per cent were “in research mode”.

Bailin said the fact 25 per cent of family offices were exposed to cryptocurrencies that “due to their lack of fundamentals – are highly speculative” contrasted with their general aversion to alternative assets.

“Once again, these views are contradictory,” he said.

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