Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
How big family offices work and their views on the future: UBS study
UBS Wealth Management last week (July 17) launched its annual ‘Global Family Office Report’ for 2020. The big fund manager and global bank surveyed principals and executives in 121 single-family offices around the world. Those family offices handle an average total family wealth of US$1.6 billion. This represents a significantly larger dataset than that of any other comparable study, with a total of funds under management of US$142.4 billion.
The study shows how family offices have made tactical portfolio changes in response to market sell-offs, in particular due to the volatility surrounding COVID-19. But the report also analyses long-term investing trends and attitudes. There are some surprises, such as the next generation of family office leaders is considered unlikely to manage the money according to their stereotype of disrupting historical behaviour. The “next-in-line” appear to be more conservative than people think.
The report, based on analysis by UBS ‘Evidence Lab’, reveals how single-family offices have been impacted by market and economic disruption arising from the pandemic, and how they have responded. During the first quarter of 2020, family offices’ average maximum drawdown was 13 per cent. However, family offices protected themselves from the worst effects of the sell-off by rebalancing their portfolios to manage risks. A total of 76 per cent said that their portfolios had performed in line with, or above, respective target benchmarks over the year to May.
A total of 55 per cent rebalanced their portfolios in March, April and May in order to maintain their long-term allocations. While two thirds (67 per cent) say that their mid- term view hasn’t changed, most are seeking to make tactical changes to their portfolios in response to the macro-economic and market shifts. The survey parameters exclude some of the largest family offices in the world, such as the Myer Family Office in Melbourne and Sydney, which has more than 100 staff and takes on the management of assets for like-minded ultra-high-net-worth investors. Graeme Hart, in New Zealand, however, is probably included, with a net worth for his family of about NZ$9 billion. The actual names of respondents, who are notoriously secretive, were not made available.
Rising interest in sustainable investing but…
Globally, almost three quarters of family offices (73 percent) currently invest at least some assets sustainably. Currently, family offices primarily adopt exclusion-based strategies, which make up 30 per cent of investments. ESG integration is catching up, as families look to more than double allocation over the next five years, from 9 per cent to 19 per cent. Some of the impact investing priorities include education, healthcare, automation and robotics, and alternative food sources. However uncomfortable it may have been at times, they stuck to their plans and remained disciplined. Meanwhile, fewer than half of the cohort (48 per cent) view the ‘next-in-line’ leaders of family offices as pushing for an increase in sustainable investing.
“Family offices embrace and manage risk like no other investors,” the study says. “It is missing an opportunity that gives these clients the biggest headache, not making a loss. This is why they are looking to deploy cash to take advantage of market dislocations. We expect to see big moves in the coming months.”
Anurag Mahesh, co- head of the UBS Wealth Management ‘Global Family Office Group’ for APAC, said: “More than half (56 per cent) of families remain closely involved in strategic asset allocation, making it a priority for the family office and a cornerstone of wealth preservation. Risk management remains a top priority for many of our clients. We see that the Family Offices across the region continue to focus on their long-term objectives, while keeping agile enough to take advantage of opportunities that may arise.
“We continue to witness a strong trend amongst Asian Family Offices to allocate their investments to Private Markets and Direct investments over the years. Given the strong preference of Asian Families for private markets and given their entrepreneurial roots, this doesn’t come as a surprise to us,” he said. “In line with many families’ growth focus, information technology and healthcare are the top two preferred sectors for their investments. For many of our Asian GFO clients, they prefer direct investments as they offer greater control. Many family businesses also value private equity diversification properties.”
Private equity a key driver of returns
More than three quarters (77 per cent) of family offices invest in private equity, with 69 per cent viewing it as a key driver of returns. Three quarters (73 per cent) of those investing expect private investments to deliver higher returns than public investments. They noted that direct investments offered greater control, with 35 per cent regarding this as an advantage, against just over a quarter (27 per cent) before the economic disruption.
Many families also value private equity’s diversification qualities. Slightly more than half of those investing in private equity do so to diversify, as the asset class is not buffeted by daily listed market volatility. For many business families, private equity is in the blood. About a third describe private equity as a ‘passion for the owner’.
Reflecting the business backgrounds of many families, almost three quarters (71 per cent) which are investing in private equity focus on expansion or growth equity. As many have spent their lives building businesses, this is an extension of their careers. Venture capital is also a common investment, with slightly more than half (53 per cent) normally investing in this area.
In line with many families’ growth bias, allocations to information technology (77 per cent) and healthcare (60 per cent) are preferred sectors. But family offices usually diversify their investments across four to five sectors such as information technology; healthcare; real estate; consumer discretionary; and, communication services.
The next-in-line: more alike than different
The report also reveals that the next-in-line do not comply with stereotypes. Currently in their 20s and 30s, they’re expected to be in their 30s and 40s when they take control. Despite commonly held expectations that there will be a shift in emphasis as the transition occurs, over half (54 per cent) of family offices say the next generation are just as interested in traditional investments as their parents. In Asia and the US that proportion climbs to 71 per cent. Slightly less than half (48 per cent) of respondents thought the next in line would show additional interest in responsible investing.
– G.B.
