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Wealth Management Blue-Print


According to a recent report by UBS (“Global Family Office Report 2020”), family offices with assets under management above $1 billion have institutional-like profiles. They are meticulous, rigorous, stick to their plans in the face of a storm, they hold their position – they are disciplined.

Also known as “strategic asset allocation”, this is the cornerstone of wealth preservation and accumulation. It does not change lightly. Alterations involve not only the beneficial owners but also the family office’s decision makers and even the NextGen. Some of the older families rely more on family office or bank partners.

Before the Covid-19 crisis, the highest strategic asset allocation was in developed market equities (ex., Apple, FB, Google), at 23%, and another 11% in fixed income developed markets. Developed markets rate an investment about four times higher in equities and almost twice in fixed income over developing markets. Overall, the choice is 59% of the portfolio is dedicated to traditional asset classes and 35% to the alternative markets.

About 70% of family offices had no plans to change their 2019 asset allocation. However, with interest rates close to zero or negative, fixed income exposure was low.

Over the last 15 years, a strategically planned portfolio generated an annualized return of 7.0%, and over the last 18 months, the model portfolio would have returned 13.8% in 2019.

Overall, portfolios are broadly diversified, with 35% allocated to alternative investments. However, there is also a move towards direct lending. The average family also holds about 2% in physical gold, but since the crisis, some families have pumped that up to a little over 10%.

Disasters such as Covid-19 can kill equity markets, which is another reason why diversification is necessary. Real estate is good in this regard, as it is an illiquid holding, along with certain cars and antiques. However, others fear illiquidity during times of crisis. About half of those surveyed stated that they plan more allocations for real estate, although a similar amount still preferred developed market equities.

During this period, more than half of family offices rebalanced their portfolios, and deployed cash, raising their risk profile.

Tactical changes are made to compensate for uncertain times, and two thirds of the family offices changed up to 15% of their portfolios. Some were opportunists while others focused more on risk aversion.

The risk takers went after bank debt trading, which went down to 10+% on some days. For those family offices who invest in hedge funds, almost three quarters said that they performed in line with or above expectations.

Risk aversion implementation includes hedge funds, derivative funds and changes in the portfolio composition.

Noting earlier that asset allocation does not change easily, family offices were split in their plan to raise their allocations to real estate or to aim at developed market equities.

Private Equity

Private equity is an important asset class for family offices. It is what they know best. Three quarters of those investing expect private investments to deliver higher returns than public investments, and they have their own research teams to assess opportunities, normally reviewing five investment opportunities at a time. About half invest in private equity because they can also access a broader range of opportunities; fast-growing companies are increasingly remaining private or raising growth capital outside the public markets. Companies are coming to public markets much later than they have in the past. Private equity is also good for its diversity – it does not suffer from the public market volatility. All of this means however, that family offices have to keep a close eye on the health of the company. Obviously, one should invest in a sector with which they are familiar.

Of course, investing in private equity focuses on expansion or growth equity. Venture capital is popular in this regard, with information technology and healthcare being the preferred sectors for investing. About one third of those interested in private equity invest in just the funds, whereas another 26% invest in funds and directly. Partner banks are involved in this case – they can be the source of new deals or be responsible for due diligence.

Covid has at least taught some family offices that with private equity, they have more control.