Family offices across the world are increasingly keen on private equity over the medium and long term as part of a mounting interest in institutional-style strategic asset allocating, despite some lagging levels of confidence in the depths of the volatility surrounding Covid-19.

Meanwhile a slowly growing minority are also focused on sustainability investing, according to the first annual report of family offices by UBS.

The Swiss private bank released the study, which had polled 121 of the world’s largest family offices*, on Thursday (July 16). In it, UBS noted that they broadly rode out the volatility of the pandemic well so far, In part this was due to a rising focus on strategic asset allocation (SAA).

Institutional investor-style SAA has been growing in importance among family offices, and with good reason. As UBS noted in its report, a model US dollar portfolio with 2019 allocations would have yielded 7% a year on average over the past 15 years and 13.8% in 2019. However, that portfolio strategy would also have led to the worst quarter of performance in 10 years.

At the end of 2019 family offices on average had about 13% of their assets in cash, a signal of caution about the high state of equity valuations. Overall, they held 59% of assets in traditional asset classes, another 39% in alternative asset classes (16% in private equity), and the remaining 6% in gold and precious metals or art and antiques.

However, 55% of family offices had to rebalance their portfolios during March, April and May to maintain their strategic asset allocations amid the steep collapse in financial market valuations. In addition, two-thirds tactically shifted up to 15% of their portfolios into different asset areas during this period, either to buy oversold assets or to cut pro-growth exposure by adding cash and gold. 

Around a third (35%) of family office portfolios were broadly diversified. UBS said the world’s family offices haven’t yet fundamentally adjusted their allocation frameworks, but that they are “likely to do so in the months to come, as they digest the implications of what appears to be a major economic turning point with many ramifications across financial markets”.

PRIVATE EQUITY PUSH

Notably, this might well result in bigger allocations to private equity.

Just 28% of respondents said they would invest more into the asset class during May, as market volatility still reigned, well below the 49% recorded before the crisis. “That could well reflect the fear of illiquidity that dominated financial markets at the time,” the report noted.

However, over the longer term they were far more confident. More than two thirds (69%) say they viewed private equity as a key driver of returns and almost two-thirds felt it would offer superior rewards to public investments.

All-told, 34% of respondents said private equity was a passion of the owner. And the fashionable areas of technology and healthcare were seen as the most appealing areas; 77% and 60% of respondents said they were preferred sectors for investing.

In addition, almost half (45%) of respondents to questions in May said they intended to raise their allocations to real estate to take advantage of market dislocations. A similar percentage was aiming to raise allocations in developed market equities, followed by developing market equities.

“Maybe in the next few months as you see companies and businesses start to need more liquidity or more financial support, there will be more financial opportunities coming. And so definitely real estate businesses will be interesting, and we can actively participate in companies to turn them around," said a Singapore-based family member and chief investment officer in the report. 

SUSTAINABLE THOUGHTS

While there was a strong level of interest in private equity, the appeal of sustainable investing was more mixed.

All-told, 39% of family office respondents said they intended to allocate most of their portfolios sustainably in five years’ time, while 73% said they were already investing at least some of their assets sustainably. And most were doing so fairly simply; exclusion-based strategies were the most popular approach to sustainable investing among family office portfolios, at 30%.

However, UBS said that a rising interest in ESG should not be overstated. It noted that “most family offices still plan to opt for the easiest option of excluding assets not in line with their values,” noted the report. “There’s also a steadfast small minority who would rather keep things as they are – maximising investment returns through traditional investments, while pursuing philanthropy separately.”

The chief investment officer of one European family office said in the report: “We don’t have a mandate for ESG, but it’s not rocket science to look at the change in consumer demand and the political and social environment. These issues have come to the forefront now and impact business performance.”

However, interest in sustainability and philanthropy appears less prominent in the US and Asia. In those two regions 71% of respondents said the next generation of incoming owners were just as interested in traditional investments (focused exclusively on financial returns) as their parents, versus other focuses such as philanthropy. A little under half said inheritors were looking to increase sustainable investing.

* The survey respondents had a combined wealth of $142.2 billion or $1.6 billion each on average. Two-thirds of respondents were based in Europe, the Middle East and Africa, but the poll included participants from 35 markets, including Hong Kong and Singapore. I first survey was sent between February 19 and March 13, and a second was sent out between May 5 and May 26.