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Family offices eyeing increased equities allocations

Geopolitics has knocked inflation off the top spot in the list of concerns, according to UBS' fourth annual Global Family Office Report.
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Geopolitics has knocked inflation off its top spot in the list of European family-office major concerns, according to new research from UBS.

Although recent inflation numbers – and the associated likelihood of interest rates remaining higher for longer – make worrying reading for many investors, new research from UBS shows inflation falling to third place among the top concerns for family offices globally, with those in the US most worried by the spectre of recession, while in Europe and Asia, geopolitics is seen as the biggest risk.

In its fourth annual Global Family Office Report, UBS canvassed the views of 230 of the largest single family offices around the world, covering a total net worth of nearly $500bn (average $2.2bn per family).

While this may seem far removed from the average UK wealth management client, the report notes that single family offices have much greater flexibility to rebalance their allocations than institutional or pension funds, making them not unlike individual investor portfolios in this regard.

The chart below shows the changing asset allocation of single family offices between what they did in 2020 – a year characterised by heightened uncertainty driven by the Covid-19 pandemic, wild swings in equity markets and unprecedented monetary easing – and what they plan to do in 2023, where uncertainty is arguably the only constant.

The numbers show noticeable declines in exposure to cash and real estate, increase in planned exposure to developed market fixed income, and a change in preference for private equity funds rather than direct allocations.

Overall exposures to equity (33% in 2023 vs 32% in 2020) and fixed income (19% vs 18%) remain largely static, although they do underline that these are very far from being ‘traditional’ 60:40 portfolios.

Within fixed income, there is a preference for high-quality, short-duration assets, perhaps reflecting uncertainty over longer-term interest rates and inflation.

Five-year view

Looking ahead over the next five years, more of the family offices surveyed expect to increase developed market equity and fixed income exposure (44% and 38% respectively forecasting an increase) than to stay the same or decrease.

The fixed income number is significant (a net 22% increase) after two years of net decreases (-4% in 2022 and -18% in 2021). UBS says that the rising allocation could help “to enhance diversification, potentially for protection, yield and capital appreciation”.

However, the increase in forecast exposure to risk assets (a net 32% expecting more developed market equity exposure and a net 18% set to increase emerging market equities) indicates that ‘protection’ may not be the only thing in mind for investment portfolios that are focused on intergenerational wealth transfer.

On a geographical basis, UBS sees a rise in expected allocations to Western Europe (which includes the UK), with 26% (a net 21%) expecting to increase exposure, although North America remains popular (30%, or a net 21%, expecting to increase allocations), despite fears of a decline in the US dollar.

This may be partly explained by the overwhelming home bias of US-based family offices, which in 2022 invested 86% of their assets in North America. This compares to European biases of 56% and 43% respectively for family offices in Switzerland and the rest of Europe, Asia Pacific exposures of 23% for family offices in Greater China and 28% in the rest of Asia, and Latin American holdings of just 19% for family offices based there.

From the perspective of investment themes, growth assets, particularly technology and healthcare, remain popular, along with some ESG areas.

Top four themes

The top four themes of interest for the family offices surveyed were digital transformation (where 75% said they were likely to invest), medical devices and healthtech (67%), automation and robotics (64%) and green technology (61%).

Given that family offices are likely to be as focused on capital preservation and income as they are on capital growth, it is important to view these emerging technology exposures through the lens of overall portfolio construction, with risk asset exposure mitigated through diversification measures such as short-duration fixed income (used by 37% of respondents), tilting towards more defensive geographies and sectors (29%) and the use of derivative overlays to manage risk (24%).

Coming back to earth, the latest fund sales figures from the Investment Association suggest ordinary UK investors may be on the same page as the super-rich in at least some areas.

On a net basis, the top-selling sectors in April were short-term money market funds (net retail inflows of £770m), global equities (+£340m), UK Gilts (+£259m), Specialist Bond (+£226m), and balanced multi-asset portfolios (represented by the Mixed Asset – 40-85% Shares sector, +£225m).

While net inflows into equity funds were positive for the second successive month (+£93m overall), UK equities continued to lag, with net outflows of £1.1bn bringing total net outflows over the 24 months to April 2023 to a colossal £20.6bn – a topic we will revisit next week.

This story first appeared on our sister publication, Expert Investor Europe.

Part of the Mark Allen Group.