The authoritative annual family offices study from UBS shows a marked pessimism over markets and geopolitics, with climate change high on the agenda, reports Arun Kakar
A startling 55 per cent of family offices expect a market downturn to start within months, UBS has said in its annual survey of 360 family offices which together control in excess of $400 billion in wealth.
The report found that family offices fear a financial markets downturn will ‘commence by 2020’ amid a broad outlook of ‘cautiousness and in some cases discomfort’ over current geopolitical tensions and their market impact.
Many family offices, which have an average wealth of $1.billion are therefore ‘rethinking’ parts of their investment strategies.
Private equity and real estate are the burgeoning areas of investment interest the bank said, as uncertainty begins to weather the outlook for financial markets.
Average investment returns stood at a disappointing 5.4 per cent for the 12-months to Q2 across surveyed family offices, with the developed market yielding 2.1 per cent, some 5.2 per cent below expectations. Performance was worse still in developing market equities, which returned a negative 1.1 per cent – 10 per cent behind expectations.
Solace could be taken, however, in private equity, which fared the best of all asset classes with an average return of 16 per cent for direct investments and 11 per cent for funds-based investing.
Real estate also returned a healthy 9.4 per cent return, as family offices increased their allocation by 2.1 per cent. The asset class now accounts for 17 per cent of the average family office portfolio.
As market pessimism becomes the predominant outlook, the report noted a shift in investment approaches. Almost half (45 per cent) are ‘re-aligning their investment strategy to mitigate risk’, with a similar figure looking to ‘take advantage of opportunistic events (42 per cent). Some 42 per cent are increasing their cash reserves and 22 per cent are reducing leverage exposure to investments.
‘While the average family office hasn’t made wholesale changes to its portfolio, many have been building up cash reserves and deleveraging their investments in anticipation of disruption ahead,’ Gooch adds.
Asked on a range of geopolitical issues, the report also found:
- Some 63 per cent think Brexit is set to have a negative impact on the UK as an investment destination in the long term
- Some 87 per cent view AI as the ‘next big disruptive force’ in business.
- More than half (57 per cent) think blockchain will ‘fundamentally change’ how we invest in the future.
Mounting global concerns with the climate crisis are also being reflected in the activities of family offices, the report also found. Eight in 10 respondents said that the world’s wealthiest families will have an ‘increasingly active’ role to play in helping to address global challenges ‘historically reserved for governments’.
Additionally, some 65 per cent feel they have a role to play in ‘alleviating economic inequality’, while 53 per cent consider climate change as the ‘single biggest threat’ to the world.
One in three family offices are now engaged in sustainable investing, with 19 per cent of the average portfolio now dedicated to sustainability. The report predicted that this number would rise to 32 per cent within the next five years, owing to the fact that 85 per cent of sustainable investments have either met or beaten expectations.
‘This is no longer seen as a ‘side project’ or preoccupation of the Next Gen, but a priority for the family as a whole,’ says Sue Ferrari, head of UBS’s global family office group. ‘Many products are now recognised by family offices as fully-fledged investment tools that can generate good returns.’
On the topic of the next-generation, the report also found that 54 per cent of family offices now have a succession plan in pace, up from 43 per cent last year. The average age of a family office heir is 45 years old, with 29 per cent under the age of 40.
The two most important challenges to succession were that it involves discussing a ‘sensitive topic’ (37 per cent), and that benefactors are ‘too young’ to plan for the future role of a benefactor (36 per cent).
This was followed by the matriarch/patriarch’s refusal to relinquish control (33 per cent) and next generations not being viewed as ‘qualified enough’ to take the reins (31 per cent).
Ferrari adds: ‘Succession often spans a series of complex matters involving business, investments and family relationships. Written plans are important, but they should be considered as part of a broader process of preparing the next gen to take control. The key is to start early.’