Family Offices’ strategy to outperformance in troubling times

The first annual report released by UBS focuses on 121 of the world’s largest single family offices, covering a total net worth of USD 142.4bn, with the individual families’ net worth averaging USD 1.6bn. According to the report, family offices’ institutional nature, expert insights and superior access allowed them to ride out 2020’s storm in financial markets. In a historically turbulent time, portfolios performed in line with or above their objectives.

Strategic asset allocation

The report stated that strategic asset allocation remained a top priority for the family office and a cornerstone of wealth preservation, with more than half (56%) of families staying closely involved in strategic asset allocation. This resulted in over half (55%) of family offices rebalancing their portfolios in March, April and May in face of market turmoil in order to maintain their long-term strategic asset allocation.

Unsurprisingly, a number of family office Chief Investment Officers started to question the stretched valuations of an aging equity bull market towards the end of 2019 and with 35% allocated to alternative investments, they pursued broad portfolio diversification.

“Instead of investing in private equity funds, be it leveraged buyout, venture or growth capital
funds, we were finding opportunities in direct lending,” explains a Hong Kong-based chief investment officer. “That was a conscious move to a senior part of the capital structure, so there was an added level of protection should you see some stress in the markets.”

Private equity: a key driver of returns

Despite rising valuations and increased uncertainty, private equity remained an important asset class for family offices, with over 69% viewing it as a key driver of returns. Many entrepreneurial families have a zeal for building businesses and perceive private equity as part of their DNA.

At a time when fast-growing companies are increasingly remaining private or raising growth capital outside the public markets, private equity can provide a broad range of opportunities, and 73% of family offices investing in private equity expect them to deliver higher returns than public investments.

Private equity also delivered the diversification that family offices' were seeking, with 52% distributing their exposure through PE investments.

Sustainable investing: rhetoric or reality?

While 39% of family offices intend to allocate most of their portfolios sustainably in five year’s time and 73% say they already invest at least some assets sustainably, family offices still largely trail institutional investors on the journey towards adopting sustainable investing.

Within sustainable investing, exclusion-based strategies form by far the highest proportion of family office portfolios, at 30%. Since most family offices view measuring impact as a big challenge, an exclusion-based strategy makes most sense when navigating the unfamiliar.

Family offices still prioritize financial return on investment (ROI) (or internal rate of return, IRR) when evaluating impact investments, with 43% placing it among their top three performance indicators and with families in the US and Asia making it an even higher priority.