“Happy families are all alike,” according to the first sentence of Tolstoy’s novel, Anna Karenina; “every unhappy family is unhappy in its own way.” And sure enough, that is also the story of family offices in 2020.
There were a lot of hurdles that could have derailed a Family Office this year—the March sell off, the subsequent recovery, hedge fund under performance, private investments that couldn’t handle COVID. Many cleared those hurdles and went on to double digit returns, but many also fell along the way. We have been told of Family Office returns ranging from -7% to +20%, which is one of the widest dispersions we have seen in a long time.
By March, Family Offices knew that what was happening wasn’t a normal market correction. This could be something much bigger, maybe as big as 2008. There are a number of things they did to manage the COVID crises, some of which they are still doing now.
A number of Family Offices were prudent and came into 2020 with cash buffers, in some cases as large as 30%. For others, the first step was raising cash and reducing risk. This meant better understanding the risks in their businesses and investments. Many spent the summer just understanding the cashflow needs of their operating businesses and investments.
After May, when they felt comfortable about their investments, the question came up of how best to take advantage of the opportunity.
The first thought was Distressed Credit and Special Situations. But with all the stimulus deployed by global central banks and governments, the opportunity disappeared as quickly as it had appeared.
By July, inflation became a bigger concern and gold & silver prices started rising.
Throughout this time, and especially into August as the markets squeezed ever higher, many Family Offices saw their core businesses hurting, even as their portfolios recovered. This pulled them in different directions: I often heard them saying, “The Economy is not the stock market.”
When clients came back after the summer they came back with a new set of worries: The U.S. elections and the risks from Brexit.
The U.S. election was an especially big risk for European Family Offices since most have 80-90% of their assets in the U.S. and, in a number of cases, they don’t hedge currency risk, since historically the U.S. dollar has tended to go up when risk assets have gone down, providing a natural hedge.
And so, as clients approach the end of the year, three big questions are on every CIO’s mind:
- Am I overexposed to the U.S. economy and the dollar, and what can we expect there over the next four years?
- When will we see a real turn in the credit cycle, or has a substantial rise in defaults been avoided?
- Do I own enough technology, and how will technology impact the rest of my investments?
These questions will now determine how incremental assets are invested.
Those that decide that they are overexposed to the U.S. economy are making bets into Europe, Japan and even Emerging Markets. Those believing that the U.S. dollar is going down, are diversifying into other currencies, gold and in some cases even Bitcoin.
Allocation of the Family Office in 2021
Family Offices who expect a turn in the credit cycle will in 2021 are being patient, deploying capital into strategies that can benefit from market dislocation, such as Distressed, Special Situations and Private Equity Secondaries. Those who believe that central bank and government stimulus has averted a wave of defaults are instead looking at Public Equities, Growth-oriented Private Equity and Private Debt.
The question of technology is even more complex. Some see a bubble that will burst when rates go higher, while others see every business becoming a technology business. We see Family Offices doing a lot more work on this idea, trying to understand where and how they can prudently increase their exposure to innovation.
Another lesson a number of Family Offices have taken from this is to introduce more Uncorrelated Investments into their portfolio, so that less of their assets zig zag in lockstep with the market.
We see a variety of views on what 2021 might bring, and therefore a variety of approaches to investment and building portfolios. It seems that next year, each Family Office may be happy—or unhappy—in its own way again.