UBS has prepared a comprehensive analysis that is framed in a year that is expected to be plagued by uncertainty. A scenario for which there are also numerous investment alternatives that may be of interest.
UBS has published its annual 2022 Global Family Office report, in which it analyses the investment vision and expectations of 221 family offices around the world, which have a combined wealth of 493 billion dollars and an average net worth of around 2.2 billion dollars.
This financial services firm has prepared a comprehensive analysis that is framed in a year that is expected to be plagued by uncertainty. A scenario for which there are also numerous investment alternatives that may be of interest.
The covid-19 pandemic, digital disruption and geopolitical movements are driving profound change in global business and financial markets. In response to these risks and uncertainties, family offices are reviewing their options with greater urgency than at other times.
In any case, private equity stands out this year as an asset class with high expected returns and is the only asset class that has attracted higher allocations year on year, the report notes.
Family office asset allocation in 2022
Specifically in terms of asset allocation and portfolio construction, UBS advocates exploring new options in these unpredictable times. This situation is driven by high inflation, declining central bank liquidity and rising interest rates. In the face of these challenges, UBS notes that family offices are reviewing their strategic asset allocation.
In more detail, they are reducing allocations to fixed income and sacrificing liquidity for yield, while increasing investments in private equity, real estate and private debt.
On the other hand, the main concerns of these family-owned companies are, as this report details, high and possibly persistent inflation, together with unstable global geopolitics. All this at a time when valuations of many financial assets remain high. In this context, most believe it will be more difficult to find uncorrelated returns. As they explore new possibilities, they are looking for alternative diversifiers, including active strategies, along with illiquid assets and derivatives.
A good source of returns for family offices
Private equity’s potential for higher returns and its broad opportunity set are increasingly popular. Eight out of ten family offices now invest in this asset class and their numbers are steadily increasing year on year.
Typically, family offices invest in both direct investments and funds. While the former are often an extension of business activities, the latter effectively diversify risk across managers, strategies and time periods. In the era of the Fourth Industrial Revolution, the technology sector is naturally the most common investment destination, the UBS paper explains.
Sustainable and impact investing
On the other hand, just over half of family offices have sustainable investments: as allocations stabilise, they are refining their purpose as well as their objectives. Due diligence is intensifying as they seek to avoid greenwashing, measure impact and define their approach.
Exclusions remain the most common tool, and continue to outperform environmental, social and governance (ESG) approaches such as integration and stewardship, which are increasingly popular with other types of institutional investors.
Cryptocurious rather than crypto-committed
The annual 2022 Global Family Office report also indicates that many family offices are investing in Distributed Ledger Technology (DLT) and cryptocurrencies to learn about decentralised payments, rather than for purely financial reasons. In this case, certain geographical differences are reflected. For example, US family offices are more likely to invest in this sector than those in Asia-Pacific.
On the other hand, family offices see the lack of regulation as the biggest obstacle to investment.
Costs are expected to rise
Another aspect analysed is staffing and costs. Family offices generally focus on the areas where they can add most value – strategic asset allocation and risk management – as well as on the key control function of financial accounting and reporting.
As they compete for skilled staff in these areas, family office costs are expected to rise over the next three years, driven by salaries and bonuses. IT costs are also expected to rise, as spending on software, platforms and cybersecurity increases.
UBS’s conclusions on 2022 for family offices
UBS concludes, as we have already mentioned, that 2022 will be a year characterised by a climate of uncertainty. In particular, the main factor to take into account and assess during the current financial year is that of rising prices.
The paper notes that while there is a wide diversity of opinion as to when and to what extent the current high inflation will abate, many family offices agree that fixed income is no longer as effective an anchor to diversify portfolios.
This is prompting family offices to seek diversification into private markets and higher yields, which may be conducive to entrepreneurial talent that is able to create value.
However, valuations are often high, encouraging a tendency to invest in early stage assets. There are no easy options, concludes UBS in its report, whose survey found that family offices use the full range of options in their investment portfolios, from illiquid investments in private markets to active management in public markets.