The world’s family offices have seen their investment performance more than double year-on-year as families exploit a bull equity market.
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The average family office portfolio returned 15.5% in 2017, up from 7% the previous year
Almost two-fifths of family offices are now engaged in sustainable investing
Alternatives now constitute nearly half of the average family office portfolio
The Global Family Office Report 2018surveyed principals and executives in a record-breaking 311 family offices, with an average size of $808 million assets under management (AUM).
Having returned 7% in 2016, and just 0.3% in 2015, the average portfolio delivered returns of 15.5% last year.
The report said this accelerating performance was driven by family offices’ continued preference for equities in the context of a strong bull market. A total of 28% of the total average family office portfolio was now comprised of equities. Improved performance can also be attributed to strength within the private equity space, which comprised more than a fifth (22%) of the average portfolio and had delivered returns of 18% in 2017.
Reflecting this year’s upward performance levels, almost half (48%) of family offices reported their assets under management increased over the year.
“Family offices have delivered their strongest returns since we began measuring their performance five years ago,” Sara Ferrari, head of global family office group at UBS, said.
“This reflects the bull market, as well as family offices’ ability to take a long-term approach and embrace illiquidity.
“For the first time since we have been analysing this data, Asia has led the way on performance, benefiting from a relatively high exposure to developing market equities and the high number of private equity deals in the region. Following a path we’ve seen in other regions, we’re also seeing family offices in developing markets becoming increasingly sophisticated and institutionalised. We expect this trend to accelerate in the coming years.”
Dr Rebecca Gooch, director of research at Campden Wealth, said in addition to the “robust” average family office portfolio performance of 15.5%, “we have witnessed a significant growth and professionalisation of the family office space since the turn of the millennium.
“One-third of all responding family offices now have secondary branches, half have reported that their AUM has increased year-on-year, and three-quarters reported that the wealth of the families they serve has risen over the last 12 months.”
Trend towards riskier, more illiquid investments continues
The year saw a continuation of family offices’ drive towards higher risk, more illiquid investments in their pursuit of yield, the report said. Nearly half (46%) of the average family office portfolio was now allocated to alternative investments.
Private equity maintained its momentum, with allocations having increased over the year to 22%. While allocations to hedge funds continued to slow, real estate saw a slight rebound in popularity. After a small decline in allocations in 2016, family offices increased their exposure to real estate direct investments to 17% of the average family office portfolio.
When asked about their investment intentions for the coming 12 months, half of family offices reported they intend to invest more in direct investments, namely private equity. More than a third planned to increase their allocations to developing market equities, private equity funds and real estate direct investments.
Family offices increasingly manage their wealth with purpose
Almost two-fifths (38%) of family offices were now engaged in sustainable investing. As part of the trend, impact investing experienced a significant increase in participation; the amount of family offices making such investments increased from one-quarter in 2016 to one-third in 2017. The most common areas of investment were education; housing and community development; agriculture and food.
Nearly half (45%) planned to increase their sustainable investments over the next 12 months while, looking further ahead, 39% of family offices projected that when the next generation took control of their families’ wealth, they will increase their allocation to sustainable investing.
Ferrari said families of great wealth felt a “deep-seated obligation” to make a positive impact on the world, which was reflected in a consistently high level of philanthropic activity.
“The family office structure allows them to go further and translate their values into financial returns through impact investment,” she said.
“Yet many are still to be persuaded to cross the line from interest to action. The appetite is there, but more work needs to be done to build the investment case and create opportunities.”
Gooch said impact investing will be an important space to watch over the coming years.
“Our research shows that the next generation, and millennials in particular, are driving impact investing within the family office space. This is key as we are on the precipice of a major generational transition set to take place over the coming 10 to 15 years. This could result in the growth and transformation of the impact investing arena.”
Slow progress on preparing for looming wealth transfer
A total of 70% of family offices expected a generational transfer in the next 10 to 15 years. Next-generation family members were taking a more active role within the family office, indicating the handover was beginning to take place. Among the next generation of family members, three in 10 (29%) family offices now held management or executive roles, while 23% sat on the board.
However, half of all family offices did not have a succession plan in place. Indeed, there has only been a one percentage point increase in succession plans since Campden Wealth in partnership with UBS warned of the problem last year.
“The next generation are clearly influencing family office direction and investment strategy, particularly on questions of sustainability and impact,” Ferrari said.
“But all too often, the underlying issue is not being addressed. Families need to be much more proactive in tackling the issue of succession.”
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