More than half (55 percent) of family offices anticipate a market downturn by 2020, according to The Global Family Office Report 2019 by UBS, in partnership with Campden Wealth Research.
The Global Family Office Report 2019 surveyed principals and executives in 360 family offices around the world, with an average of $917 million in assets under management; 36 percent of family office respondents were based in North America.
Respondents were asked for their average performance for the 12 months prior to their participation in the survey during first and second quarter 2019.
The average North American family office portfolio delivered a 5.9 percent return
North American investment returns outperformed Europe (4.3 percent), but fell short of investment returns from Asia Pacific and Emerging Markets (both returning 6.2 percent).
Developed market equities produced an average return of 2.9 percent for North American family offices. Developing market equities returned –1.9 percent.
Private equity fared the best of all asset classes for family offices in North America, achieving an average return of 16 percent for direct investments and 12 percent for funds-based investing. Real estate also performed well, with a return of 11 percent.
John Mathews, Americas head of private wealth management & UHNW, UBS Global Wealth Management, said, “While the uncertainty in the markets hasn’t slipped from their purview, family offices are acting with future generations in mind and remain committed to longer-term investments. They’re targeting direct investments in specific asset classes such as real estate or private equity where they can leverage their business-building expertise and exert more influence.”
Rebecca Gooch, director of research at Campden Wealth, added, “Family offices have been navigating volatile markets, and this is reflected in disappointing investment returns across most asset classes. The notable exceptions were illiquid investments, which continued to perform well. Real estate and direct private equity actually exceeded the high expectations that were set in a buoyant market at the start of last year.”
U.S./China relations at top of economic risks seen by North American family offices
Some 94 percent of North American family offices polled believe U.S./China relations will have major economic implications, while 55 percent are expecting a market downturn to commence by 2020.
In response, family offices are beginning to consider taking defensive positions, including moving from equities to illiquid investments, including direct private equity.
Globally, nearly half (45 percent) of those surveyed are realigning their investment strategy to mitigate risk, while 42 percent are doing so to take advantage of opportunistic events. Another two-fifths (42 percent) are increasing their cash reserves, while more than a fifth (22 percent) are reducing leverage exposure within their investments.
Gooch said, “Family offices are cautious about geopolitical tensions, and there is a widespread sense that we’re reaching the end of the current market cycle. 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.”
Skepticism about the impact of climate change does not detract from enthusiasm for sustainable investments
In a significant divergence from the global norm, a minority (36 percent) of North American family offices believe climate change is the single greatest threat to the world. This is a stark contrast with family offices in Europe (68 percent) and Asia Pacific (61 percent).
Despite this view, more than 54 percent of North American family offices believe the majority of family offices will engage in sustainable investing by 2022, and a majority (66 percent) believe there is now an ample supply of opportunities to invest in green technology.
These values are reflected in the growing popularity of sustainable and impact investing strategies. One quarter (25 percent) of North American family offices now engage in sustainable investing, with 21 percent having made impact investments. While these numbers are lower than their global counterparts, it is expected to rise within the next five years.
Judy Spalthoff, Americas head of family advisory and philanthropy services at UBS Global Wealth Management, said, “When family offices invest, they have the ability to set powerful agendas. One of their most powerful areas of influence lies in sustainable investing, an area where family offices have continually increased their allocations over the past year. Sustainable investing is no longer viewed as a ‘side project’ but an investment tool that can generate good returns — and family offices are prioritizing accordingly.”
