Strategic approach pays off for family offices amid market disruption

• Despite an average maximum drawdown of 13 percent at the nadir of this year’s market sell-off, the majority of family offices say that their portfolios have now performed in line with, or above, target benchmarks
  
• Family offices are making tactical portfolio changes in response to market dislocations
• Expectations for private equity’s outperformance fall
• The next-in-line defy stereotypes
• Sustainable investing remains a long-term priority but action is gradual

Zurich/London, 16 July 2020 – UBS today launches its Global Family Office Report 2020. UBS has surveyed principals and executives in 120 family offices around the world. The sample is purely comprised of single  family offices, with an average total family wealth of USD 1.6 billion, significantly larger than that of any other comparable study.
 

The report, based on analysis by UBS Evidence Lab, reveals how family offices have been impacted by market and economic disruption arising from the Covid-19 pandemic, and how they have responded.

During the first quarter of 2020 - including the most intense phase of market turmoil in March – family offices’ average maximum drawdown was 13 percent. However, family offices protected themselves from the worst effects of the sell-off by rebalancing their portfolios to manage risks. More than three quarters (77 percent) said that their portfolios have performed in line with, or above, respective target benchmarks over the year to May.

Over half (55 percent) of family offices rebalanced their portfolios in March, April and May in order to maintain their long-term allocation. While two thirds (67 percent) of family offices say that their mid-term view hasn’t changed, most are seeking to make tactical changes to their portfolios in response to the macro-economic and market shifts.

Family offices have a strong risk appetite, and are taking advantage of the market dislocation to exploit opportunities for higher returns. Almost half (45 percent) are looking to raise allocations in real estate and a similar number are aiming to increase their allocations in developed market equities (44 percent), followed by emerging market equities (38 percent).

Many family offices have also added to their cash and gold allocations. The retreat to cash looks set to be temporary, with 26 percent indicating they will lower cash reserves in the next 2-3 years, but gold could be a long-term beneficiary, with 45 percent saying they will increase their exposure to the precious metal.

Josef Stadler, Head of Global Family Office at UBS Global Wealth Management, said:
“Family offices have behaved differently to others during one of the most volatile periods in the history of financial markets. In some senses, we saw them take an institutional approach, applying meticulous asset allocation strategies and rigorous investment processes. However uncomfortable it may have been at times, they stuck to their plans and remained disciplined.

“Yet family offices also embrace and manage risk like no other investor. It is missing an opportunity that gives these clients the biggest headache, not making a loss. This is why they are looking to deploy cash to take advantage of market dislocations. We expect to see big moves in the coming months.”

More than three quarters (77 percent) of family offices invest in private equity, with 69 percent viewing it as a key driver of returns. However, expectations for private equity returns have fallen in light of the economic dislocation arising from the Covid-19 pandemic. Only half (51 percent) of family offices said they expected private equity to outperform public investments, down from three quarters (73 percent) beforehand.

Family offices note that direct investments offer greater control, with 35 percent regarding this as an advantage, against just over a quarter (27 percent) before the economic disruption. Investors in private equity companies have been receiving regular information updates and can ensure, for example, that companies have enough financial liquidity to ride out the downturn.

The report also reveals that the next-in-line do not comply with stereotypes. Currently in their 20s and 30s, they’re expected to be in their 30s and 40s when they take control. Despite commonly held expectations that there will be a shift in emphasis as the transition occurs, over half (54 percent) of family offices say the next generation are just as interested in traditional investments as their parents – and in Asia and the US that proportion climbs to 71 percent. Meanwhile, under half (48 percent) view the next-in-line as pushing for an increase in sustainable investing.

Almost three quarters of family offices (73 percent) currently invest at least some assets sustainably. UBS anticipates that this trend will accelerate over coming years, with nearly two-fifths (39 percent) of family offices intending to allocate most of their portfolios sustainably in five years’ time.

Currently, family offices primarily target the easier option of exclusion-based strategies, which make up 30 percent of their overall investments. ESG integration is catching up, as families look to more than double allocation over the next five years, from 9 percent to 19 percent. A small minority intend to continue to maximize returns through traditional investments, while pursuing philanthropy separately.