Family offices showed signs of a healthy risk appetite despite ‘challenging’ conditions in the third quarter, which saw stocks and bonds decline in tandem for the first time in a year.
New research from Citi Private Bank shows clients have put more cash to work in liquid products in Q3, opting against a super ‘risk-off’ attitude in all regions except Asia-Pacific.
Wealthy families across the North America and EMEA (Europe, Middle East and Africa) regions upped their exposures to fixed-income and equity holdings, while wealthy families in Asia leaned more into cash holdings in the third quarter. The bank’s research was based on findings from 1,200 single-family-office clients, each with a net worth of at least $250 million.
Hannes Hofmann, global head of the family office group at Citi Private Bank, told Spear’s that asset allocations in EMEA ‘had been the most conservative of all regional family office allocations’ going into Q3.
Recent events in the Middle East may have sparked a move to cash holdings, but as market consensus solidified around the ‘higher-for-longer’ rate environment in the three months running up to the end of September, family offices continued to defy expectations of a retreat to cash.
‘Asian family offices have added to their cash while other regions have put cash to work during the quarter,’ says Hofmann. ‘Yet Asian family offices ended up with more equities and less cash than family offices in other regions.’
The APAC region’s move to cash can be partly explained by a ‘more risky asset allocation’ at the start of the third quarter. ‘Another factor is the general performance and outlook for Asian markets in Q3,’ Hofmann added.
Family office investments ‘marked by caution’ in North America
The shift into bond holdings, a marked change following the end of the zero-rate post-crisis era, continued. Investment-grade fixed income assets found most favour, with allocations increasing on both a capital and equal-weighted basis for the second quarter in a row.
Citi Private Bank noted inflows into high-quality investment-grade fixed-income assets and sovereign debt were ‘the driver,’ particularly sovereign debt inflows focused on three to five-year maturities.
In the sizeable North American market, ‘investment decisions were marked by caution,’ the US bank added. ‘Expectations for the need to “wait out the storm” differ amongst family offices – some family offices have benign outlooks of rolling recessions or soft landings,’ Hofmann said.
‘For all family offices, the relative value of credit (spread product) has improved compared to other asset classes since rates and spreads have widened out substantially in the last 18 months. We have seen US family offices invest into municipal bonds, US investment grade bonds and other fixed income as a result.’
Equities remain largest asset class globally amid shift to fixed income
Across all family offices, global high yield fixed income and global emerging market (EM) fixed income saw outflows. The same was true in equities, which also saw EM outflows.
‘Over the past two years we have seen a shift away from high-risk equity markets like frontier markets and into more traditional markets with stable cash flows and operating environments,’ says Hofmann. ‘The emerging market equity exposure of family offices at 4.6 per cent is small compared to developed equity at 27.4 per cent and we expect to continue to see adjustments.’
The ‘higher for longer’ outlook is a contributing factor, and a ‘general risk-off environment that has seen family offices reallocate from equities to fixed income in the past 18 months,’ adds Hofmann.
Equities remain the largest single asset class for investors, with allocations at 33.6 per cent globally.
Private markets not ‘out of fashion’ despite heightened scrutiny
‘A common tenor amongst family offices is that security selection has become more important now that central banks have tightened monetary policy,’ says Hofmann. ‘Family offices compare small cap with large cap, growth with value, and the magnificent seven with the remaining 493 names in the S&P 500 in their quest for value.’
Citi Private Bank also identified interest in investing in what they describe as ‘unstoppables – secular trends that are providing interesting opportunities independent of the economic cycle,’ including clean energy, longevity and artificial intelligence.
Despite the heightened scrutiny around private equity this year, widely perceived to be facing a reckoning in the new higher-rate environment, Hofmann does ‘not see any evidence of these sectors being out of fashion. The figures from our report indicate a more diversified picture.’
Will Wainewright runs Alternative Fund Insight, focused on hedge funds and private markets