Family offices have reacted ‘decisively’ to the huge recent shifts in markets and resisted the temptation to sit on the sidelines in cash, according to the head of Citi Private Bank’s family office group.
Hannes Hofmann, the London-based global head of the US bank’s division, told Spear’s the world’s richest families had been active with big changes to their allocations but decided to keep risk on the table this year.
‘They have participated in the equity rally which turned out to be stronger than anyone expected,’ says Hofmann. Technology stocks have driven a major rally this year in a rebound from the 2023 sell-off.
‘Everyone expected a big shift by family offices to cash when short-term interest rates shot up, but I am pleased to say that didn’t happen. This shows family offices are becoming more sophisticated and acting more like institutional investors.’
Cash did not dominate new allocations to the extent expected by Hofmann but 47% of respondents to Citi Private Bank’s survey of 268 family offices, representing $565bn in capital, still increased exposure last year.
Cash was beaten only by fixed-income, with more than half (51%) of the respondents raising exposure. Bonds are firmly back in fashion with the world’s wealthiest families.
Private equity remains a major draw, despite rising rates and falling valuations denting the outlook for the sector. Almost two-fifths (38%) of respondents increased exposure.
‘Family offices are making big capital commitments to private equity, perhaps in the expectation of an improving opportunity set in the next one to three years, by the time managers come to deploy the capita,’ Hofmann says.
Bonds remain strong
Going forward, sentiment is most positive towards bonds, with 45% bullish on global developed investment grade fixed income.
Second is private credit (44% bullish), which has seen surge in Wall Street interest this year thanks to the increased opportunity set and steady returns available in a higher rate environment.
‘Private credit is a topic everyone wants to talk about and family office sentiment towards private credit is very bullish, the second most popular. But it is a much smaller allocation than private equity in absolute terms.’
‘Hedge funds are regarded in the middle of the pack in sentiment terms. They definitely have a role play, but it is not a sector where we will see a big shift in allocations,’ says Hofmann.
‘Larger family offices have a bigger proportional allocation to hedge funds, in part due to a greater capacity for due diligence.’
Bottom was crypto assets, with just 8% bullish on the under-pressure digital currency sector.
Shift in allocation
A key theme in the report was the intense focus on portfolio management and asset allocation decisions in the past year, against the backdrop of surging inflation, volatile markets, war in Ukraine and geopolitical tension.
‘In a time of such uncertainty, with a seismic change in investment environment, family offices have had to focus on the basics —how do you protect capital and maximise the portfolio return,’ adds Hofmann.
The focus on markets came at the expense of fostering family unity and continuity — only picked as one of two top priorities by 21% — ‘as it often does in challenging times,’ noted the report.
‘There is a divergence in expectations between families, who want to focus on the next generation and strategy, and family offices who have been ultra-focused on wealth management and asset allocation decisions in the past year,’ pointed out Hofmann.
‘I would describe this as a shift away from soft topics to hard topics. But this will trend back again.’
He believes that points to the unusual nature of the market and macroeconomic backdrop of the past eighteen months.
‘Family offices have reacted to that decisively. There have been big shifts in asset allocation and how they spend their time. That is a positive thing.’
How philanthropy is changing
He has also noticed how the younger members of the richest families are approaching philanthropy differently which could lead to big changes in the years ahead.
‘There are very clear signs the new generation does not want to give philanthropically in the way their parents did, with just their name on a building — they want to track the impact, remain engaged and see how money affects recipients.’
But Citi Private Bank highlighted ‘insufficient’ succession planning by families, which could pose long-term risks to the health of the sector despite its steps towards professionalisation and a more sophisticated outlook.
‘Most concerning is the insufficiency of leadership succession planning for families and family offices alike and the lack of educational programs for the next generation,’ noted the report. Just one in three family offices have a succession plan in place.
Will Wainewright runs Alternative Fund Insight, focused on hedge funds and private markets