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November 16, 2022updated 07 Nov 2023 12:03pm

Family offices shift focus from growth to preservation

By Katharine Swindells

New research shows family offices representing the world’s ultra-wealthy are moving away from risky growth strategies 

Family offices are increasingly opting for wealth preservation over maximum growth amid inflation and global economic instability, new figures show.

Global survey results released by Campden Wealth on Wednesday show the impact this uncertainty is having on family offices and their wealth management priorities, as they move from fixed income to private equity.

The findings come from research collected from over 380 single and private multi-family offices, representing a combined $390 billion of private wealth in assets under management.

While the past two years have seen extreme growth for the world’s wealthiest, with the UHNW population soaring by 9.4 per cent during 2021, recent months have seen huge uncertainty in the global economy. 

Record-high inflation, the war in Ukraine and rising interest rates have all had a significant impact on the global markets.

In 2021, ‘growth’ was the main investment priority for an average of 40 per cent of global family offices – up significantly on the two years prior, when the average was less than 25 per cent.

This year however, the percentage has fallen across all regions, with more offices shifting to a preservation mindset.

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A report last week found that, in the first half of 2022, the global UHNW population fell by 6 per cent and their combined net worth fell by 11 per cent.

Although in the long-term these offices are still focused on growth, Campden Wealth's research shows how family offices are reacting to this period of instability.

‘Many of these family offices have a 50-year-plus time horizon,' says Catherine Grum, head of Family Office Services at BDO.

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'So in times of uncertainty their priority isn’t making huge growth this year, but that they're achieving their bigger objectives in the long run.’

This approach to investment comes as family offices prepare for the year ahead, with over half of those surveyed saying they have a negative economic outlook for this financial year. 

'Given concerns over inflation, rising interest rates and a potential forthcoming recession, family offices are moving somewhat more towards a balanced investment strategy, bucking a trend from last year where they shifted towards growth,' explains Rebecca Gooch, Campden Wealth's senior director of research.

'In turn, while family offices are more careful about de-risking their portfolios this year, they are also likely to maintain a reasonable level of growth-oriented investments and to be on the lookout for opportunistic deals.'

What are the biggest economic risks to family offices?

Inflation is the leading cause for concern - with 85 per cent of family offices saying the record-high rates pose a significant risk to the market, followed by rising interest rates and geopolitical risks.

Family offices in North America and Asia Pacific are far more likely than those in Europe to be concerned about rising interest rates, while the North American offices are less worried about the impact of the war in Ukraine.

Over a third of family offices in Asia Pacific are still very concerned about the ongoing impact of the Covid-19 pandemic, compared to less than one in ten in Europe.

'These aspects will impact some family offices more than others, but certainly family offices' overall outlook on the economy has soured this year, and increasing attention is being paid to risk management,' Gooch says.

'Portfolio diversification, both from an asset class and geographic perspective, is becoming an even greater priority.'

How is inflation changing wealth management investment strategies?

In response to this, family offices are looking to adjust their investments with over half saying seeking new investment opportunities is a top priority.

Many family offices are reducing their allocation to fixed income, given the adverse impact of high inflation and rising interest rates on bond prices.

Some 22 per cent of family offices say they plan to decrease their allocation to fixed income in developed markets.

Meanwhile, private equity is on the rise as a key asset allocation.

Over the past two years, public equities have taken centre stage, given their considerable returns in 2020 in both developed and developing markets.

This year, although public equities remain the largest asset class, occupying on average a third of the average portfolio, private equity is closing the gap.

This year, private equity makes up 27 per cent of the average family office’s strategic asset allocation, compared to 22 per cent in 2021.

Private equity was the top-performing asset class in 2021, Gooch explains, delivering average returns of 20% for direct investments and 19% for funds globally, and family offices assert this trend will continue into 2023.

Private equity funds and direct investment, in particular, are areas where over 40 per cent of family offices say they plan to increase allocation, with only one in 10 saying they plan to decrease.

‘Year on year they’re increasing their exposure to private equity and there's a clear trend they want to continue that, particularly those who were doing direct themselves rather than using funds,’ Grum says.

‘It gives them a much more flexible time horizon, so they can take a more long term view and for some of them that allows for them to be more opportunistic, where they see that long term case for growth.’

Going forward, we may see this period expedite generational shifts, Grum says.

Times of economic uncertainty or major global events, often accelerate natural transitions from senior leaders in families to younger generations, who will have their own approach and priorities when it comes to investment.

Main image: Shutterstock

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