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Higher risk, more illiquid investments boost family office returns

Family office are driving towards higher risk and more illiquid investments in pursuit of yield, according to the new Global Family Office Report 2018.

The average family office portfolio returned 15.5% in 2017—more than double the 7% generated in 2016 and well above the 0.3% delivered in 2015, the Campden Research-UBS report said after surveying 311 family offices with an average size of $808 million assets under management.

Continued improved returns in 2017 was largely due to family offices’ continued preference for equities. Families allocated 28% of their average portfolio to equity markets, up by 4.3 percentage points year-on-year.

“This represents an on-going shift driven by fruitful gains, as last year’s report announced a similar 2.6 percentage point increase in developed markets equities allocations,” the report said.

Within their equity portfolio, family offices invested 22% in developed markets and 6% in developing markets. The strategy paid off, with developed markets returning 23% and developing markets returning 38% last year.

“Family offices have delivered their strongest returns since we began measuring their performance five years,” Sara Ferrari (pictured), head of UBS’s Global Family Office Group, said.

“This reflects the bull market, as well as family offices’ ability to take a long-term approach and embrace illiquidity.”

Family offices favour alternatives

Almost half of the average family office portfolio (46%) is now allocated to alternative investments—a 2.9 percentage point increase from the previous year, despite a large reduction in hedge fund allocations.

Private equity remained a stronghold in family office portfolios, with allocations increasing to 22%, up 2.8 percentage points from 2017. Direct investment in private equity accounted for 16%, while private equity fund accounted for 7.6%.

Real estate direct investments, meanwhile, rebounded to 17% after a moderate decline in 2016.

When asked about their investment intentions over the coming year, half of family offices principles said they intended to invest more in direct investments, mostly private equity.

However, allocations to hedge funds continued to fall—a trend that began at since at least 2015. Hedge funds made up just 5.7% allocated of the average family office portfolio, a 3.2 percentage point drop year-on-year.

“Less-than desirable returns over the past several years, amplified by market volatility, has not played in the favour of hedge funds,” the report said.

Family offices increasing wealth with purpose

Of the family offices surveyed, 38% had engaged in sustainable investing, with the amount of family offices making such investment increasing from one-quarter in 2016 to one-third in 2017. The most popular areas on investment were clean energy, healthcare, education and gender equality.

The report said nearly half (45%) planned to increase their allocation over the next year and 39% said they expected the next generation to increase the family offices’ allocation to sustainable investing.

Similar to sustainable investing, 32% of the family offices said they are involved in impact investing and more than half (54%) said they planned to increase their allocation to impact investing over the next 12 months.

Asia’s risk taking brings greatest returns

While all regions reported healthy returns, Asia recorded the highest average return at 16.4% in 2017, followed by North America (15.9%), Europe (15%) and Emerging Markets (14.7%), the report said.

Asia’s family offices have 14% of their portfolio allocated to developing market equities compared to the 3.9% in Europe and 4.5% in North America. Their 6.9% allocation to emerging market bonds was also higher than most other regions.

However, the average Asian family office only gave $1.3 million to philanthropic causes in 2017 compared with the $6.4 million in Europe.

“For the first time since we have been analysing this data, Asia has led the way on performance, benefitting from a relatively high exposure to developing market equities and the high number of private equity deals in the regions,” Ferrari said.

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