Family offices are making some of the biggest changes to their asset allocations in years, according to UBS. Specifically, according to Judy Spalthoff, head of the family office solutions group for the bank, family offices are adding more hedge funds, fixed-income securities and investments outside the U.S. to their portfolios.
Fixed income and hedge funds in particular are being used more for diversifiers than they were in the past, Spalthoff said in an interview. Currently, the most favored diversification strategy globally is high-quality, short-duration fixed income, UBS said.
The firm surveyed family offices to find out how higher interest rates have changed their investing behavior.
“When it comes to alternative asset classes, family offices intend to use their investment flexibility as a competitive advantage,” UBS said. That includes the use of private equity allocations.
The findings stem from UBS’s “Global Family Office Report,” which it conducts annually. The firm looked at 230 families with more than $100 million in assets. UBS said the report “reflects the end of the era of low or negative nominal interest rates and ample liquidity that followed the financial crisis. Against that backdrop, family offices anticipate making major shifts in asset allocation.”
Family offices are also increasing their allocations to global regions that have been less in favor for the past few years. They still have almost half their assets in North America, but more than a quarter of those surveyed said they are planning to increase allocations to Western Europe over the coming five years and almost a third are planning to raise and broaden their allocations in the Asia-Pacific region, the survey showed.
Active managers have also become more prominent in family office investment portfolios, according to the report.
At the same time investments are shifting, a majority of family offices are now concerned about moving wealth to the next generation, Spalthoff added. Seventy-six percent of the families surveyed said one of their top immediate goals is to successfully complete the wealth transfer. Yet only 38% have a complete succession plan.
“The gap in planning speaks to the age of our country itself,” Spalthoff said. Many of the families that have amassed this level of wealth have done so relatively recently and are only now grappling with transferring it to a new generation. “It is a conundrum for families, because at the same time wealthy families are growing and changing.”
Diverging interests among family members are also complicating the wealth transfer. For instance, younger generations are more interested in investing with environmental, social and governance issues in mind, she said.
Family office executives said they were now more concerned about geopolitical issues than inflation, which sank to third place among their worries, while a possible recession ranked No. 2.
Despite their active interest in investment, however, many family offices fall short in managing their affairs beyond investing. For instance, only about half have specialists for cybersecurity controls in place, despite the fact that more than a third of these offices have been the targets of cyberattacks, the report said.
“Many wealthy families are becoming more interested in outsourcing services to gain more efficiency in such things as performance reviews, bill paying and cybersecurity, which are complex,” Spalthoff said. The management of “great wealth brings great responsibility that families are taking seriously.”
