In response to a variety of factors including shifting interest rates, looming inflation, and fluctuating economic growth, family offices globally are making the most significant changes in strategic asset allocation seen in recent years. This comes as part of a broader strategy to navigate geopolitical issues and adjust to regional investment predilections.
UBS, the Swiss multinational investment bank and financial services company, recently outlined the dynamics of these asset allocation changes. With the era of nearly zero interest rates coming to a close, balanced portfolios managed actively are being viewed favorably once again. According to the bank, approximately 38% of family offices plan to increase their fixed market bond allocations over the next five years, a remarkable shift following a four-year period of steady cutbacks.
However, it’s not just the bond market that’s seeing an uptick in interest. Fixed income sources are currently favored as diversification tools, with 37% of family offices transitioning to high-quality, short-duration bonds. These are considered as potential instruments for wealth preservation, yield, and capital growth.
Real estate allocations, in contrast, are expected to decrease in the coming year. Despite this, there’s still an increased inclination towards riskier assets. The bank’s report shows that about 34% of family offices plan to boost their stakes in emerging market equities over the next five years. This comes as the US dollar peaks and the Chinese economy exhibits signs of recovery.
Furthermore, hedge fund allocations have seen an increase from 4% to 7%, while direct private equity allocations have dipped from 13% to 9%. Despite these shifts, private equity funds, private debt, and infrastructure are seeing an overall increased allocation, which collectively explains the reduced interest in real estate.
George Athanasopoulos, a high-ranking executive at UBS, explained that these shifts are indicative of a turning point in time. The period of low or even negative nominal interest rates, along with the subsequent liquidity overflow following the global financial crisis, is coming to an end. He added that despite this shift towards liquid, short-dated fixed income, 66% of family offices still maintain a long-term view that illiquidity can enhance returns. As a result, they’re looking to increase allocations to alternatives such as hedge funds, private equity funds, and private debt.
Despite these changes, a sense of caution permeates the atmosphere of family offices due to an uncertain growth outlook in developed economies, stricter lending conditions, and heightened geopolitical tension. In fact, geopolitical issues have surpassed inflation as the primary concern among family offices globally, followed closely by the fear of a recession and then inflation itself.
Finally, a noticeable change in regional asset allocations has been observed. While almost half of the total assets managed by family offices are still based in North America, over a quarter of these entities are planning to increase their stakes in Western Europe over the next five years. Simultaneously, almost a third are looking to enhance and diversify their allocations in the wider Asia-Pacific region. This shows a growing trend of embracing previously less favored investment regions as family offices continue to adapt to the changing global financial landscape.
