The main concern for family offices is geopolitical developments and risks, leaving behind inflation and worries about a global recession. This shift, combined with developments in the path of inflation, interest rates and economic growth, is leading to the biggest shift in strategy regarding family office asset allocation in many years.
The biggest shift that family offices plan to make is into developed market fixed income, where after three years of bond cuts, nearly four in ten (38%) plan to increase over the next five years. Fixed income is now the most popular source of diversification, with over a third (37%) of family offices moving into high-quality short-term bonds for wealth protection, yield and capital appreciation.
At this time, increased exposure to fixed income reflects general reallocation from a broad mix of asset classes. Over the next five years, a greater allocation to risk assets is forecast, with 34% planning increases in emerging market stocks after the US dollar peaks and the Chinese economy reopens.
At the same time, there continues to be a strong trend among family offices to include alternatives that help diversify a portfolio but redefine their allocation. Allocations to hedge funds increased to 7% from 4% and, conversely, allocations to direct private equity fell to 9% from 13%. Family offices also plan to reduce real estate allocations next year. Collectively, this is due to the increased allocation to private equity, private debt and infrastructure.
While current market trends and geopolitical trends have led to a shift towards liquid, short-term fixed income, 66% of family offices still believe that illiquidity enhances long-term returns and seek to further increase allocations to alternatives, such as hedge funds, private equity and private debt, to further diversify their private markets allocations.
Chances
Active management is becoming popular again, as it relies more on selecting investment managers and active management to enhance diversification. Family offices have confidence in hedge funds’ ability to generate investment returns as monetary policy reduces excess financial liquidity and macroeconomic uncertainty remains.
Family offices with private equity investments prefer to invest using mutual funds, as they typically offer diversification and can allow family offices to enter markets where they lack in-house expertise.
Over the next 12 months family offices appear to be hoping for value opportunities, with private equity holders planning to over-allocate their portfolios to the secondary private equity market, anticipating that some institutional investors will be forced to realign their portfolios after the decline in public markets, and as exits remain difficult to achieve through Equity Mutual Funds.
The reduction of real estate allocations in 2023, and over a period of five years, is expected. This fits with the picture that interest rates will remain high in 2023, with some weakening in house prices, before easier money and lower valuations begin to support the asset class again.
Concern about geopolitical developments
Geopolitics overtook inflation as the top concern among family offices worldwide, followed by recession and inflation.
Family offices are also increasing their allocations to previously underserved areas. While they still have almost half of their assets in North America, over a quarter plan to increase allocations in Western Europe over the next five years and almost a third plan to increase and expand their allocations in the wider region of Asia and the Pacific.
