Family Office
September 13, 2022

Portfolio analysis and outlook

September 13, 2022
Family Office Group
SUMMARY

Inflation, fear of recession and geopolitical uncertainty are the top-three economic concerns for family offices globally.


Near-term worries

Inflation, fear of recession and geopolitical uncertainty are the top-three economic concerns for family offices globally. Taking a closer look at the data, we see recession and market volatility as bigger concerns for family offices with AUM <$1BN, with 76% of family offices in this category noting them as their top issues versus 50% for AUM >$1BN. Social unrest and geopolitical uncertainty are slightly higher concerns for family offices with AUM >$1BN.

Despite the headwinds, leading family office CIOs who spoke and attended our seventh annual Family Office Leadership Program in Washington D.C. indicated they viewed market volatility and dislocation as a potential opportunity to build resilient portfolios by focusing on high-quality investments while maintaining their strategic long-term vision.

 

 
Near-term worries for the financial market and economy
 

Geopolitical uncertainty tops the list in Asia (79%), while inflation is top of mind for family offices in North America, Europe, Middle East and Africa, and Latin America (76%, 86% and 75% respectively).

  Asia Pacific Europe, Middle East & Africa Latin America North America
Inflation 64% 86% 75% 76%
Recession 50% 43% 50% 58%
Geeopolitical uncertainty 79% 43% 70% 45%
Interest rate increases 50% 64% 30% 44%


Mark-to-market value

As a result of the dramatic market volatility and downturn that began in early 2022, nearly three quarters (73%) of family offices experienced a decline in overall portfolio mark-to-market values since the beginning of the year. A sizable 43% experienced a decline greater than 10%, which is quite the contrast to last year, where fewer than 13% of family offices reported any decline.

 

 
Year-to-date change in portfolio mark-to-market value
 

We also tried to gauge the impact on returns of several key factors such as leverage, percentage of direct investments, use of external advisors, etc. While such analysis is limited by the sample size, it directionally appears to validate that family offices that use leverage, direct investments, external investment consultants and independent investment committees have fared relatively better year to date.

Tables showing percentage of family offices who reported an increase in mark-to-market value despite the significant market downturn since early 2022:

 

Use of Family office with usage > 10% of AUM Family office with usage/allocation < 10% of AUM
Leverage 21% 16%
Direct investments 26% 14%

 

Use of Family office usage = Yes Family office usage = No
External investment consultant 23% 17%
Independent investment committee 23% 13%




Outlook for the next 12 months

Despite the concerns and perhaps a reflection of their sentiment that the market may have bottomed out, there is a high degree of optimism for portfolio returns over the next twelve months, with 80% of the family offices expecting portfolio gains and 62% expecting a 5% or higher increase in portfolio value.

Family offices with AUM <$1BN have a more favorable outlook than those with AUM >$1BN, with 67% reporting an expectation of 5% or higher portfolio returns versus 47% respectively.

 

 
Expected total portfolio returns over the next 12 months
 

Regionally while there is a generally positive outlook, there is a higher degree of optimism in the Americas and less so in Europe, Middle East and Africa and Asia family offices, likely associated with their geopolitical concerns.

 

  Asia Pacific Europe, Middle East & Africa Latin America North America
Negative 7% 21% 10% 8%
Flat 29% 29% 0% 7%
Positive 64% 50% 90% 85%
  100% 100% 100% 100%

 


Asset allocation

Public equity represents the lion’s share at 23%. But the attractiveness of real estate and private equity remains, representing 35% of asset allocations combined (20% and 15% respectively). Cash and fixed income total 25% (10% and 15% respectively), while concentrated positions still account for 12%.

However, the share of real estate and private equity varies markedly between those managing more or less than $500M (38% and 31% respectively), reflecting the greater appetite to deploy patient capital from family offices with greater AUM. Continuation of the strategic and long-term priorities, and limited short-term reactive adjustments to the overall allocation strategy, was a consistent theme that we also heard from our family office CIO speakers at the Family Office Leadership Program in D.C. supporting this observation.

 

 
Asset allocation of the family office's portfolio
 

Looking 12 months ahead, the asset class sentiment continues to be overweight to private equity and has been  a continued trend over the last three years. Family office CIOs viewed market volatility and dislocation as an opportunity to build more resilient portfolios by focusing on high-quality investments, as can be seen from relatively high overweight sentiment to global developed equities and investment grade fixed income. A complete 2020 to 2022 asset class sentiment overview can be found in the report following our CIO’s concluding commentary.

 

 
Asset class sentiment for the next 12 months
 

The allocation in passive investments splits the respondents in half, with 45% of family offices reporting an allocation greater than 20% and 55% below that threshold.

Family offices with AUM <$500MM report a higher allocation to passive strategies than their counterparts with AUM >$500MM.

 

Percentage of the family office’s portfolio allocation in passive investments

  FO AUM < $500mm FO AUM > $500mm
Less than 10% of AUM  23% 38%
Between 10% and 20% of AUM 27% 25%
Greater than 20% of AUM 50% 38%

 

There is a relatively even split between assets managed in house and those trusted to outside investment managers.

Nearly 60% of family offices actively trade, and of those who actively trade, equities are the most frequently traded asset class, as might be expected (63%).

70% of responding family offices use minimal (<10%) or no leverage. Only 7% use 30% or more.

Family offices with larger portfolios tend to use greater leverage with 42% of Family offices with AUM >$500MM using 10% or greater leverage versus 17% for those with AUM <$500MM.

 

Leverage employed against the family office portfolio

  FO AUM < $500mm FO AUM > $500mm
None 35% 23%
‹10% 48% 36%
10 - 20% 7% 21%
20 - 30% 7% 11%
30% + 3% 9%

 

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