UBS has unveiled a new piece of research looking at how some of the world’s wealthiest families positioned themselves during the market turmoil this year.
In the 2020 Global Family Office Report, an annual study in its sixth year, the bank surveyed 120 executives and principals from family offices, who looked after families with average total wealth of $1.6 billion.
Between March and May this year, these families significantly increased their exposure to cash, with 44 percent saying they increased such holdings either moderately or significantly. However, 37 percent bought more developed market equities, bonds (29 percent), as well as the safe haven asset gold (25 percent).
“We had a lot of opportunities in that indiscriminate selling that we saw in March,” said the chief investment officer of one Europe-based family office quoted in the survey.
“For example, in investment grade debt we saw bank debt trading down 10+ percent on some days. Having the conviction to say that, no matter what happens, I think this is a strong investment, considering the yield and duration, and go for it and really put your money where your convictions were. I think that was the only diversification, not even a diversification but an actionable thing, that really helped us out as a family office.”
The family offices who had hoarded cash during the crisis said they planned to put it back to work in the coming years.
Almost half (45 percent) of the study’s respondents said they planned to raise real estate allocations in the coming years, with a similar percentage looking to buy more equities.
A knock to confidence in private equity
UBS said that at the height of the crisis “when liquidity was everything”, family offices’ immediate reaction was to view private equity with greater caution. Just over a quarter said in May that they expected to increase direct private equity, well below the 49 percent share who said they would do so ahead of the crisis.
“But that could well reflect the fear of illiquidity that dominated financial markets at the time. It remains to be seen if they take advantage of any distressed opportunities emerging from a recession,” UBS said.
More than three quarters (77 percent) of family offices invest in private equity, with 69 percent viewing it as a key driver of returns. However expectations of this asset class have fallen during the pandemic.
Only half (51 percent) of family offices said they expected private equity to outperform public investments, down from three quarters (73 percent) beforehand.
Family offices noted that direct investments offer greater control, with 35 percent regarding this as an advantage in May, against just over a quarter (27 percent) before the economic disruption.
A Singapore-based family chief investment officer said there could be opportunities as companies became distressed in the coming months.
“Maybe in the next few months as you see companies and businesses start to need more liquidity or more financial support, there will be more financial opportunities coming,” he said.
“And so definitely real estate businesses will be interesting, and we can actively participate in companies to turn them around.”
Most are pleased with overall performance
During the first quarter of 2020 – including the most intense phase of market turmoil in March – family offices’ average maximum drawdown was 13 percent. However more than three quarters (77 percent) said that their portfolios have performed in line with, or above, respective target benchmarks over the year to May.
Over half (55 percent) rebalanced their portfolios in March, April and May in order to maintain their long-term allocation.
Josef Stadler, the head of global family office at UBS Global Wealth Management, said family offices appeared to have behaved differently to others during the period of volatility.
“In some senses, we saw them take an institutional approach, applying meticulous asset allocation strategies and rigorous investment processes. However uncomfortable it may have been at times, they stuck to their plans and remained disciplined.
“Yet family offices also embrace and manage risk like no other investor. It is missing an opportunity that gives these clients the biggest headache, not making a loss. This is why they are looking to deploy cash to take advantage of market dislocations. We expect to see big moves in the coming months.”
