Global family offices recorded a weak investment performance, with returns at their lowest for three years, despite gains in private equity, according to a report by Campden Wealth Research, carried out in partnership with UBS.
The composite global portfolio of family offices returned 0.3% in 2015, down from 8.5% in 2013 and 6.1% in 2014, the UBS/Campden Wealth Global Family Office Report 2016 revealed.
Private equity investments have become more central to family offices over the past year, representing nearly a quarter of the average overall portfolio. Multi-year participants have posted a 2.3 percentage point rise in holdings of private equity investments to 22.1 percent%.
However, the average family office has reduced its holdings in hedge funds from 9% to 8.1%, driven by performance and fee concerns.
UBS Global Family Office Group vice chairman Philip Higson said: “Most family offices can trace their roots back to the growth and success of a single business, and as a consequence you will often find an emotional desire to back entrepreneurs and ideas they believe in.
“Strong performance from private equity over the last five years has only served to strengthen this natural affiliation.”
Overall, the percentage of family offices pursuing a growth strategy has increased from 29% to 36%.
Family offices in the US showed the most optimism, with a big move to growth allocations. Emerging market participants were much less stressed compared to 2015 and reduced their preservation allocations dramatically.
European participants were standout negative, exhibiting their risk-off stance with increased preservation allocations and a cut in growth allocations.
“In the search for yield, family offices are playing to their strengths by allocating longer term and accepting more illiquidity. This approach is successful when experienced in-house teams have sufficient bandwidth for conducting due diligence and managing existing private market investments,” Higson said.
The report further revealed that 61% of family offices are now active or expect to be active in impact investing in the future.
Philanthropy continues to be a priority for several family offices, with one-third of respondents likely to increase their philanthropic allocations and another two-thirds to continue with the same amount of allocation.
Campden Wealth director of research Stuart Rutherford said: “We have found that some of the wider social considerations of impact investing are also influencing traditional investing. Family office executives are increasingly telling us that the next generation’s social values are causing them to reconsider their asset allocation.”
Also, 43% of family offices expect a generational transition within the next decade, while 69% in the next 15 years, the report highlighted. However, only 37% found that the younger generation wants to be more involved in the family office than they currently are.
“In our experience the risk of disruption from a generational transition should not be underestimated. It is the number one reason for beneficial owners to make changes to their family office structure and management team," Higson said.