Family Offices 2016: Performance weakens against challenging markets

Global Family Office Report 2016: the world’s leading family office research study offers insight into performance, investments and structural issues

Key findings:

• Composite global family office portfolio returns flat
• Variation in regional risks and search for growth
  
• Impact investing on the rise, driven by Millennial engagement
  
• Looming succession challenges
  

Zurich/London, 8th September 2016 – Campden Wealth Research, in partnership with UBS, has today launched its annual report on family offices globally. The Global Family Office Report 2016 surveyed principals and executives in over 242 family offices, with an average size of USD 759 million assets under management.

The key findings:

Investment performance was weak, with returns at their lowest for three years

After returning 8.5 percent in 2013 and 6.1 percent in 2014, the composite global portfolio of family offices returned a disappointing 0.3 percent in 2015. This flat performance contrasts sharply with endowment funds of the top three US universities (Yale, Princeton and Harvard), which were up over 10 percent during the same period, although US endowments on average returned a more modest 2.4 percent in 2015.

Stuart Rutherford, Director of Research at Campden Wealth commented on the findings:

“The endowment funds of top universities tend to be prepared to take greater risks than the average family office, and often have much lower allocations to cash and fixed income. There is also more stability in their investment approach and management because they don’t have to navigate changes to family control and investment objectives. This enables endowments to seek higher returns in challenging market conditions.”

Significant regional differences in risk taking

There has been an overall increase in the percentage of family offices that are pursuing a growth strategy from 29 percent to 36 per cent. However, strategic asset allocations reveal a high degree of regional variation.

The most optimism can be found in the US, with a big move to ‘growth’ allocations. Emerging market participants are much less stressed than in 2015 and have cut their ‘preservation’ allocations dramatically. In contrast, Europe is the standout negative, with its risk-off stance demonstrated by increased ‘preservation’ allocations and a cut in ‘growth’ allocations.

Philip Higson, Vice Chairman, Global Family Office Group, UBS AG noted:

“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. The poor headline performance in 2015 can be attributed to weakness in liquid market investments. Portfolios that remained fully invested will have achieved year to date returns in excess of 5%. The best returns in 2016 have come from the rebounding of sectors and assets that came under pressure from weak energy and credit markets last year.”

Private equity is in favour, at the expense of hedge funds

Private equity investments have become even more central to family offices over the past year and now represent close to a quarter of the average overall portfolio. Multi-year participants have recorded a 2.3 percentage point increase in holdings of private equity investments to 22.1 percent. Meanwhile, the average family office reduced its holdings in hedge funds from 9 percent to 8.1 percent last year amid concerns about performance and fees.

Philip Higson commented:

“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.”

Impact investing has come of age, driven by Millennials

A significant 61 percent of family offices are now active or expect to be active in impact investing in the foreseeable future. Millennials are a key catalyst for this change, with two-thirds of participants agreeing that families with children born after 1980 will see an increase in requests to participate in impact investing.

In addition, philanthropy continues to be a priority for many family offices. One-third of participants are likely to increase their philanthropic allocations while another two-thirds said they would remain the same. Education was the biggest beneficiary of family office philanthropy this year, replacing Children & Youth at the top of the table.

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.”

Succession is a looming challenge

The report found that 43 percent of family offices expect a generational transition within the next 10 years, and 69 percent in the next 15 years, making this a pressing issue for the community. Yet just 37 percent find that the younger generation wants to be more involved than they presently are in the family office.

Against this backdrop, participants were asked for their main governance priority over the next 12-24 months and ‘implementing a succession plan’ topped their list of responses.

Just two in five respondents have personally experienced a successful transition of a family office. These individuals pointed to a number of factors that were important: a willing and able next generation; an older generation prepared to give up control; and a flexible and trustworthy family office.

Philip Higson added,

“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.“