Wealthy families are preparing for a downturn

By James Langton | September 24, 2019 | Last updated on September 24, 2019
2 min read
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The dedicated investment offices of wealthy families are girding themselves to face market turmoil in the year ahead, according to new research from UBS AG and Campden Wealth Research.

Their latest report — based on a survey of 360 family offices, which manage an average of US$917 million for wealthy families — found that over half (55%) are bracing for a market downturn by 2020.

To prepare for difficult markets, 42% are building up their cash holdings and 22% are curbing their exposure to investment leverage.

“Family offices are cautious about geopolitical tensions, and there is a widespread sense that we’re reaching the end of the current market cycle,” Rebecca Gooch, director of research with Campden Wealth, said in a statement.

The survey also found that 45% are adjusting their investment strategies to mitigate risk, and 42% are preparing to seize opportunities that may arise in a downturn.

“While the average family office hasn’t made wholesale changes to its portfolio, many have been building up cash reserves and deleveraging their investments in anticipation of disruption ahead,” Gooch said.

The report said that average investment returns for family offices came in at 5.4% over the past year.

Public equities were weak, with developed market equities returning 2.1% and emerging markets declining by 1.1%.

This was offset by private equity (PE), which returned 16% from direct PE investments and 11% from PE funds; and real estate, which generated an average return of 9.4%.

“Family offices are looking to increase their allocations to real estate and private equity, particularly direct investments which offer families greater operational control. While family offices are concerned about the uncertainty in financial markets, they remain convinced that longer-term investments can deliver superior returns,” said Sara Ferrari, head of the global family office group at UBS.

The survey also found that family offices expect to play an active role in addressing major global issues, such as climate change and economic inequality. It said that 53% cite climate change as the biggest threat facing the world.

In response to this concern, the survey found that 19% of the average family office portfolio is now devoted to sustainable investments. This is expected to rise to 32% over the next five years. Impact investing represents 14% of the average portfolio, which is forecast to rise to 25% in the next five years.

“We have seen family offices become much more engaged in discussions about sustainable and impact investing over the last 12 months. This is no longer seen as a ‘side project’ or preoccupation of the [next generation], but a priority for the family as a whole. Many products are now recognised by family offices as fully-fledged investment tools that can generate good returns,” said Ferrari.

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James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.