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Family offices sacrificing liquidity for returns in a new era of strategic asset allocation: UBS

Khairani Afifi Noordin
Khairani Afifi Noordin • 4 min read
Family offices sacrificing liquidity for returns in a new era of strategic asset allocation: UBS
In Asia Pacific, 40% of the family offices surveyed plan to increase direct PE allocations. Photo: UBS Global Wealth management co-head of global family and institutional wealth Asia Pacific Tommy Leung
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Family offices are reducing their fixed income allocations and increasing investments in alternative assets such as private equity (PE) real estate and private debt — sacrificing liquidity for returns, according to UBS Global Family Office Report 2022.

This is amid a “new era” of strategic asset allocation (SAA) as inflation, central bank liquidity and rising interest rates compel family offices to review their investment options, the report finds.

The Global Family Office Report 2022 surveyed 221 single family offices around the world. It is the largest and most comprehensive of its kind, with the family offices surveyed averaging a total net worth of US$2.2 billion.

In Asia Pacific, 40% of the family offices surveyed plan to increase direct PE allocations, while 18% intend to raise investments in PE funds and funds of funds. Real estate is favoured by 26%, while 33% are turning to private debt.

A third (33%) of the average family office portfolio in Asia Pacific was allocated to equities in 2021, while 15% was allocated to fixed income, 11% to real estate and 2% to private debt.

Moving forward, family offices are exploring incremental shifts in SAA, venturing further into the private markets they have been investing in during recent years.

See also: Winning the loser’s game

“In response to the Covid-19 pandemic, digital disruption and now a war in Ukraine, [family offices] are reviewing their options with greater urgency, as a strategic shift towards additional sources of return and alternative diversifiers gains ground,” says UBS Global Wealth Management executive vice chairman Josef Stadler.

“Against challenging market conditions, family offices see the bigger picture and are applying prudence and innovation to their strategic asset allocation,” he adds.

As Asia Pacific family offices continue to favour PE, their allocations to PE look set to rise further in the next five years with technology being the most common invested sector, says UBS Global Wealth management co-head of global family and institutional wealth Asia Pacific Tommy Leung.

See also: Time to invest in Asia Pacific real estate market: M&G Real Estate says

“PE has become more popular with family offices as they offer a potential for higher return from illiquidity premium. In addition, they also provide a broader set of opportunities that are otherwise not available in the public markets,” says Leung.

PE is a core risk asset across global regions, with 96% family offices in the US investing in PE, followed closely by Switzerland at 86%, Middle East at 83% and Asia Pacific at 79%. Even in Western Europe and Latin America, where PE investment lags, participation is high at 73% and 76% respectively.

Seeking out active strategies

Among other findings, the report also shows that family offices are seeking out more active strategies — a departure from recent years. Four out of ten (39%) of Asia Pacific family offices are either relying more on active strategies and manager selection or considering doing so, the report found.

Of the Asia Pacific family offices surveyed, 66% say it is hard to find uncorrelated returns in the current environment. Reflecting low bond yields, 52% of Asia Pacific family offices say they no longer think high-quality fixed income helps diversification. Just above a quarter (27%) of Asia Pacific family offices use hedge funds to diversify or are considering doing so.

As the search for alternative diversifiers intensifies, 41% of Asia Pacific family offices think they’re no longer able to build a complete portfolio with long-only investments.

In terms of investment themes, 86% of family offices in Asia Pacific shared that automation and robotics is the one that resonates the most with them. Digital transformation is another popular investment theme at 79%. This spans across e-commerce, data, artificial intelligence, cloud and blockchain.

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Meanwhile, 24% of Asia Pacific family offices have either invested in distributed ledger technology (DLT) or considered doing so in 2021. Approximately a quarter (24%) of APAC family offices were investing in cryptocurrencies or considering it.

About half (53%) of the family offices in Asia Pacific have sustainable investments, while half say that sustainable investments will outperform the overall market in the next five years.

Photo: UBS

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