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Family office optimism amid portfolio reassessments

Building great wealth is rare. Sustaining wealth for generations is even rarer. Establishing a family office is one of the ways wealthy families aim to preserve their wealth over time. However, families are demanding more than just wealth management from their offices. Families are increasing in size and generations, meaning their offices are also being tasked with family matters such as family unity and continuity.

How they balance these varying needs and priorities is something we seek to reveal each year.

Citi Private Bank’s annual global family office report provides insights into the thinking and actions of some of the world’s wealthiest families and their family offices. The report covers investment sentiment and portfolio actions, in addition to the expectations of the family, family office best practices and family governance.

One of the most interesting findings of our 2023 report is the change in priorities among the 268 global offices we surveyed. Family offices shifted their focus toward wealth management (74%) and away from family matters such as unity and continuity. However, the top two family worries were preserving the value of their assets and preparing the next generation to be responsible wealth owners, reflecting a desire to address both financial and family issues. We observed a similar pattern during the global financial crisis and the Covid pandemic, when family offices were busy dealing with uncertainty and partially disengaged from addressing family issues. Therefore, while it is understandable in the short term, there is clearly an insufficient alignment that will need to be addressed sooner rather than later.

Yet despite market volatility, geopolitical unrest and economic instability, almost all of the family offices we surveyed are optimistic for portfolio returns in the year ahead.

So, what are their main concerns and what actions are they taking to achieve these expected portfolio gains in the near-term?

Cause for concern

In relation to financial markets, family office executives highlighted a range of near-term worries. Inflation topped the list with 56% of respondents, followed by the effect of rising interest rates cited by 51% of respondents. The increasingly fractured economic and geo-political relations between the US and China came third, with 48% of family office executives expressing concern about the impact the deteriorating relationship may have on global markets.

In terms of financial stability more generally, the lasting impact of COVID-19 disruption, combined with the Russian-Ukraine war in Europe, has played a key role in ongoing market volatility. We found smaller family offices in terms of AUM tended to express greater concern about financial stability compared to larger entities (44% vs. 34%).

Levels of concern varied by region, too. Interest rate increases were reported as the top issue by family offices in North America whereas the Russia-Ukraine war was the primary concern for those in Europe, the Middle East and Africa. Unsurprisingly, family offices in Asia Pacific reported US-China relations as their main concern and inflation dominated for Latin America.

Asset allocation: change is in the air

In the context of these concerns, there has been a marked shift in asset allocation in the last 12 months among family offices of all sizes, more than in recent years.

Over half of respondents increased fixed income allocations. This is a significant acceleration from the 20% recorded the last two years. Smaller family offices (by AUM) were likelier than larger entities to increase their fixed income allocations, but also to reduce them.

Private equity allocations increased for 38% of respondents, which is a significant slowdown from numbers recorded in 2022 and 2021 (63% and 52% respectively).

Allocations to private equity funds were primarily focused on growth equity (30%) and venture capital (27%). When comparing by AUM, smaller entities were more heavily weighted in growth equity funds whereas smaller entities held greater weight in venture capital funds. Direct investing remained strongly in focus for 80% of family offices.

Real estate was the steadiest overall and has historically been a dominant component within family offices’ holdings. In fact, at our flagship Family Office Leadership Program event earlier this year, we discussed challenges and opportunities for this key sector. Despite the challenges of rate hikes, high vacancy rates, and upcoming maturities, potential bright spots were highlighted within travel and hospitality and select opportunities in global luxury real estate, multifamily and offices.

Finally, public equity saw the biggest retreat, with 38% of respondents decreasing allocations, when just 19% and 28% did so in 2021 and 2022, respectively.

Looking forward

What are the expected portfolio returns for the next 12 months? The expectation is positive.

Remarkably, nearly all family offices surveyed expect portfolio upside in the coming year, and mark-to-market portfolio values have rebounded following the losses of last year. The majority of gains were in the 0-10% range between January and June 2023, although 12% of family offices reported decreases of more than 10%.

To continue adapting to these ever-shifting market conditions, family offices told us they will continue to reposition their portfolios further in the next 6-12 months. They are bullish on global developed investment grade fixed income (45%) and private credit (44%). Just under half are bearish on cryptoassets. 

With inflation beginning to subside and the desire to keep some dry powder for investment opportunities, family offices are increasingly attracted to cash, with 34% bullish vs. 7% bearish.

In public markets, the consensus favors increasing exposure to technology at 69% and healthcare at 58%. Larger entities saw themselves likelier to be adding financials in the next 12 months compared to smaller sized offices (33% vs 22%).

Finally, direct investments may be reaching a crossroad as 66% are seeking opportunistic deals based on attractive valuations, whereas 38% said they have paused new direct investments to economic uncertainty. The sector preference within direct investments mirrors those in public equity, with technology and healthcare leading the way at 63% and 40%, respectively. Interestingly, a growing number are turning to external investment advisors and banks for their deal flow support.

Location, location, location

The 2023 survey recorded the largest number of global respondents to date, with two-thirds coming from outside of North America. This global reach provided interesting insights into the marked regional differences – and similarities –  of family office asset allocations around the world. 

North America

Family offices in this region are the likeliest to engage in direct investments with 14% of their asset allocation, about twice as much as the average for other regions. 45% of offices had no exposure to sustainable investments, versus a global average of 28%, making this region the least advanced with this asset class.

Europe, Middle East, Africa

The increase to fixed income allocations was the most significant compared to other regions at 67%. The region was the highest to record a preference to consumer goods for public equity compared to the average. Interestingly, it is the region where the allocation to art was the more pronounced (5% vs. a global average of 2%). 

Latin America

Family offices in this region are most concerned by the economic impact of inflation. Fixed income was the leading asset class in the region with 30%, almost twice as much as the global average of 16%. It was also the region with the largest decrease in public equity (44%).

Asia Pacific

This region reported the highest cash holdings at 18%, versus an average of 11% for the other regions. Furthermore, only 6% of family offices had no exposure to sustainable investments – considerably further along than North America. Finally, this region was the least likely to engage in direct investments (69% vs. a global average of 80%).

Overall, family offices have adapted to challenging market conditions, seeking portfolio resilience and opportunity. Their asset allocation shifts have broadly aligned with the views of our Chief Investment Office, focusing on certain attractively valued equities and fixed income in the face of a slowing economy. We continue to believe family offices should keep portfolios fully invested rather than attempting to time markets and holding excess cash.

At Citi Private Bank, we proudly serve more than 1,800 family offices worldwide. If you would like to speak to us about where we see potential investment opportunities in the near- and long-term please contact our family office team.  

This information is a summary of Family Office Survey responses collected from Citi Private Bank Family Office clients from June 7th to August 9th 2023. This article is for informational purposes only based on those responses from the survey and are not intended to represent investment advice.

INVESTMENT PRODUCTS: NOT FDIC INSURED. NOT CDIC INSURED. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE.

Views, opinions and estimates expressed herein may differ from the opinions expressed by other Citi businesses or affiliates. The information contained herein is not intended to be an exhaustive discussion of the concepts mentioned herein or tax or legal advice. Readers interested in the concepts should consult their tax, legal, or other advisors. You can read our full disclaimer here.

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