The popularity of family offices continues to grow, and their ability to preserve and grow capital in the volatile conditions seen last year augurs well for 2023. Wealthy individuals increasingly want to take control of their finances and where their money is invested. Family offices will increasingly be focused on sustainable, non-traditional investments as the younger generations take command.
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Family-office trends in 2023
Riding out 2022’s storms
The year 2022 proved highly challenging for anyone managing money. The MSCI World Index of equities declined by 15.62% over the year in local-currency terms, its worst performance since the global financial crisis of 2008. Bond markets also fared poorly, the yield on ten-year Treasuries rising from 1.5% to 3.84%, its biggest annual increase since the 1960s.
Yet family offices outperformed their global peers, with North American family-office investments recording 15% average portfolio returns, compared with 13% in Europe and 10% in Asia-Pacific. That’s according to a report from Campden Wealth, which added that more than 75% of North American families grew their wealth in 2022, and more than half of family offices grew their assets under management (AUM)1. Worldwide, 58% of family offices grew their AUM in 2022.
These figures appear to bear out Campden’s claim that family offices ‘are exceptionally well-poised to navigate rocky terrain’. The organisation, which supplies analysis to family offices, explains this is because family offices are nimble entities, with cash reserves and ‘patient’ capital, that ‘can swiftly respond to economic changes quicker than many large-scale organizations can, while also being well equipped to capitalize on opportunistic deals thrown up by market volatility’.
Figure 1: The total net worth of the families by region, 2022
Challenging conditions ahead
With markets encountering further turbulence in 2023, and the likelihood that volatility will continue, the main trends playing out in family offices this year are as follows:
- Asset allocation: Reflecting the uncertainties facing the global economy in terms of growth, inflation and interest rates, family offices have turned to private equity, real estate and illiquid assets such as private debt, as well as exploring other possibilities such as derivatives as they seek returns uncorrelated with equities2. However, public equities remain the largest allocation, according to Campden.
Around nine-in-ten family offices expect to increase their exposure to illiquid assets over the next two years, according to a study by Aegon. These assets earn an illiquidity premium, and Aegon believes they will shield investors from macro uncertainty3.
Meanwhile, these entities are building up cash reserves, ready to deploy opportunistically into real assets, such as real estate, on signs of a recovery in the sector. Nearly all family offices have been overweight in cash for the past two years and are now ready to invest again, while 87% anticipate an increase in the risk appetite of their clients over the year ahead, according to research by the financial-services firm Ocorian4, 5. - Greater focus on risk management: In common with other wealth managers, family offices have pushed further along the risk curve in pursuit of higher risk-adjusted returns. However, family offices are very aware of the threats involved. Around 77% of global family offices believe that investment risk is the biggest risk they face over the next three-to-five years. Consequently, many family offices are seeking the help of external providers to incorporate exposure, risk contribution and liquidity analysis into their portfolio analysis6.
- Environmental, social and governance (ESG) factors increasingly important: Sustainability is exerting an ever-greater influence on investment. That’s the finding of a 2023 survey by Aeon Investments, which revealed that nearly two out of five (39%) family-office executives strongly agree that younger family members are driving increased interest in sustainable investment7.
Another 58% slightly agreed with the statement. This rise in ‘sustainable investing’ can be partially attributed to ‘the succession of wealth from current holders to their children, with the next generation caring more about the impact of their investments on environmental and social causes’, according to an earlier report by IG Prime8.
Family offices also face other challenges. including the need to upgrade technology, deal with cybersecurity threats, attract talent in an increasingly competitive environment, and successfully bridge a major generational transition in which trillions of dollars are changing hands worldwide. - A growing power
Family offices are an increasingly important force in financial markets, and this trend will continue, driven by a huge transfer of wealth across generations, the tech revolution and the rapid growth of Asian economies. These entities are increasingly using new investment approaches to extend their reach beyond traditional, more conservative investments, while also boosting investment in risk-management techniques. We expect these trends and the growing interest in investing sustainably to continue.
1 https://www.rbcwealthmanagement.com/_assets/documents/cmp/the-north-america-family-office-report-2022.pdf
2 https://www.landytech.com/blog/family-office-trends
3 https://www.wealthmanagement.com/family-office-hnw-investment/family-offices-have-dry-powder-ready-deploy-real-assets
4 https://www.ocorian.com/insight/family-office-risk-appetite-grows-they-count-cost-being-cash
5 https://www.rbcwealthmanagement.com/_assets/documents/cmp/the-north-america-family-office-report-2022.pdf
6 https://www.landytech.com/blog/family-office-trends
7 https://aeoninvestments.com/institutional-asset-manager-research-from-aeon-investments-reveals-changing-family-office-investment-focus/
8 https://www.ig.com/en-ch/prime/insights/articles/family-office-investments-post-pandemic-220815
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