Share |

Why European SFOs are optimistic about the future

While commentators, politicians and much of the general public remain unsure about what will happen to the global economy in the short term, single family offices in Europe remain upbeat and believe that the present crises can be survived.

Investment guru Warren Buffett said on Monday that we are in an "economic pearl harbour", but only a minority of respondents to the second annual Merrill Lynch/Campden Research European Single Family Office Survey 2009, launched this week, believe running an SFO is less viable than it was 12 months ago. Indeed, 41% believe it is more viable today.

Such optimism may, on the face of it, suggest that families are more confident about the economy than most but there are more complex reasons for their belief in the viability of the family office model.

Clearly, families have been affected hugely by the downturn with 96% of survey respondents saying their investment strategies have been affected by the credit crunch.

On the one hand, this has meant that families' investment objectives have changed dramatically. Whereas just 4% of respondents to last year's survey said their aim was to "preserve wealth very conservatively," this has risen to 20% this year.

In practice, this has meant there has been a massive flight to safety with a pronounced move towards cash (equal to 26% of the average portfolio compared to 5% last year) at the expense of equities (down to 18% from 34%). The average split between traditional and alternatives was 55/45% - a reversal on last year's study's figures.

Such dramatic shifts have put asset allocation strategies under the microscope of executives and family members alike, and the pressure is now on for family offices to deliver. "SFOs need to think carefully in this climate," one Scandanavian SFO head told Campden Research. "Recent events have highlighted the reason why families set up on their own in the first place. If you don't handle your family's assets correctly, they may wonder if it's worth having a family office at all."

One of the most important factors with regards to "getting it right" is an SFO's risk management strategy. Surprisingly, however, most (74%) did not change the way they handled risk in 2008. While 15% said they were experiencing skill shortages in risk management and 4% said they needed to recruit risk management functions, that leaves a sizeable amount who appear to be either complacent or very confident that their risk management strategies are up to speed.

This latter explanation seemed to be borne out by one SFO head Campden Research spoke to: "Our risk management structure served us very well," he said. "We're really quite tight and didn't have anywhere near as many surprises as we know others did."

On the other hand, families have seen their relationships with counterparties stretched to breaking point. Asset managers, who last year were seen as an SFO's main external financial services provider, were overtaken by private banks. The number of SFOs who selected investment banks was also down.

Confidentiality and reputation topped the list of the most important criteria when choosing an external financial services provider – last year's survey saw "investment track record" cited as the most important, but its fall to fifth place in the list reflects a belief that the performance mantra is no longer enough.

The general mood was summed up by one SFO head, who said: "The credit crunch didn't affect our relationships with creditors. However, relationships with our major counterparties changed considerably for the worse."

There are, therefore, some important questions for families to consider: have changes to your asset allocation strategies been considered decisions for the long term or knee-jerk reactions? Does the family office model still have meaning if your money is mostly in cash given interest rates are declining so rapidly? Given a need to diversify out of cash, but a mistrust of counterparties, how will you view new products that will, inevitably, come onto the market in due course?

The answer to these questions could well determine whether SFOs remain hopeful for the post credit crunch era.

Click here to purchase the Merrill Lynch/Campden Research European Single Family Office Survey 2009.

Click here >>
Close