Family offices are taking on more risk in 2015, continuing a multi-year trend that is likely to stoke debate over ultra-high net worth investment intentions, according to the second global family office report.
Released today, the Global Family Office Report 2015 found that family offices are taking on more risk by reducing their holdings of cash, increasing their allocation in equities, and by investing in hedge funds.
Families pursuing a 'preservation' investment strategy dropped from 26% to 21% in the past 12 months, with those implementing a 'balanced' strategy increasing four percentage points to 50%.
Based on the survey responses of principals and executive across 224 family offices, the report from Campden Wealth and UBS found the average single family office in its sample had assets of $806 million, with combined private wealth of all the surveyed offices totalling more than $200 billion.
The report also found that costs have increased in the family office space, with those participating in last year's study reporting an increase from 92 basis points to 99 basis points.
Dominic Samuelson, chief executive officer of Campden Wealth, said the report provided more granularity than last year, adding that the trend towards riskier investments was a by-product of higher returns in 2014.
“Riskier intentions and investments are the inevitable consequence of the higher returns reported in 2014 as well as the continuing central bank action to keep interest rates low”, he said.
According to the report, the average family office will now spend nearly $8 million annually ensuring effective operation, with roughly 20% of that figure coming from external manager performance fees.
For the first time, the report provides granular breakdowns of average family office spending, finding that the largest single cost is the average $3.3 million spent on investment activities, followed by $1.5 million on legal and tax services.
Stuart Rutherford, director of research at Campden Wealth, reflected on the increased costs: “There are a number of factors driving costs. The one most directly impacting costs this year appears to be a willingness to take on staff or restructure, buoyed by the positive investment returns of previous years.”
Other key findings:
• The average family office CEO's annual basic salary is $333,000.
• 22% of the average family office portfolio is in private equity.
• There is typically a home-market bias with regards to real estate investments.
• Offices are diversified in their hedge fund strategies though are most commonly involved in long/short equities.
• Around a third (32%) of family offices do not have risk management procedures or controls for family reputation.
• Family offices that are engaged in philanthropy have average philanthropic endowments of about 2.5% of AUM ($20 million).
Looking to the future, Philip Higson, vice chairman of UBS Global Family Office Group, said family offices are bullish about the outlook for 2015, adding that the strongest returns are likely to come from private equity and real estate.
According to the report, the average family office has invested approximately $105 million in real estate and $177 million in private equity activity, which includes venture capital and co-investing.
He concluded with a warning: “There are number of concerns that we highlight in the report. One example is the fact that a third of offices do not have any risk management procedures around family reputation.”
He added: “Though offices are well geared to look after investments, through written, internal, and external evaluation, reputation isn't getting the attention it deserves. In a digital age, that's a real familial risk”.
To find out more about the Global Family Office Report 2015, click here.