Despite poor financial markets performance, rising inflation, interest rate hikes, and increased geopolitical tensions in 2022, North American family offices have once again demonstrated their propensity to capitalise during volatile times.
According to the North America Family Office Report 2023 by Royal Bank Of Canada (RBC) and Campden Wealth, North American family offices fared surprisingly well during an especially tumultuous period, with almost half of those surveyed declaring an increase in assets under management (AUM) and 12% declaring a significant increase. Similarly, when asked how their investment portfolio performed relative to benchmark, 48% of respondents reported that it had outperformed, compared to just 12% who indicated underperformance.
“Our research has shown that the success of North American family offices [FOs], despite the challenges of 2022, can best be attributed to their proactive management,” says Adam Ratner, Campden Wealth’s Director of Research. “Many of the family offices we surveyed revealed a proactive shift in their investment focus towards alternative asset classes in an effort to hedge against inflation. These strategic decisions by FOs and the savvy recommendations of their external investment managers have clearly played a crucial role in their ability to weather the storm.”
“Given the uncertainty around rising rates, rising inflation and a slowing economy, many families adopted tactical strategies to better optimise their asset mix during these challenging times,” says Manju Jessa, Head of Family Office & Strategic Clients, RBC Enterprise Strategic Client Group. “Reducing/paying off any credit facilities; looking for higher yielding short-term deposit rates for cash; adjusting the duration of bond portfolios and employing different hedging solutions are a few examples of how families were able to better navigate this difficult period. Focusing on the Investment Policy Statement and being reminded of the long-term approach to investing was also rewarding as markets began to stabilise.”
The report is based on a statistical analysis of 144 survey responses from North American single family offices and private (not commercial) multi-family offices, with an average net worth (including operating businesses) of $1.3 billion and a collective wealth of $189 billion. The family offices surveyed have, on average, $900 million in AUM and aggregate AUM of $126 billion.
A SHIFT TO PRIVATE MARKETS AND AN EYE ON CUTTING COSTS
Due to global financial markets uncertainty, the report also found that North American family offices have continued to adopt a more conservative attitude towards investment strategies with an increased focus on wealth preservation. Two years ago, the primary investment strategy of 48% of family offices was growth. Subsequently, it has declined to 38%, with family offices adopting a strategy of wealth preservation rising from 13% to 18%.
“In contrast to the early pandemic years where the long-term implications were difficult to understand, however the use of significant fiscal and monetary policy decisions quickly helped stabilise markets. In contrast, 2022 and 2023 (to date) have been times of true uncertainty,” says Jessa. “Between anticipating when central banks would start lowering rates (which has so far not materialised), rising geopolitical uncertainty (in Russia, China and the Middle East), and a guessing game around if and when the economy would slip into a recession, investors have had a lot of decisions to make. Therefore, taking a more conservative look at existing holdings and making adjustments where necessary benefitted many families during this period. While we may be past the point of maximum uncertainty, a prudent approach remains of utmost importance while focusing on preserving capital for generations to come.”
A key feature of family office investment in recent years has been an ever-increasing allocation in developed market bonds reducing exposure to developed market equities. This now constitutes the largest asset class, continuing a trend that expands on the average portfolio allocation of 27% from a year earlier.
“Private markets are perceived as a safe harbour,” says Ratner. “Despite the challenging investment landscape of 2022, private markets allocations surged to 29% of the average North American family office portfolio according to our data set. This growth suggests that family offices view private markets as resilient and attractive in uncertain times. Our respondents have ranked these asset classes as having the highest expected long-term returns.”
The report also found that more North American FOs intended to increase their allocation to developed market bonds than developed market equities.
“Facing ambiguity in the world around them, many family offices increased their fixed income holdings to benefit from significantly higher yields,” says Jessa. “Bonds became increasingly attractive as a more conservative and defensive trend emerged. With interest rates still relatively high and the outlook for economic growth somewhat uncertain, increasing exposure to fixed-income instruments by some families continues to be a focus.”
Part of North American family offices’ ability to weather the financial storm of the past year could be attributed to them showing firm cost control. The survey results estimate that family offices’ operational costs averaged $5.7 million last year, representing a 22% reduction on the previous year. Family offices were able to keep tight control on their costs by reducing discretionary expenditure and staff remuneration. The average basic remuneration for chief executive officers was found to be down by around one third (approximately $304,000) on the previous year.
EMERGING TECHNOLOGY AND SUCCESSION CONCERNS
From a technology adoption standpoint, there has been a somewhat slow adoption (38%) of relatively newly available wealth aggregation platforms, which can provide an overview of an organisation’s financial position by consolidating data from multiple banks and investment managers.
When it comes to matters of governance, however, North American FOs are seen as effective when ensuring capable individuals are in leadership positions (79%) and making informed decisions (78%). However, they are seen as less effective in facilitating a collaborative approach and avoiding conflict between family members.
“Regarding the effective management of family offices, the secret is early, open and transparent communication within the family,” says Ratner. “External structures, such as Campden Education’s Family Wealth Essentials Series, can also be instrumental in preventing issues becoming problematic and facilitating collaboration among family members.”
This increased need for communication between family members is of greater importance as global family offices continue to navigate a major global wealth and succession transition event. North American family offices feel the key to a successful transition (of which 76% say the issue is critical) is to introduce Next Gens to family values at an early stage (92%) and encourage their interaction with the family office and family leadership (84%).
“Aligning the goals of the Next Gen and the current generation is a complex challenge,” says Ratner. “Family offices across North America are eager to demonstrate that wealth can be invested for positive outcomes, aligning with the preferences of next generation.
“However, the key challenge lies in preparing the next generation adequately. Ensuring that they are introduced to family values early and have opportunities to interact with family leadership is essential. Only 35% of family offices view their next generation as well prepared, indicating that a proactive approach to education and preparation is needed to bridge the gap.”