When Cash Is Not King: The New Favorite Investment Options For Family Offices
Family offices are doing some strategic planning in response to long-term low interest rate environments and high fees associated with institutional funds by deploying capital into higher yielding, more illiquid assets. Alternative investments now comprise nearly 46% of family portfolios, with real estate (17%) and private equity (22%) the most significant contributors. However, equities remain the most popular stand-alone asset class, accounting for 28% of total investment and contributing significantly to the 15.5% total average investment returns enjoyed in 2017.
Although the family office investment approach remains relatively risk-averse, there are shifts taking place, not only between asset classes but also within traditional asset classes themselves, as innovative investment options emerge. The motivation behind investment is evolving as well, with social and environmental impact becoming a serious consideration.
Some emerging investment instruments, like Crypto, are becoming more popular globally and are attracting growing interest, but are not very well understood within the family office space. With these points in mind, we focus on three asset classes that are of specific interest:
Accounting for 17%of all family office investments, real estate has become more popular option for strategic planning in recent times due to the attraction of higher yields. It maintains its position as the third largest asset class, after equities and private equity, delivering an impressive average annual return of 12% in 2017. Commercial real estate remains the most popular property investment option for family offices, making up 59% of real estate investment. Property has traditionally been a stable long-term, low-risk investment option for family businesses, with companies like Berkshire Hathaway prioritizing the bricks and mortar approach. However, even in this space, there have been shifts in how family offices are investing. Innovative investment options such as crowdfunding (e.g. The House Crowd) are changing the way companies spread their risk and manage their exposure, and make real estate investment accessible for everyone. Real estate has also become the most popular co-investment, contributing 60% to total co-investment across family offices. Alternative property investment products, such as the Azurite mini-bond offered by Azurite ISA, allow real estate investors easy access to exclusive global property portfolios without significant entry costs or initial outlay. Nigel Robertson, Director of Azurite ISA and seasoned private investor, comments that “family offices often have direct investments in local commercial and residential real estate, but to diversify their property investment they should consider investing into property bonds within recession-proof markets to balance their risk and enjoy the benefits of high-yield offshore exposure.”
According to the UBS Campden Wealth Global Family Office Report, 54% of family offices have indicated intent to increase their allocation to impact investing over the next 12 months, with 39% projecting that reported that they plan to increase their allocation to impact investing over the next 12 months. Looking to the future, 39% of respondents also projected that when the next generation takes control of investment decisions, they will increase their allocation to impact investing. Dr. Rebecca Gooch, Director of Research, Campden Wealth comments: ”Impact investing will be an important space to watch over the coming years. Our research shows that the next generation, and millennials in particular, are driving impact investing within the family office space.”
A spokesperson for Impact Investments at Avenue Capital Group concurs: “Family offices exist principally to maintain multi-generational wealth by pursuing investment strategies that support the legacy and reputation of the family. There has been a seismic shift in investment thinking due to the rise of millennials, reflecting their keen awareness of the risks and opportunities associated with a growing population, longer human life spans, rising per capita incomes, and the effects of climate change on food, water, waste, energy and other social imperatives.”
It is important to note that impact investing does not necessarily come with higher risk, and there are positive indications that healthy returns can be achieved. A 2018 study by the Global Impact Investing Network (GIIN) found that over 90% of impact investors reported that their investments were meeting or surpassing their projections.
Crypto is an entirely new and innovative asset class being incorporated into strategic planning, with a track record of extraordinary volatility and gains. Despite the current bear market, the number of funds investing in crypto is increasing, with more than 600 and counting. Funds like Andreessen Horowitz believe crypto will be the future of money, a new store of value or simply the next internet. Yet, this bet is accompanied by high risk. And that is where tools like sentiment analysis come in. Based on Big Data and AI, sentiment analysis quantifies which emotions move the masses, providing an edge to those who leverage it.
Bijan Farsijani, COO and co-founder of augmento.ai, comments: “Crypto and crowd psychology are strongly related. Markets experienced this firsthand during last year’s crypto bubble. Euphoria and FOMO (fear of missing out) fuelled the discussion about Bitcoin & Co. The word spread like wildfire and as a result, prices skyrocketed. Hard data on which sentiments dominate online conversations mitigates risk. It helps investors to assess whether to take caution versus if the hype can become a self-fulfilling prophecy.”
When it comes to investing, cash is not king. Family offices need to stay abreast of performance trends across all key investment categories when doing strategic planning to ensure optimum allocation of wealth and effective balancing of yields versus risk.