Aside from navigating the unprecedented market volatility and economic uncertainty triggered by the ongoing pandemic, family offices have to deal with the impact of the war in Ukraine, surging inflation and rising interest rates on the investments.
“In their aim to secure long-term prosperity, many single-family offices (SFOs) are responding to today’s challenges in similar ways – such as shifting their investment strategy to preserving rather than growing wealth in an economic environment where inflation threatens to erode value,” says Thomas Ang, global head of family office services at Credit Suisse, commenting on the results of the Swiss bank’s latest survey on family offices.
About 54% of respondents in the survey cite investment strategy and asset allocation as among their top three challenges, while 47% cite achieving annual return targets.
The release of the SFO Survey Report 2022 coincides with the launch of the Credit Suisse Single Family Office Index, which tracks the financial asset performance of more than 300 SFOs across Asia, Europe and the Middle East.
According to the survey, based on a total of 116 responses from SFOs in 50 countries across Europe, Latin America, the Middle East and Asia, family offices have yet to find a solution to the age-old challenge of managing generational conflict. “The number one concern of SFO managers is the smooth transfer of wealth to younger family members, who may well have different priorities and risk appetites,” Ang notes.
More than half of SFOs (53%) are finding it hard to include the next generation in decision-making and managing the wealth transfer. In addition, 26% indicate that relationships within the family are a significant business challenge.
Regional differences are apparent when it comes to who makes the decisions. In Asia, 61% say investment decisions are made by selected family members while in Europe, this falls to 39%. By contrast, 50% of SFOs in Europe declare using formal investment committees as opposed to only 17% in Asia.
Younger family members are often pivoting towards ideas and causes driven by purpose – notably sustainability, innovation and transparency, the survey finds. Yet in some cases, they have no say at all (31%).
Environmental, social and governance (ESG) issues may not yet be a major influence on SFO investment strategy, with just under half of the respondents (45%) reporting that they do not allocate any funds to sustainable investments.
The reasons they cite range from it not being part of the family’s strategy (23%) to hard-to-measure performance (20%) and lower returns (11%). Risk as well as a lack of both sustainable investing products and opportunities are also cited.
Larger SFOs and those in EMEA, however, tend to invest more of their portfolio sustainably.
Meanwhile, the Credit Suisse SFO Index reveals than since 2020, large SFOs have outperformed their small and medium-sized counterparts with a cumulative asset growth of 15.8% as of July 29 2022. During the period, medium-sized SFOs have grown their assets in custody by 8.4% on a cumulative basis, while small SFOs have returned to their pre-pandemic levels on a cumulative performance basis, earning a cumulative 1.7%.
Year-to-date as of 29 July 2022, SFOs have on average lost 7.6% of their beneficial owners’ assets in custody at banks, with listed equities (-6.5%) as the key performance detractor and alternative investments including commodities (+0.7%) as the top performance contributor.
As of July 29 2022, the average asset allocation on assets in banks’ custody is 47% in equities, 29% in bonds, 17% in alternative investments and the rest in multi-asset investment solutions.
Large SFOs overall hold significantly more listed equities (62%) than small SFOs (45%). Moreover, large SFOs tend to hold less alternative investments in bank custody than small SFOs as they hold more in direct investments than small SFOs on average.
As a result of their higher equity allocations, large SFOs have underperformed small and medium SFOs year-to-date. This breaks with the trend over the last two years, where large SFOs outperformed small and medium SFOs for the opposite reason.
Regionally, Asia SFOs outperformed their European and Middle Eastern peers on a year-to-date basis.
The Credit Suisse index builds on a database consolidating more than 325 custodians and a large number of active-end clients with more than 300 SFOs tiered in three different size groups: small (less than US$100 million of assets under management), medium (between US$100 million and US$500 million of AUM) and large (over US$500 million of AUM), spread across Asia Pacific, Europe and the Middle East.