The lockdown measures undertaken by organisations and companies worldwide to limit the spread of the COVID-19 pandemic disrupted activities in the marketplace leading to a stock market crash. The 500 wealthiest individuals, despite suffering an initial decline in wealth, collectively saw their networth increase by USD 813 billion.
According to Blackrock Global Family Office Survey of 185 family offices around the globe, three-quarters of the family offices weathered the uncertainties of 2020 without making major changes to their portfolios. Furthermore, Fox Global Report -which surveyed 117 family offices with an average investable asset base of $747 million- reported that 33% of respondents surveyed in May 2020 had a positive outlook for the year, and 44% of the offices saw the economy improving by May 2021.
Here are five trends shaping the family office sector in 2021:
’Cautious but Opportunist Investment Outlook
Family offices remain strategically cautious in the face of the still reverberating economic impact of the Covid- 19 pandemic. While the full implication of the pandemic remains unclear, there are bound to be significant changes in the fiscal and monetary policies, which will produce long-term impact on economic growth, interest rates and corporate fundamentals. Despite these, only 23% of the companies surveyed by Blackrock Global intend to make material changes to their allocation as a result of the pandemic, 38% have a slightly negative outlook on the market while 37% are neutral.
As investors seek to preserve wealth while taking advantage of opportunities in the market, there are four considerations:
a. Portfolio diversification: Family offices are increasing allocation to alternative asset classes, highlighting private equity, private debt, real estate and hedge funds as their preferred means of greater diversification. Family offices across all geographical regions intend to increase their Asian exposure, particularly in Chinese equities, through partnership with ground resources.
b. Liquidity management: Family offices are critically evaluating their liquidity for operations, private equity capital commitments and capitalization on anticipated volatility in the market.
c. Global Equity Market Valuations: According to the Blackrock Global, many family offices believe that central bank liquidity injections have obscured the true health of corporates and equity markets and remain watchful on the sustainability of these companies.
d. Inflation: Family offices, concerned about the long-term ramifications of the fiscal and monetary stimulus injected into the economies, globally, are paying more attention to inflation-hedging assets such as gold, inflation-linked bonds, real estate and infrastructure.
Increased Reliance on Technology
The interest in technology is fostered by an increased need for more transparency and a growing expectation of better real time data to drive decision-making. Technology will help to meet the demand for better reporta cyberattack, the most common forms of attack being phishing, malware and social engineering respectively.
Northern Trust’s 2020 Family Office Benchmarking Survey found that cybersecurity was the number one concern for global family offices in 2021 ahead market volatility, geo-political uncertainty and succession planning. Family offices are expected to prioritize the implementation of a cyber security strategy to mitigate significant attacks, including staff education and awareness training.
According to a Campden Wealth survey, 24% believe that incorporating sustainability considerations will lead to better investment returns, and at least, 75% of the family offices are planning to increase their exposure here.
Blackrock Global reports that “sustainable investing is more prominent in EMEA with an average with an average 22% invested in sustainable strategies, 14% in the US, 7% in Asia and 3% in Latin America. Of those family offices investing in sustainable strategies, 34% rely on exclusion policies, 56% use specific sustainable strategies and 38% have adopted sustainability as a key component of their investment risk assessment.”
As awareness increases of the real financial impact that environmental, social and governance issues have on the long-term
The emerging technologies recommended the most for the family office environment are robotic process automation (RPA) and blockchain. RPA software enables user-led automation to perform rules-based, repeatable tasks that previously required humans to perform. Some common tasks include data entry/form population and account reconciliations which when combined with machine learning and artificial intelligence it can be used, for example, to gather tax information and populate tax forms. For family offices operating a wide ecosystem of advisors, bankers, custodians, attorneys etc., a private blockchain is recommended as an affordable and elegant solution to fostering collaboration.
Family offices looking invest in technology should consider the following questions to make an appropriate decision about what is right for them: what is the long-term strategy; what are the roadblocks and challenges to achieve that strategy; what are the required capabilities and what do we need to do better/quicker/ safer, and how can technology help.
Cybersecurity Remains a Growing Concern
As the need for and relevance of technology increases in the family office and with UHNIS, so do the concerns on data privacy and security. According to Campden Wealth 2019, 20% of family office executives confirmed that they have experienced
sustainability of a business, investors recognize values, legacy as well as financial profit in making investment decisions, and this trend is being driven by the next generation of family members.
Despite this interest, the lack of a common framework which makes the assessment of investment opportunities more difficult remains a barrier to entry.
Family offices are ramping up efforts to become more professionalized according to Fox Global Investment Survey, 2020. Of the 117 family offices surveyed, over 45% of them have hired a Chief Investment Officer, (up from 43% in 2017); 86% use at least one external investment advisor; 68% have an investment committee, and 56% of participating family offices have some type of (formal or informal) investment policy statement for some or all of their family members, averaging eight customized investment portfolios. These are hikes compared to previous years and the trend is expected to last as family offices continue to make more strategic decisions to benefit the business.
Heading into 2021, the overarching sentiment is one of caution. The unforeseen challenges in the wake of Covid-19 pandemic have prompted family offices to diversify their asset classes as well as geographically. At the same time there is a feeling that family offices need to be more opportunistic in the coming months to take advantage to tap into growth opportunities outside their core focus.