Rich Families Making Major Changes To Asset Allocation, New Reports Find

With the era of low interest rates and ample liquidity coming to an end, some of the world’s richest families have made (or are planning to make) major shifts in asset allocation, the new 2023 UBS Global Family Office Report shows. The survey, released today, covers 230 “family offices,’’ each handling investments for a single wealthy family. The families have a collective net worth of nearly $500 billion, or an average of $2.2 billion each.

The average portfolio breakdown of those surveyed in 2022 is 55% in traditional asset classes (down from 57% in 2021) and 45% in alternatives (up from 43% last year). But lurking below those broad categories is a more significant shift–away from private equity and towards long out-of-favor fixed income.

With yields on short-duration fixed income currently at more than 5%, a third of those surveyed by UBS are already holding such debt. Moreover, nearly half plan to make significant or moderate increases to fixed income holdings in 2023 and beyond.

“We’re seeing that liquidity is a big factor in decision making,” Charles Otton, UBS’ head of global family and institutional wealth for the Americas, tells Forbes. “We all got very used to money being free, but now people are valuing liquidity and adjusting their portfolio accordingly.”

A similar Global Family Office Report, released by Blackrock earlier this year, also shows that money managers for the rich tweaking their portfolios. Almost half of the 120 offices surveyed in that report said they planned to change investment strategy or make portfolio adjustments this year. Many have jumped into fixed income and private credit in response to the current market environment.

“By seeking maximum flexibility and leveraging a broad toolkit, portfolios can pivot nimbly across duration, regional and sector exposures in response to rapidly shifting conditions,” wrote Rick Rieder, BlackRock’s chief investment officer of global fixed income.

Family offices are shifting allocations when it comes to alternative investments. While U.S. family offices’ allocation to alternatives was roughly the same from 2021 to 2022 (declining modestly from 36% to 34%), direct private equity exposure dropped dramatically (from 24% to 14%), according to UBS. Meanwhile, allocation to hedge funds rose significantly over that same period (from 4% to 7%). This trend holds true globally as well: As uncertainty abounds in markets, there has been a reemerging emphasis on active over passive investment management.

While there is still some private equity exposure among family offices, most have been reducing direct private equity investments in the near-term, instead turning to PE funds, private debt and infrastructure. Rather than searching for brand new private equity companies, which are often riskier investments, family offices are now favoring private market businesses that have grown to a certain point and have some kind of EBITDA, Otton observes.

Many of those surveyed also plan to reduce exposure to real estate this year, the report found. “There is a general caution creeping in given higher rates and some softness—though more commercial than domestic residential real estate, where investment remains strong,” explains Otton. Over the longer term, however, roughly a third of family offices still plan to increase exposure in this sector once capital becomes more available and valuations are lower.

While allocations to emerging market equity have largely held flat in recent years, family offices plan to increase their exposure in that space throughout 2023 amid China’s reopening and an apparent peak in the U.S. dollar. Nearly half of their assets are still in North America, but the majority of offices plan to increase their allocations to Western Europe for the first time in years.

The UBS report also sheds light on the top concerns for family offices in 2023, with many remaining cautious about an uncertain global economic growth outlook. High inflation was the top worry last year, and while that was cited by many again, that has now been supplanted by geopolitical concerns at the top of the list, according to the survey. In the United States, however, people are much more focused on the state of the economy, with the likelihood of a recession as the biggest concern among family offices there.

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