The past few years have been marked by “great” trends. In labor, the Great Resignation was followed by the Great Reshuffling, as people moved between sectors. At the other end of the wealth spectrum, we have the Great Rebalancing, as 37% of ultra-high net worth families said they would rejigger their investments in 2023, and 27% say they will in 2024.
That’s the takeaway from UBS’s fifth and largest annual Global Family Office survey. It polled 320 family investment offices, with an average net worth of $2.6 billion, in seven regions of the world. Accounting for $600 billion of wealth, the survey offers a deep dive into how some of the wealthiest and best-equipped investors perceive business, economics, finance, the environment, tech, and geopolitics. It’s all the more relevant as family offices are proliferating.
“I think as they grow in popularity and prevalence globally, they’re going to increasingly be a leading indicator of what other investors are thinking, both ultra-high net worth investors, and probably high net worth investors,” said Jennifer Gabrielli head of the Ultra High Net Worth Solutions Group at UBS Wealth Management Americas.
Rebalancing Investments
So where is the money going? A big shift is moving cash to fixed income, growing at the highest rate in five years, mainly as government and high-grade corporate bonds. Returns have soared for bonds, after decades of doldrums, so the move is not surprising. But it is also an indicator of possible future interest rate changes. Family offices are avoiding longer-duration bonds, which are more vulnerable to interest rate shifts, and focusing on durations under five years. Globally, family offices allocated 19% of funds to fixed income. It was especially popular in Latin America, at 34%, but mild in the U.S. at just 7%.
The U.S., however, is going big in private equity, with it making up 35% of investments, vs. a global rate of 22%. “The U.S. saw a considerable increase in private equity allocation year-on-year,” says Gabrielli. “And even the starting point for private equity for U.S. family offices is already higher than global peers. So we’re kind of over-indexed.” Private equity investments mostly go to funds rather than direct investments.
For overall investing, manager selection and active management are on the rise, with 39% of family offices relying more on that route, up 4% from 2022. This indicates concerns but also opportunities for market volatility. “I think families are using that as an opportunity to take advantage of high-quality managers with good track records as part of the diversification play,” says Gabrielli.
There’s been more worry about real estate slumping, especially in the U.S. With other asset classes doing better, it’s natural for U.S. offices to shift money into other options, says Gabrielli.
U.S. Economic Exceptionalism
Another key differentiator for the U.S. is how popular it is for investment. Despite whatever pessimism there may be in politics and the press, the U.S. economy looks more promising than other regions to investors. This is backed up by other studies. Late last year Wilmington Trust issued “The makings of U.S. economic exceptionalism” report, arguing that a strong stock market, flexible labor pool (see Great Reshuffling), and innovative businesses will keep the U.S. ahead.
This comes as economies like the EU’s and China’s are slowing. Of the family offices polled, 16% said they expect to increase investments in Greater China (primarily PRC and Taiwan) in the next five years. The figure is 17% for Western Europe and 4% for Eastern Europe. But 35% of offices expect to invest more in the Asia-Pacific region (excluding Greater China). And 38% expect to pump more into North America.
U.S. family offices are the biggest investors, with 82% of assets going into North American investments. There’s another reason: It’s easier. “If the U.S. is doing fine, why do we need to invest somewhere else?” UBS quotes the president of a U.S. family office as saying. (The report features several quotes but doesn’t reveal who said them.)
Artificial intelligence is helping here, with giants like OpenAI, Google, Microsoft, and Meta, as well as a plethora of startups, based in the U.S. Seventy-eight percent of family offices (and 83% in the U.S.) say they are likely to invest in AI in the next two to three years. It’s followed, globally, by health tech at 70% and automation and robotics at 67%.
What Keeps the Wealthy Up at Night
There’s plenty of concern for where the global economy could be going, however. The biggest worry is major geopolitical conflicts, with 58% of family offices considering it a risk in the next 12 months—almost twice as high as worries of a global recession. Over the next five years, 62% of offices have that concern. The survey didn’t ask about particular regions or conflicts, though. These concerns gibe with The Global Cooperation Barometer 2024, a McKinsey and the World Economic Forum report, which cited “sharp declines in peace and security” as the greatest threat.
Climate change jumps to the number-two worry for family offices (one point ahead of a debt crisis) in the coming five years, with 49% of all offices seeing it as a risk (vs. 36% in the U.S.). As with geopolitics, the survey didn’t ask respondents to name specific areas of concern, but it says that “several family offices with large real estate holdings indicate that sustainability has become critical for them.”
Input from the (also anonymous) investment manager of a Mexican family office hints that keeping up with climate change is a big concern. “In Latin America, infrastructure for things like water does not develop as fast as in developed countries. It takes time,” they said. “If you can adapt the infrastructure to harbor resources, you can at some level mitigate the impact. If your infrastructure is 30–40 years old, though, the impact is huge.”
“Mexico has been in severe drought. And how does that impact how they’re thinking about everything from their investment portfolio—so the companies that are impacted by climate change, positively or negatively, as well as their philanthropic leanings, but then also their operating businesses,” says Gabrielli. (Worth, for instance, has reported on a huge effort by hedge funds to develop AI weather prediction to guide investments.)
Financial Upsot to Sustainability
Climate change also offers investment opportunities. These are spurred, in part, by sustainability regulations, says the report, again mentioning the real estate sector. Thirty-two percent of family offices said they want to focus on or better understand “net zero and the energy transition,” while 30% said that about “clean tech/green tech/climate tech.”
Wealthy families may be concerned about the environment personally, but for investing, it’s more and more about returns. “Close to two-thirds [of family offices] fully expect that, just because the investment is sustainable, or has an impact angle, it should still be getting a market rate of return,” says Gabrielli. “Maybe a couple years back, there was this concept [that] those might be at a discount. There’s no more discount.”
