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Family office: family does not emphasize inheritance, only rewards

Recently, Citigroup Private Bank released a research report called “Global Family Office Insights in 2023″. The report surveyed 268 family offices around the world. Among them, 2/3 came from regions outside North America, and the total net worth of respondents reached 565 billion. Dollar. To assess global investment sentiment and portfolio changes in the context of geopolitical tensions, macroeconomic headwinds and market volatility.

**” Home Office moves away from the public market to fixed income and private equity “* *

Family offices have significantly adjusted their asset allocation strategies over the past year against the backdrop of a rebound in the U.S. stock market, fears of an unrealized recession and high bond yields. The survey results show that 51% of respondents increased their fixed income allocation, while only about 20% of respondents increased their allocation to the asset class in the previous two years; 38% increased their private equity allocation, a significant slowdown from the past two years.

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Changes in home-office asset allocation over the past year, source: citibank

Home offices have withdrawn from the public equity market significantly, with 38% of respondents reducing their public equity allocation, compared with 19% and 28% respectively in the past two years. Real estate allocation is the most stable, with 56% of respondents maintaining their current weight, while 29% increased their allocation and 15% decreased their allocation. For cash, 47% of respondents chose to increase their allocation, and 24% reduced the proportion of configuration.

Geographically, offices in Europe, the Middle East and Africa (67 per cent) and Latin America (60 per cent) are more willing to increase their allocation to fixed income assets. Smaller (AUM <$0.5 billion) family offices are more likely to increase their fixed income allocation while reducing their public equity allocation than larger (AUM> $0.5 billion) family offices.

Change in the value of the global home-run portfolio in 2023, Source: citibank

As recession expectations have not yet materialized, the value of the home office portfolio rebounded after last year’s losses. More than two-thirds of respondents reported an increase in portfolio value between January and June 2023, mostly between 0% and 10%. Despite the strong performance of the public market, more than a quarter of the respondents still said that the value of their investment portfolio has declined, and 12% of the respondents said that the decline was more than 10%. Losses are more common in Asia Pacific (36%) and even less in Latin America (18%).

**” Alternative asset allocation accounts for nearly half, continued bullish on private equity and fixed income assets going forward “* *

Average share of global home-based asset allocation in 2023, source: citibank.

The survey results show that home offices still favor alternative asset allocation, with respondents allocating an average of 46% of their assets to alternative assets including private equity & credit, real estate and hedge funds. At the same time, the proportion of cash is 12%, the proportion of fixed income is 16%, the ratio of public and private equity is exactly the same at 22%, and the allocation to private equity funds (12%) is slightly higher than that of direct investment (10%). Although hedge funds still play a diversified role in market volatility, investor interest in them remains low (4%). The allocation of private equity credit has increased (3%), and 44% of the family offices are optimistic about the future prospects of this type of asset.

Home Office allocation preferences for each asset class in the coming year, source: citibank

In order to continue to adapt to changing market conditions, the Family Office plans to further rebalance its portfolio over the next 6 to 12 months. Continued bullishness on mature market investment grade fixed income securities (45% of respondents), private credit (44%), direct investment in private equity (38%) and private equity funds (32%). Almost all respondents expect the portfolio to appreciate in the coming year. The factors they are most concerned about affecting investment include interest rates, inflation, geopolitical factors, and international relations.

Unlike institutional investors such as hedge funds, three-quarters said they use no (48%) or very little (25%) leverage. Despite mixed expectations for the open market over the next year, they still share a common preference for increasing exposure to the technology (69%) and healthcare (58%) sectors, followed by energy (28%), real estate (28%) and finance (27%) sectors, respectively.

**” The family office no longer cares about inheritance, only about returns, and the professional development is uneven “* *

For the family office, which aims to serve the family, training the younger generation to become leaders is the primary task of high net worth families, but this task is no longer important in the market downturn. Due to the volatility of the market, now they are mainly focused on one thing: return on investment.

When asked about their current focus, 74% of home offices chose wealth and 55% chose investment management. Only 21% of respondents chose the option of “promoting family unity and inheritance”, compared with 34% in 2022. This result is not surprising. “In challenging times, family offices often prioritize immediate needs at the expense of less urgent but very important priorities, as we observed during the subprime crisis or the pandemic,” the report said.”

More and more family offices have achieved specialization in investment management, but the progress of other functions has been inefficient, especially in the development of succession plans and the education of the next generation. According to the survey, only one third of the family offices have created such plans, while 52% of the families expect to complete the leadership transition in the next five years. For those who are not ready, the current situation poses a significant risk. Family offices that have successfully passed on three generations prioritize family unity and inheritance factors at almost twice the average (41%), and these families are usually more experienced and aware that they need to continue to solve key problems.

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With regard to the challenges ahead, the Family Office has more options to adapt to changing market conditions and to meet the needs and expectations of family members. In response, Citi pointed out in the report that it would be a mistake to focus only on investment performance. Family businesses are dynamic and ever-changing systems. The same is true for the home office. The more attention is paid to the past or established practices, the less adaptable it is. If you want to achieve everlasting foundation, in addition to investment ability, family trust, inheritance planning, etc. are still required courses.

(article source: haitou nationwide)

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