European single family offices are showing an increasingly strong preference for private banks as their external financial services provider, a Merrill Lynch survey has found, reflecting a significant shift in attitudes which is joined by some radical changes to typical asset allocations.

The Merrill Lynch/Campden Research European Single Family Office Survey 2009, which was carried out between October and December of last year, found that the overwhelming majority (68 per cent) of participating offices had changed their investment strategies as a direct result of market turmoil.

The most pronounced shift reported by the offices was a move away from equities and towards cash. Among the those surveyed, equities comprised 18 per cent of the average portfolio in 2008, down from 34 per cent in the previous year. At the same time, cash made up 26 per cent of the average portfolio, up from 5 per cent a year earlier. 

This flight to cash has become a ubiquitous theme in recent months as capital protection became prioritised over growth; accordingly almost half (48 per cent) of the offices surveyed by Merrill Lynch reported that asset protection was their primary concern.

“The single family offices have responded by moving away from equities and fixed income, to cash and other assets perceived to be safe havens in turbulent times,”said Gary Dugan, chief investment officer of Merrill Lynch Global Wealth Management for EMEA. 

The participants in the survey reported a markedly defensive attitude towards investments in 2008: 20 per cent of respondents said their objective was to preserve capital “very conservatively”, a sharp increase on the 4 per cent which took this approach a year earlier. In addition, more than 60 per cent of the offices surveyed described the family’s investment objectives as “balanced” or to “preserve.” 

This defensive emphasis is hardly surprising given the assumption that many family offices are likely to have sustained even more punishing losses than the average HNW investor. As Mr Dugan pointed out to journalists at a press briefing, UHNW investors tend to have a greater bias towards alternative and illiquid investments, and this, combined with a lower than average exposure to bonds, could make for losses in excess of 50 per cent.

In terms of asset allocation, Mr Dugan predicts that in future there will be an increased emphasis on strategic asset allocation. In his view a typical portfolio’s bonds exposure will have to increase from 10 per cent, while exposure to alternatives (including commodities) should be reduced from 50 to potentially as little as 30 per cent. He does however maintain that investors will be willing to go back to alternative investments, but perhaps only to the strong providers who can offer the right level of liquidity.

Among other findings, 57 per cent of the offices surveyed named private banks as their main financial services provider, up significantly from 36 per cent in the previous year, reflecting a marked shift in attitudes towards institutions and the criteria on which they are judged.

The rise of private banks has been met with declining sentiment towards asset managers, which were named the main external service provider for 52 per cent of SFOs, down from 75 per cent a year earlier.

Investment banks have also fallen out of favour - no surprise in light of the fate of Bear Sterns and Lehman Brothers. Just 31 per cent of the survey’s respondents preferred the services of an investment bank, down from 43 per cent the year before.

Strikingly, Merrill Lynch also found that confidentiality is now the most important criterion on which family offices evaluate their financial services provider.  While investment track record was the most important criterion a year before, in this year’s survey it fell to fifth place.

“No longer is the performance mantra the overriding issue for offices which have experienced a weighty fall in global equity markets, the collapse of household banking names and the drying up of credit, lending and financing,” said Campden Research chief executive, John Pettifor. “Transparency and scrutiny have become the new watchwords.”

The Merrill Lynch/Campden Research European Single Family Office Survey 2009 included 40 single family offices in 10 countries, 52 per cent of which were based in the UK and Switzerland. The offices surveyed managed from between €100 million (around $126 million) to over €1.5 billion.