Family Office
Single-Family Offices Dug Into Cash As Risk Appetite Rose – Citi Private Bank Study
Among the details, the study from the US private bank showed that larger SFOs increased exposures to equities, taking resources from cash holdings. Elsewhere, there was continued enthusiasm for alternative asset classes.
A Citi
Private Bank study of 1,200 single family offices worldwide
showed that they switched cash into riskier assets in the second
quarter of this year, suggesting confidence in markets
returned.
On a global equal-weighted basis, the average cash holding was
30.1 per cent, and on a capital-weighted basis, it was 22.4 per
cent. The decline from the first quarter was mainly led by the
larger family offices, shifting holdings to fixed income and
equities, the bank said.
(In the equal-weighted methodology, each account included in the
analysis is given the same weight in the calculation of averages.
In the capital-weighted methodology, each account’s weight is
proportional to its asset value, such that larger family office
accounts have a greater bearing on the average calculations.)
Overall, SFOs boosted fixed income holdings, particularly on the
higher quality end of the spectrum, for example in
investment-grade bonds, such as government debt and debt issued
by financial organisations. Investors have been locking in
“attractive” fixed income portfolio yields for five to six years,
at levels that are far higher than estimated cash yields for
equivalent periods of time.
The data sheds light on how single-family offices, often regarded
as sources of “patient capital,” have been prepared to hold
assets such as relatively illiquid private equity and property,
as well as more liquid, and volatile, stocks. It is, perhaps,
striking that cash holdings for many of those in the Citi Private
Bank database are as high as one-third of the total, particularly
in an age of inflation.
Risks and moves
While larger SFOs pushed some cash into the equity space,
overall, family offices cut equity exposure in the second
quarter, the 30-page report said. On an equal-weighted basis,
allocation to stocks fell to 34.1 per cent from 34.9 per cent in
the first quarter. Within the overall equities segment, developed
small- and mid-cap stocks logged “significant” inflows, the
report continued.
The study also found that SFOs raised exposures to hedge funds,
private equity, and real estate. With commodities, the pattern
was mixed, with all regions apart from Europe, the Middle East
and Africa seeing lower allocations. In these regions, holdings
of gold rose.
In the report, Hannes Hofmann, global head, global family office
group, at Citi Private Bank, and Shu Zhang, global head, global
investment lab at the bank, said that so far this year: “2023 has
surprised to the upside. The most widely forecasted recession in
history has so far failed to appear. Stubbornly high inflation in
many places has begun to retreat in the face of ongoing rate
hikes from global central banks. Global Equities have pressed
higher, adding a further 6.3 per cent in the second quarter
of 2023.”
“Again, the technology sector powered ahead. In this environment,
family offices put more of their cash to work on average. In
every region, allocations to fixed income rose, with high-quality
fixed income such as investment grade and US Treasuries now
offering income that they have not for many years,” the said.
“And while there was a slight retreat from equities overall, we
saw increased allocations to private equity, real estate and
hedge funds in most regions.”
Cash variations
Holdings of cash vary depending on what region family offices are
in, the report found.
On an equal-weighted basis, SFOs in Asia-Pacifc held the lowest
proportion of cash (24.7 per cent), whereas those in Europe, the
Middle East and Africa held the highest proportion of cash
(33.9 per cent).
“Many family offices may be sitting on excess cash to fund
tactical purchases of risk assets rather than as a core holding.
However, such behaviour is contrary to Citi Global Wealth’s
investment philosophy. Our approach stresses upon building fully
invested core portfolios for the long term. Particularly over
longer periods, large cash holdings have exerted a drag on
portfolio performance, albeit dampening volatility,” the authors
of the report said.
“Our strategic asset allocation methodology forecasts an
annualised return of 3.4 per cent for this asset class over the
next decade, lower than that for any other asset class except
commodities,” they said.
Citi’s tactical shifts
The US bank said that at the end of June, it was “neutral” on
global equities, having been 1 per cent underweight at the end of
March. On global fixed income, it is now 1 per cent overweight,
previously 2 per cent overweight. It has kept its 1 per cent
underweight position on cash.
“Within global equities, we have gone from neutral to overweight
US small- and mid-cap, while trimming US large-cap and
global pharmaceuticals. Given their lower valuations and the
potential for US dollar downside, we also shifted holdings toward
equities in Asia, Europe and Latin America,” the bank said.
“Within global fixed income, we have increased our allocation to
emerging market US dollar debt by 2 per cent, where yields stand
well above those of comparable US Treasuries. While still
overweight the latter, we have reduced our holdings,” it
added.
The lender said its analysis is based on investment assets held
by single family office clients at Citi Private Bank. The bank’s
family office group said that in definition terms, an SFO has
$250 million or more in net worth and one or more dedicated
professionals covering 1, portfolio of assets/investments and
liabilities; 2, legal matters; 3, finance and accounting; 4,
trusts and tax planning; and/or 5, philanthropy
and foundations.