With stagnation in the West, wealthy individuals in the US are separating out Asia as an investment region from the broader emerging markets, and want access to increasingly high-level investment services there to grow their wealth. One challenge for family offices will be forming the right partnerships to provide this for their clients.

The economic rise of Asia-Pacific has created a burgeoning high net worth population which is set to overtake that of Western Europe by 2015, according to the latest estimates from Ledbury Research. Underlying this trend are growing enterprises and deal activity.

The US has always had a strong home bias when it comes to investing. By example, US equities accounted for 74 per cent of total equity allocation of US mutual fund investors in 2010, compared to only 40 per cent of the global market capitalization, according to Vanguard (click to view here).

This bias may be decreasing, and the ultra-wealthy will likely be at the forefront of this trend among individual investors. Wealth managers have been boosting their clients’ allocations to Asia-Pac. A survey in July by Scorpio Partnership and LPEQ found 84 per cent of senior investment professionals at wealth management firms expect to increase their allocation to these markets in the next 12 months.

“The ultra wealthy have not only a desire to invest in Asia, but a desire that’s increasing all the time,” says Charles Grace, a senior consultant at Family Office Exchange.

FOX’s latest study of its HNW members found that, “given lingering concerns about the US economy and government policies, nearly 10 per cent of offices are shifting away from US-centered assets.” Furthermore, 62 per cent of members are increasing allocation to Asian markets specifically.

Another point to emerge is that the ultra-wealthy are separating out “Asia” from international or emerging markets investments broadly, says Grace. “They want to separate and make a discrete allocation to Asia.”

According to Alan Harter, managing director of Pactolus Private Wealth Management, interest from US-domiciled clients are focused on how on-the-ground partnerships in Asia can be established. There is less interest in the traditional blind pool approach but “businesses that have already achieved a measure of profitability but are looking for additional capital to expand beyond Asian markets are attracting a lot of attention,” he says. From a cash management perspective, Pactolus’ clients are interested in integrating Asian currencies with their strategies.

Meanwhile, Michael Sonnenfeldt, founder and chairman of the high net worth peer-to-peer group TIGER 21, says that when it comes to Asia-Pacific, “despite very high allocations to cash and low allocations to public equities TIGER 21 members are still buying income-producing real estate, private equity deals they have a knowledge and understanding of, and market neutral hedge funds which have stood the test of time.”

Sonnenfeldt notes that while members are “deeply concerned about financial instability and political risk around the world they still have one foot on the gas even if the other is on the brake.” 

How are they gaining access?

Understandably, the most popular vehicles for gaining exposure to Asia are at this stage the more accessible ones such as ETFs and mutual funds, according to FOX. The exception is private equity, which completes the top three. When it comes to those vehicles which wealthy individuals are increasingly using to gain exposure, they are private equity, long/short equity and hedge funds, the same survey says.

“As time goes on they want exposure to high-level deals, and more time is being spent on vetting these,” says Grace. “Family offices are spending more time on this issue, and while previously families might have been content to have managers who had offices just in the centers such as New York and London, now they’re looking for managers who have offices in Hong Kong, for example.”

Building a capability

As ever, good investing will not be a case of jumping on the bandwagon. Just because Asia is growing, it doesn’t mean investment there will deliver returns. For instance, the MSCI EM Asia, which captures broad equity performance in the region, was down 16.44 per cent year-to-date at 20 September in US dollar terms. Its three-year performance was 6.57 per cent and its 10-year was 13.07 per cent.

On the private equity side, the first half of this year returned $11.7 billion to investors - the best six-month performance since 1998 – but was also rocked by natural disasters that threatened this performance and scandals over Chinese stocks quoted in the US, writes Asia Private Equity Review, demonstrating some of the difficulties of the region.

But if the stagnation in the West continues, as expected, sophisticated investors will want bottom-up knowledge on all kinds of asset markets, and perhaps one-on-one partnerships for business deals.

“It’s much more about getting the right partnerships and identifying the right people in Asia,” said Grace. “Building the right capability will take some time, it’s a growth part of [HNW individuals’] portfolios and we’re still at the phase of educating ourselves, and for this family offices are drawing on diverse sources – they’re talking to geo-political specialists for example.”

“The challenges are particularly acute because without credible on-the-ground partners, the probability of any measurable progress is very low. Outsourcing can only work to a certain degree. In our particular circumstances, on-the-ground partnerships from existing family relationships have helped establish our initial network,” says Harter. He adds that this has a much longer lead time, but results in more credible partners with real deal flow.

Peer-to-peer global networks

On the peer-to-peer front, it’s “more talk than action so far,” says Grace, but families do want to talk to other families when the alignment of interests is right. “We’re pure networking [at FOX] but we’ve had more interest globally – the challenge is finding that family with complementary interests,” he says. “It’s still in the early innings.”

Harter thinks there is definitely scope for this kind of service, “as long as one’s expectations are tempered with regard to short-term success.”

“Networks of this nature take a tremendous amount of time to foster,” says Harter. “We have found that by focusing on the specific needs of the family offices themselves and then seeking the appropriate partner has increased our success.”