The credit crunch has been felt far and wide. Europe’s single family offices, which manage the fortunes of some of the continent’s wealthiest families, responded to the financial crisis with a decisive shift from equities to cash in 2008. A culture of protection replaced a culture of growth.
Single family offices were not spared the pain of financial losses last year. A Merrill Lynch and Campden Research survey, published in March, revealed that the vast majority of single family offices changed their investment strategies as a direct result of market turmoil. That change was reflected in a pronounced shift in asset allocation, according to The Merrill Lynch/Campden Research European Single Family Office Survey 2009.
“The credit crunch has affected our world, not just our portfolio. Obviously, it has dramatic consequences for our assets and the way we manage them,” one German family office said.
The survey revealed that equities accounted for just 18 percent of the average portfolio in 2008 compared to 34 percent a year earlier. Cash made up 26 percent of the average portfolio compared to five percent a year earlier. Even investment in fixed income dropped to 10 percent from 13 percent as family offices opted to secure their assets in cash.
Family offices are regarded as long-term investors with limited churn between asset classes. It took a major financial crisis, sparked by the credit crunch, to spur them into transferring sizable holdings into cash.
The survey of 40 single family offices in 10 countries, including Germany, Switzerland and the UK, showed they intended to adopt defensive strategies in 2009 to weather the economic storm. Almost half of the offices surveyed – managing from €100m to well over €1.5bn – said their biggest concern was asset protection.
“The credit crunch is a once in a lifetime event. Significant decisions need to be made now that will have consequences for a generation or more,” one French CEO said.
The survey, based on research conducted between October and December 2008, revealed a shift towards traditional assets and away from alternatives. The average portfolio was split 55/45 between traditional and alternative investments in 2008, reversing the previous year’s stated intended ratio.
Investors displayed a far more defensive attitude to investing in 2008. More than 60 percent of the offices surveyed described the family’s investment objectives as ‘balanced’ or to ‘preserve’. A further 20 percent said the objective was to ‘preserve very conservatively,’ a sharp increase on the four percent who took this approach a year earlier. “We are seriously debating the whole idea of asset classes. Are we looking at asset classes the right way?” one Swiss-based family office said.
The survey also revealed some investment intentions for the years ahead.
Many single family offices surveyed did not seem to be entirely comfortable with their current levels of equity exposure. Almost at odds with all other responses, 28 percent felt that equities were under-represented in their portfolio. Twenty percent believed that private equity was under represented, and a further 20 percent believed that there was no under representation in their portfolio.
The survey also showed that family offices are considering decreases in some asset classes in the next three years, including cash and fixed income in favour of direct venture capital investments, fund of hedge funds, REITS and co-investment, particularly with other family offices.
The survey highlights that market turbulence has reinforced the view within single family offices that they should retain their market independence. Primary strategies for 2009 and early 2010 will include recruiting and retaining high quality talent, refining investment management, improving governance, reassessing relationships with service providers and upgrading risk management procedures, the survey shows.
Most respondents in this second annual survey were based in the UK and Switzerland. The trend towards setting up offices in both countries continued unabated with families expressing the wish to be close to significant and well regulated financial markets.
More than half of the offices surveyed have been formed since 1990. Almost three quarters of the offices operate with less than 20 full-time staff. The reason many families set up an office was to establish a professional wealth management operation while others were established in order to separate family and commercial affairs and increase confidentiality.
The sharp downturn in share prices and contraction in credit markets also sharpened the focus of single family offices on risk management and governance, as well as their relationships with financial services providers. While most family offices had not made any significant changes to their risk management systems in the past 12 months, many were planning to do so.
The survey revealed the shifting preferences of single family offices engaging financial service providers.
While ‘investment track record’ was the most important criteria for evaluating financial service providers a year earlier, it fell to fifth place in the latest survey. ‘Confidentiality’ was given prime importance this time.
The survey showed that the performance mantra was no longer the overriding issue for family offices which experienced a weighty drop in global equity markets and the collapse of major financial institutions.
“With the markets in flux and household names under the microscope, transparency became the key this year. Those service providers that couldn’t show transparency were cropped. No excuses,” one Dutch family office said.
Private banks topped the list of the most popular providers, followed by asset managers and investment banks. The majority (57 percent) of single family offices surveyed named private banks as a main provider, up from 36 percent a year earlier. Asset managers, who a year earlier were seen by 75 percent as a main service provider, dropped to 52 percent.
Just 31 percent mentioned investment banks as a major provider, down from 43 percent a year earlier.
In fact, transparency and scrutiny emerged as key considerations for family offices seeking a financial services provider, according to the survey. The survey also showed that family offices will be more demanding of their service providers, and put them under closer scrutiny in future. “There has been a sea change in how we view banks,” one Swiss family office said. “Transparency and scrutiny are the key words now.”
One clear message emerged from the survey about the outlook for 2009. It will be a year to ‘dig in’ and weather the storm. “The next 12 months are about controlling risk and protecting capital,” one British family office said.
The survey also showed that family offices expect the crisis to come to an end beyond 2009. But few believe it will be business as usual. Many expect that the preservation of wealth will be given a much higher priority, even in times of growth.
Family offices remain upbeat about their long-term future despite the global economic crisis. The survey shows that market turbulence has reinforced the view that it makes sense for family offices to retain their independence and operate outside banking and mainstream financial services. Only 18 percent of those surveyed said that the economic crisis made running a single family office less viable. In fact, some 41 percent said the crisis made running an office more viable while another 41 percent said it made no difference.
Protecting and preserving family wealth over generations will remain of paramount importance for most of Europe’s single family offices, the survey showed. Educating family members about finance and investment will be a cornerstone of a strategy to protect wealth, in good times and bad.
The turbulence in financial markets has challenged many assumptions, the survey suggests. But the rationale for family offices appears as strong as ever.
“Recent events have highlighted the reasons why families set up on their own in the first place,” one Scandinavian family office said.