Investors are replacing their traditional investment playbooks with a greater focus on active management and private debt and equity assets.
Australian family offices, which have an estimated $AU500 billion under management, are switching to more defensive strategies amid growing concerns about global economic and political turbulence, according to leading managers.
The increasing use of active managers and the stepping up their exposure to private equity are among the key changes intended to balance traditional strategies, which include a dominant exposure to public markets.
Theone Star, head of private wealth at Schroders Australia, says: “We are seeing a notable shift in how family offices approach portfolio construction. Inflation, unpredictable central bank policies and geopolitical risks have created an environment where traditional playbooks are no longer suitable.”
Schroders Global Investor Insights Survey, which involved 90 family offices worldwide, shows that investors are focusing on a balance between defensive positioning and strategic growth.
The major geopolitical concerns affecting investment decisions are US foreign policy and the possibility of an armed conflict between China and Taiwan, followed by political and military conflict in Europe and the Middle East. Other worries affecting investment decisions include uncertainty about interest rates and cyber security.
Robyn Langsford, global head of KPMG enterprise family business, adds: “The majority of family offices are actively moving away from traditional investment models.”
She says they’re increasingly preferring private debt, private equity and infrastructure, investments that give them greater control and less correlation with public markets, combining opportunistic high growth and defensive assets.
Jono Gourlay, head of wealth at Mutual Trust, the nation’s largest multi-family office consultancy, agrees political and economic uncertainty add to volatility for traditional assets, but warns there is “no one size fits all playbook when it comes to private market allocations for family offices”.
The survey by Schroders, a global asset management company with more than $AU1.5 trillion under advice and management, also found more than half of the family offices have a preference for private equity, where capital is invested directly into small or mid-cap private companies or used to buy-out public companies to take them private.
It also found most family office investors seeking income are considering direct lending and private debt, which is loans and credit provided to companies or assets that are not financed by banks or traded on public markets.
Nearly six-out-of-10 family offices identified “portfolio resilience” as their primary investment objective for the next 12 to 18 months. About half planned to reduce exposure to risk, while only 17 per cent planned an increase.
Star says: “Private assets provide access to high growth opportunities with lower correlation to public market fluctuations, but perhaps more importantly, these assets offer greater control over investments, which is particularly valuable in periods of market turbulence.”
Family offices are also increasingly looking to active managers because they can be more effective adjusting positions and identifying mispriced assets. The managers are selected with the aim of outperforming a benchmark or index.
Mutual Trust’s Gourlay says it is critical to understand what a family is trying to achieve and their needs, risk tolerance and investment knowledge.
“There is potential value to be sought from active management in private market asset classes – but manager selection is critical as so many of the fund structures are complex and lack transparency,” he says.
Factors for selection include the manager’s track record, transparency, fees, redemption terms, currency and risk.
KPMG’s Langsford adds: “The traditional ‘set and forget’ approach is less appealing for actively investing family offices today. Family offices are moving towards more dynamic, diversified and actively managed strategies that prioritise resilience and adapt to a world characterised by higher inflation, unpredictable policies and elevated geopolitical risks.”
Recent analysis by KPMG found there was a shortage of investment opportunities for big private capital in Australia due to market size and the level of private capital available.
Private capital is changing the rules by shifting away from the buyout models towards growth and capital models with lower deal sizes and longer terms, its analysis shows.
