Family offices have registered their best investment performance in five years as they upped risk in the pursuit of alpha.
According to the UBS Global Family Office Report 2018, which aggregates the performance of 311 family offices from around the world, returns increased nearly twofold in 2017.
The average family office investment portfolio generated an average return of 15.5% in 2017 versus 7% in 2015.
That was the strongest since UBS - in partnership with Campden Wealth Research - started measuring sector performance five years ago. The figure is also quite a bounceback from just 0.5% returned in 2015.
UBS described 2017 as 'remarkable', with around 95% of family office portfolios meeting, or outperforming, benchmark targets.
UBS head of global family office group Sara Ferrari (pictured below) said: 'Family offices have delivered their strongest returns since we began measuring their performance five years ago.
'This reflects the bull market, as well as family offices’ ability to take a long-term approach and embrace illiquidity.
She added: 'For the first time since we have been analysing this data, Asia has led the way on performance, benefiting from a relatively high exposure to developing market equities and the high number of private equity deals in the region.
'Following a path we’ve seen in other regions, we’re also seeing family offices in developing markets becoming increasingly sophisticated and institutionalised. We expect this trend to accelerate in the coming years.'
Upping the risk
The 2017 performance was fuelled by family offices moving further into equity investment, both on public and private.
Overall allocation to equity rose 4.8% over the year, primarily on the back of 3.8% rise in investment in developed market equities, with US portfolios the most favoured.
Equities now represent 28% of the average portfolio, with 22% invested in developed markets and 6% in emerging markets.
The decision to increase exposure to equities was a shrewd one, with developed market equities grabbing an average return of 23% and their developing counterparts 38%.
The year also saw a continuation of family offices' drive towards higher risk more illiquid assets in the pursuit for yield. As a result, nearly half the average family office portfolio is now invested in alternative investments.
Allocations to private equity rose from 18% to 22% over the year, with returns here rising from 13% to 18% of the year.
Direct real estate cemented its place as the third most popular asset class, with family offices adding on average 2.3% and the sector now accounting for 17% of the average portfolio.
Investment in hedge funds, which has been falling since 2015, fell by another 3.2% and accounts for just 5.7% of the average family portfolio.
'Amid concerns over weak performance and relatively high fees, allocations to hedge funds declined for at least the fourth consecutive year,' the report said.
Despite the decline in allocation, hedge funds have produced their best performance since 2013, with the average return standing at 7.3%.
Rise of ESG
One third of family offices are now engaged in sustainable investing, according to the report.
As part of this trend, impact investing has experienced a particularly significant increase in participation; the amount of family offices making such investments has increased from one quarter in 2016 to one third in 2017.
The most common areas of investment are education; housing and community development; agriculture and food.
On top of this 45% plan to increase their sustainable investments over the next 12 months.
Looking further ahead, 39% of family offices projected that when the next generation takes control of their families’ wealth, they will increase their allocation to sustainable investing.
Campden Wealth director of research Dr Rebecca Gooch added: 'Impact investing will be an important space to watch over the coming years.
'Our research shows that the next generation, and millennials in particular, are driving impact investing within the family office space.
'This is key as we are on the precipice of a major generational transition set to take place over the coming 10 to 15 years. This could result in the growth and transformation of the impact investing arena.'