Ultra-wealthy Asian families' love of emerging markets may prove painful

[SINGAPORE] Asian family offices' love of emerging markets may prove painful in 2018.

Family offices in the region have the highest allocation globally to equities in developing markets, according to the 2018 Global Family Office Report published Tuesday by UBS Group AG and Campden Wealth. Developing-market fixed-income exposure, meanwhile, lagged only family offices located in places such as South Africa, Lebanon and Central America.

"Family offices are favoring higher risk, more illiquid investments in the pursuit of alpha," the report said. "And with developing-market equities grabbing an average return of 38 per cent and developed-market equities 23 per cent, this asset class deserves the spotlight."

Until recently, that is. While both developing-market equities and bonds performed well in 2017, this year they've struggled amid concerns ranging from tighter US monetary policy to Argentina's fiscal woes and political upheaval in Turkey.

After soaring 34 per cent in 2017 in its biggest yearly gain since the global financial crisis, the MSCI Emerging Markets Index is down 9 per cent since January. Bloomberg's Barclays Emerging Markets USD Aggregate Total Return Index has slipped 2.8 per cent after rising 8.2 per cent last year.

That could upset Asian family offices' returns, which averaged 16.4 per cent in 2017. According to the report, Asia's richest clans have 14 per cent of their portfolio allocated to developing-market equities versus 3.9 per cent in Europe and 4.5 per cent in North America. Their allocation to emerging-market bonds, at 6.9 per cent, is also higher than most other regions.

While risk-taking might be a strength of Asia's family offices, generosity isn't. The average European family office gave US$6.4 million to philanthropic causes in 2017 compared with US$1.3 million in Asia. One reason might be "because they chose to give via a route other than the family office," according to the report.

Succession planning is still a pressing issue in Asia, with just 39 per cent of family offices in the region saying they have a plan in place. That compares to 47 per cent in Europe and 42 per cent in North America. About 20 per cent of Asia's family offices have no plan at all.

Within Asia, Singapore has seen more growth in the number of family offices. The city-state is attractive because of its legal system and quality of life, the report said.

BLOOMBERG