INTEREST rates have begun an upward climb to quell inflation and that has sparked market turbulence. But ultra-high-net-worth individuals with family offices are unfazed, says Tommy Leung, co-head of global family and institutional wealth Apac at UBS Global Wealth Management.
This is because strategic asset allocation - the broad mix of fixed income, equities and alternative assets - remains the guidepost for multi-generational investing. "When we speak to family offices, certain things hold true regarding the overall macroeconomic environment, which is that they still invest for generations, for the long term.
"Strategic asset allocation remains really the most important topic for them … That discussion and decisions don't change just because of short-term market volatility. Of course, tactical allocations, like sector and regional preferences, will move depending on the environment."
Leung is a veteran banker who has spent more than a decade at UBS Investment Bank and was previously head of credit sales for Apac.
He says a number of common objectives typically characterise family offices in Asia. One is the goal of diversification - away from the family's core business. "The clients we work with are billionaires and mostly first- or second-generation entrepreneurs of businesses. So, a large part of their wealth is still tied to a single company or industry.
"When they set up a family office the number one objective is to diversify away from their primary operating business.''
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A second objective is to professionalise the approach to the family office investments. "Ultra-high-net-worth individuals manage their own money and tend to focus on what they're good at. So they tend to invest in companies or sectors in the same industry." Professional managers ensure diversification by investing beyond a single industry or region.
The third objective is to create an avenue for philanthropic aspirations. "Philanthropy is very close to the hearts of our many big clients. They really want to give back to the society or their country. Perhaps they lack time to do due diligence on charities."
There is also keen interest in impact investing. The UBS Oncology fund, for instance, raised US$650 million globally, of which US$250 million was raised from Asian clients. The fund invests in private and public companies developing innovative treaments for cancer.
Leung recounts that a client sought to set up a family office to serve as a vehicle for impact. "He said he had already made enough money for himself and his family for generations. He wanted to return some of that and create a positive impact in the region."
He notes that the establishment of family offices in Singapore has gathered pace. Between 2017 and 2019, the number jumped fivefold, and nearly doubled from 400 at the end of 2020 to 700 in 2021. While he is unable to give details of the average size of family offices, larger ones may have assets of over US$500 million. Assets of smaller family offices may range between US$50 million and US$200 million.
Interest in private market assets has risen, he says, driven by what appears to be fundamental market shifts. "We've gone through 40 years of falling interest rates and in the last 10 years, very easy monetary policy. Now we seem to have shifted into a slightly different environment. No one knows how long this would last, but it's fair to say that the easy money has been made. Clients are fully cognizant of that. They realise that long-only investments may not generate the same returns as they have in the past 5 to 10 years. They're looking at uncorrelated private equity and debt, and also hedge funds."
Private equity, he says, is not simply about adding leverage, but about enhanced value creation. "PE firms can help companies create more value because they can hire industry experts, champions of the industry who can help day-to-day operations."
Some hedge fund strategies such as global macro may thrive on higher volatility.
Private market assets, however, are not immune to valuation challenges particularly as rates rise and the prospect of significantly slower economic growth looms. Leung says clients take these challenges in stride. "Most of our clients are pretty sensible and very much in touch with the economic and market environment. They know they have to reduce their return expectations given the uncertainty. At the same time they still demand some additional illiquidity premium for alternatives. I think it's fair to say that people expect high single digit or low-teens return on the less liquid alternative investments."
Interest in sustainable investments (SI) continues to rise, even as families seek to conduct more due diligence in efforts to discern greenwashing. The UBS Global Family Office report, published earlier this year, finds that 56 per cent globally have already made allocations into SI, and more than half (53 per cent) have also increased their due diligence, in a sign of growing professionalism. "Families want to take their time and learn about SI and see how things perform, whether the companies are truly sustainable. It's important to keep in mind that this is still a very new field. Even if a family office wanted to build capability in that area, they would struggle to find the right talent in Singapore."
UBS's flagship sustainable multi-asset portfolios have seen strong growth, more than doubling to US$5 billion, with almost 1 in 5 Apac clients invested in them. Within the UBS MyWay discretionary platform, there are now 17 sustainable building blocks clients can choose from, from around 10 in the past year, including low-carbon transition and green social and sustainable bond strategies.
Meanwhile, family offices are also understood to have dipped their toes into digital assets, including cryptocurrencies. Leung says around 1 in 4 clients has made a "small" investment into distributed ledger technology or cryptocurrencies. "The reason they invest in it is mainly to learn about the technology rather than make a monetary gain. This is on the understanding that if you don't have skin in the game, it would be more difficult to follow all the trends in development… We believe that monitoring the trends and understanding the underlying technology are the right approaches."
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