Citi report: Family offices shifting out of cash into other asset classes
As the widely forecast recession fails to appear, high inflation starts to retreat and global equities pushed higher in the second quarter, family offices have responded by putting more of their cash to work with increased allocations to fixed income, private equity, real estate and hedge funds, according to Citi Private Bank's latest Family Office Investment Report.
Below is an excerpt of the report:
The second quarter saw family offices display both an appetite for risk and a desire for high-quality yields. Inflows occurred into fixed-income and alternative-asset classes. Family offices also slightly reduced their high allocations to cash during the period.
For the second quarter running, fixed-income allocations increased. On an equal-weighted basis, the average allocation rose from 21% to 21.9%, and 14.7% to 15.5% on a capital-weighted basis. Family offices continued to favor high-quality debt, with developed investment-grade bonds seeing net dollar inflows. High-quality fixed income not only provides potential diversification to an investment portfolio but also can be an important source of income. Most of the activity within investment-grade bonds centered on government issuances and financials. This is in line with Citi Global Wealth’s tactical view on bonds. Investors have been locking in attractive fixed-income portfolio yields for five to six years, at levels much higher than estimated cash yields over the same horizon. Activity was mixed in high-yield and emerging-markets fixed income — except for Asia, where high yield saw slight positive net dollar flows. The other regions had muted activity in this subasset class.
On average, family offices decreased their exposure to equities, with the global equal-weighted allocation slipping from 34.9% to 34.1%. That said, some family offices with larger asset holdings at Citi Private Bank increased their allocations from 55.9% to 56.3%. Most of the outflows related to developed large-cap equities. However, developed small- and midcap equities received significant inflows with activity centered on financials and communications.
ALTERNATIVES AND COMMODITIES
Global allocations to each of hedge funds, private equity and real estate increased over the previous quarter. On an equal-weighted view, the combined allocation to these three asset classes rose from 12.2% to 13%.
The picture in Commodities was mixed: All regions saw reduced allocations bar Europe, the Middle East and Africa, where average holdings went from 1.7% to 1.8%, driven largely by increased interest in gold.
Family office clients worldwide trimmed their overall Cash holdings during the second quarter as compared to the previous quarter. On a global equal-weighted basis, the average holding was 30.1% (figure 1) and on a capital-weighted basis, the figure was 22.4% (figure 2). The equivalent figures at the end of the first quarter were 30.9% and 23.5%. The reduction was principally driven by family offices, with larger asset holdings at Citi Private Bank continuing to deploy some of their cash into fixed income and equities.
Despite the reduction in cash holdings on a quarter-on-quarter basis, these allocations are well above those in our benchmark strategic asset allocations. For example, our global allocation in U.S. dollars with hedge funds and 15% Illiquids (private equity and real estate) at Risk Level 3* (“reference allocation”) has a 2% weighting in cash (figure 3).
At the regional level, we continue to see wide variation in cash holdings. On an equal-weighted basis, family offices in Asia Pacific held the lowest proportion of cash (24.7%), whereas family offices in Europe, the Middle East and Africa held the highest proportion of cash (33.9%). This pattern was also true on a capital-weighted view.
Many family offices may be sitting on excess cash to fund tactical purchases of risk assets rather than as a core holding. However, such behavior is contrary to Citi Global Wealth’s investment philosophy. Our approach stresses upon building fully invested core portfolios for the long term. Particularly over longer periods, large cash holdings have exerted a drag on portfolio performance, albeit dampening volatility. Our strategic asset-allocation methodology forecasts an annualized return of 3.4% for this asset class over the next decade, lower than that for any other asset class except commodities (figure 4).
- This analysis is based on investment assets held by single family office clients at Citi Private Bank. Citi Private Bank’s Global Family Office Group considers a single family office to have US $250 million or more in net worth and one or more dedicated professionals covering 1, portfolio of assets/investments and liabilities; 2, legal matters; 3, finance and accounting; 4, trusts and tax planning; and/or 5, philanthropy and foundations.
In the equal-weighted methodology, each account included in the analysis is given the same weight in the calculation of averages. In the capital-weighted methodology, each account’s weight is proportional to its asset value, such that larger family office accounts have a greater bearing on the average calculations.