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Wealthiest Families Show Growing Appetite for Direct Investments

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Family offices are reassessing traditional approaches to asset allocation, moving away from conventional approaches to portfolio construction, according to a new report from Family Office Exchange.

The likely reason for this shift, the study found, is family offices’ growing interest in direct investments in operating businesses and real estate.

Only 29% of offices that responded to a survey reported that they used quantitative modeling to determine asset class allocations and position sizes — a typical approach of many investment advisors, according to FOX.

And just 65% of participants said they relied on the traditional building blocks of asset classes (domestic equities and fixed income), while 35% considered other asset categories.

FOX attributed much of the move away from conventional portfolio construction to interest in direct investments. Of the 29% that said they continued to use a quantitative model, 42% excluded direct investments from the model-driven outcome.

Not only that, but 55% of all participating offices said they did not include direct investments in operating businesses in their asset allocation.

“The increasing appetite of family offices for direct investments is upending many of the traditional approaches to portfolio construction,” Kristi Kuechler, managing director of the investor market at FOX who oversaw the study, said in a statement.

“We are seeing a significant shift in how families approach asset allocation across the overall portfolio, which we expect to continue to evolve.”

Sara Hamilton, FOX’s founder and chief executive, noted that direct investing “gives family offices the opportunity to invest in companies that they expect to grow, seeking strong returns, often with a longer time horizon than private equity funds.”

Thirty percent of family offices in the study said they planned to increase the pace of their direct investments and only 10% planned to decrease it.

The survey, completed in January and February, asked 109 family offices about allocations and performance as of Dec. 31. The average investable asset base of those that completed the survey was $543 million, with 13% overseeing more than $1 billion of investable assets.

Eighty-four percent of family offices were headquartered in the U.S., 48% continued to have ownership of the original business that generated the family’s wealth, and 69% were led by the first and second generations.

Other Findings

Survey participants reported a 13.9% average portfolio return for 2017, with which 58% said they were very satisfied and 35% somewhat satisfied. By way of comparison, the MSCI All Country World Index returned 24% and the S&P 500 21.8%.

FOX said that given the last year’s robust global equity returns, it was noteworthy that family office participants’ average equity allocation held steady at 42% — 28% to U.S. equities and 14% to international ones — the same overall public equity allocation as at the end of 2016.

It said this suggested a careful rebalancing or policy of “selling winners” to ensure a consistent allocation.

Three-quarters of participating offices said they used an investment committee, nearly all of which had at least one family member, and three quarters said they had at least one external advisor.

The survey showed that offices that used an investment committee generated higher portfolio returns last year than those without, and were likelier to be very satisfied with their 2017 investment performance.

Survey respondents reported that 40% of their long-only publicly traded securities were managed actively, and 32% were managed passively through either an indexed mutual fund, a separately managed account or an exchange-traded fund.

Eighty-one percent of participants reported that they invested directly in real estate or operating businesses, with 47% investing directly in an operating business outside the family’s core business, if there was one.

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