At UBS, we spend a considerable amount of time studying global wealth trends and themes. For the last several years, one trend has been clear: there has been incredible growth in the ranks of the ultra-high net worth (UHNW), particularly in North America and Asia. In fact, in China alone, a new person attained billionaire status every week during the first quarter of 2015 .
As a result of this momentous growth, we have seen a rise in the creation of both single and multi-family offices in North America and around the world . At a high level, the growth of single family offices logically follows trends in wealth creation: the institution is ideally suited to families with $150 million or more in private wealth. As a family’s assets grow, it becomes prudent and cost-effective to establish a bespoke organization, governance structure and investment strategy. The evolution of multi-family offices – where offices manage or oversee investments of three or more families – is a newer trend, made attractive as member families can spread administrative costs over a larger pool of assets and may be able to pursue investment options jointly that no one family could on its own.
An offshoot of the wealth-creation trend, intergenerational wealth transfer is another significant driver of family office growth. This is a core purpose for family offices regardless of size, strategy, family business ownership, family complexity or geography. And it may become even more central to the business as, over the next 30 years, the global UHNW population is expected to transfer $16 trillion in assets to future generations .
UBS, in partnership with Campden Wealth Research, recently conducted the largest research study of family offices in history to better understand how client families are being served today as well as the trends shaping family offices for the future. The 2015 Global Family Office Report delivers our findings from studying 224 family offices around the world, 34% of which were based in North America.
SPOTLIGHT ON NORTH AMERICA
For the North American region, we identified three major trends:
• Family offices are taking on more risk, with offices searching for greater investment returns;
• Family offices are keeping it local, continuing to invest their portfolios primarily in domestic markets; and
• Family office costs are rising relative to prior years, which is attributable in large part to the hiring of additional staff to focus on new, specialized investment strategies.
Compared to the rest of the world, North American family offices typically manage a larger pool of assets: the 2015 Global Family Office Report found that average assets under management (AUM) were $926 million in North America versus $806 million globally. These assets tend to be invested more for wealth accumulation than preservation, in part because family offices in this region tend to be led by an entrepreneurial patriarch or matriarch, with a growth mindset. Accordingly, North American family offices’ portfolio mixes tend to differ somewhat from global peers, as described further below.
Historically, North American family offices have had a strong culture of charity, and that orientation continues today. To wit, three quarters of family offices in the region are actively engaged in philanthropy, a much higher proportion than those in Europe (the least likely to involve themselves in charity), Emerging Markets (Latin America, Africa and the Middle East) or Asia-Pacific. Those involved in philanthropy also give a higher percentage of their annual AUM to charity relative to global peers, amounting to approximately $36 million each year. But it doesn’t stop there – North American family offices care deeply about their charitable contributions creating a demonstrable impact, so we have seen an increased desire for measurement tools designed to track social impact.
PORTFOLIO STRUCTURE AND PERFORMANCE
As a result of differing investment objectives, North American family office portfolios do not look like those in other regions – they have a higher allocation to hedge funds (12% versus 9% globally), a much lower fixed income component (11% versus 14% globally), and significantly greater allocations to equities (29% versus 26% globally).
The average North American family office also typically holds 45% of their portfolio in illiquid assets, such as private equity, hedge funds and real estate, a much greater proportion than in the portfolios of high net worth individuals, due to the promising nature of alternative investment returns. Given the greater use of alternatives, North American family offices’ portfolios generally contain more outsourced investments than other regions.
Despite somewhat more aggressive allocations, out of all of the regions surveyed in the 2015 Global Family Office Report, North American family offices experienced the most significant decline in annual investment performance between 2013 and 2014, dropping from a 9.9% average total return to under 6%. Interestingly, family offices in Emerging Markets were the only group to see an improvement in investment performance last year, up to 4.9% versus 4.1% the year prior, beating the performance of developed market family offices in North America, Europe and Asia-Pacific.