The global investment portfolio of family offices returned only a meagre 0.3% last year, a plunge from 6.1% in 2014 and 8.5% in 2013. According to The Global Family Office Report 2016 by UBS and Campden Wealth Research, the sharp downturn was caused by poor returns from a variety of asset classes.

“The lower performance reflects generally weak to woeful returns from a variety of asset classes, including the mainstay of fixed income and equity, as well as weakness in commodities and hedge funds,” says the report.

Philip Higson, vice-chairman of UBS Global Family Office Group, says the largest negative impact came from liquid market instruments. For instance, the report notes that the benchmark performance of developing market equities was -16.9% and developed market equities was -2.7%.

Last year, every asset class underperformed expectations, including cash. The report says it would not be surprised to see a substantial downwards expectation across the various asset classes for this year.

The various investment strategies of family office portfolios managed to perform as expected last year. Growth strategies produced the strongest returns (1%), followed by balanced (0.2%) and preservation (0.1%) strategies.

“Family offices pursuing growth strategies have significantly more invested in private equity, which enjoyed a relatively strong performance during the period,” says the report.

Higson says in this difficult environment, family offices will continue to focus more on illiquid investments, such as private equity and real estate, to boost their portfolio returns.

In terms of asset allocation, the report found that the pattern of switching among family portfolios is set to continue, with more money going into private equity going forward.

Looking at family offices that participated in the research in both 2015 and 2016, the report found that holdings of the average portfolio of family offices in private equity (including venture capital and co-investing) rose to 22.1% this year. This is in comparison to 19.8% last year.

Meanwhile, equities and fixed income both slipped in prominence. Bonds fell 1.5% while equities fell 0.6% in allocations. Both of the asset classes produced negative returns in 2015 in developed and developing markets, which weighed heavily on the overall performance of family office portfolios that year.

Family portfolios are expected to further reduce their holding in developed market fixed income and hedge funds. Hedge funds saw a decline, from 9% last year to 8.1% this year, amid concerns over poor performance and high fees. The report also acknowledges that there are increasing doubts among wealthy families about the ability of hedge funds to generate alpha going forward.

Across the globe, Europe produced the strongest performance for wealthy families, with an average return of 0.6% on their portfolios in 2015, due to their large real estate holdings and private equity.

This is followed closely by North America with an average return of 0.3%, Asia-Pacific at 0% and emerging markets excluding Asia-Pacific at -0.6%. The report says the latter two regions were impacted by the weak performance of developing market equity and fixed income markets.

In the last few years, there has been more interest in impact investing, although the actual uptake did not live up to the hype. The data from this year’s report, however, shows that impact investing is finally coming of age in the family office space.

According to the report, more than half (61%) of the family offices today are active or likely to be active in impact investing in the foreseeable future. One of the key catalysts for the change is millennials, with two-thirds of family offices agreeing that those with children born after 1980 will see an increase in requests to participate in impact investing.

Additionally, nearly half of the family offices (47%) believe that impact investing is a more efficient use of funds to achieve social impact than traditional philanthropy. However, opinions are equally divided as to whether impact investing carries more risk than philanthropy.

Philanthropy is still well established in the family office space, with fairly similar levels of philanthropic engagement this year by the participants compared with last year. The average level of philanthropic giving by family offices is 2.5% of their assets under management over the past 12 months.

In the past, investment risk was viewed as the most serious form of risk, taking precedence even above family data and confidentiality risk, banking/custody risk and family reputation risk. Investment risk used to attract the highest level of internal oversight, external oversight and written risk management procedures, policies and guidelines when managing family offices.

This year, however, there is an increase in controls being put in place to manage “family data and confidentiality” and “family reputation” in the current age of digital communication. The report found that 69% of family offices now have internal oversight for family data risk and confidentiality while 62% have this in place for family reputation risk.

Successful family office succession is a key and looming priority, with 15% of family offices expecting a generational transition in the next five years and 43% in the next 10 years. Only two in five (43%) executives participating in the study have personally experienced a successful transition, pointing to a number of factors including a willing and able next generation, an older generation prepared to give up control, and a flexible and trustworthy family office.

The report has been an annual study conducted by UBS, a Swiss global financial services company, and Campden Wealth Research since 2013. Now in its third year, the study involves 242 family offices, 75% of which are single-family offices.

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