Family offices are planning the biggest shift in strategic asset allocation for several years with changing regional investment preferences with the need to navigate geopolitical concerns.  

Swiss bank UBS said the shift in asset allocation comes in light of potential inflection points across interest rates, inflation and economic growth .

Following the end of close-to-zero interest rates, balanced portfolios with active management are returning to favour, the bank said, adding that almost four in ten (38%) are planning an increase  in fixed market bonds over the next five years after four years of cutting back. 

The bank said family offices are also going to reduce real estate allocations in the coming year. 

Fixed income is now the most popular source of diversification, as more than a third, 37%, of family offices move to high-quality, short-duration bonds  for potential wealth protection, yield, and capital appreciation. 

Over the next five years, those surveyed still foresee greater allocation to risk assets, with 34% planning increases in emerging market equities following a peak in the US dollar and the reopening of the Chinese economy, the bank said.  

Hedge fund allocations have risen to 7% from 4% and in contrast, direct private equity allocations decreased to 9% from 13%. Family offices also plan to reduce real estate allocations in the coming year. Collectively, this is due to an increased allocation to private equity funds, private debt, and infrastructure.  

“This year’s report comes at a defining moment in time. It’s the end of an era for low or negative nominal interest rates and the ample liquidity that followed the global financial crisis. Against that backdrop, our research shows that family offices are making major changes to ensure they’re positioned for growth and success” said George  Athanasopoulos, Head Global Family and Institutional Wealth, Co-Head Global Markets at UBS.  

“While current market and geopolitical trends have prompted a shift to liquid, short-dated fixed income, 66% of family offices still believe that illiquidity boosts returns in the long-term and they ’re looking to further increase allocations to alternatives like hedge funds, private equity funds and private debt to further diversify their private markets allocations.”

Overall, family offices were cautious about current markets in the face of an uncertain growth outlook in developed economies, as well as tighter lending conditions and heightened geopolitical tension. 

Geopolitics overtook inflation as the top concern among family offices globally, followed by a recession and inflation. 

Family offices are also increasing their allocations in regions that have been less favoured in the past. While they still have almost half of their assets in North America, over a quarter are planning to increase allocations in Western Europe over the coming five years, and almost a third planning to raise and broaden their allocations in the wider Asia-Pacific region.

(Reporting by Imogen Lillywhite; editing by Daniel Luiz)