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Family office investments in fixed income or bonds have increased at their fastest rate in five years as the world’s wealthiest seek diversification and elevated yields.
Swiss bank UBS said on a global level, asset allocations in fixed income by family offices jumped to 19% from 15% in the previous year.
But, allocations among Middle East families were smaller, at 11%, as they preferred instead to maintain a real estate asset allocation of 15% compared with the global average of 10%.
Maximilian Kunkel, chief investment officer of global family and institutional wealth, UBS, said family offices have seen inflation and rates peaking, and many see fixed income as providing diversification, relatively elevated yields and a steady income stream, especially as the idea of potential rate cuts is gaining more traction.
UBS’s Global Family Office Report, which surveyed 320 family offices with total wealth of $600 billion, found that family office portfolios shifted to more balanced asset allocations, with the highest weighting of developed market fixed income seen in the five years since the report began.
Allocations to real estate declined at the time when commercial real estate prices in some regions have been falling, Benjamin Cavalli, head of global wealth, strategic clients, said.
While globally, fixed income has benefitted from the move away from real estate investment, in the Middle East, real estate is still “very elevated... as part of the regional bias towards real estate we have seen in the past”, Kunkel said.
North America has the smallest fixed income real estate allocation at 7%, while Latin America had the largest allocation at 34%.
The focus is on high quality bonds, UBS said, with 76% of assets allocated to high grade supranational or sovereign debt as well as investment grade debt.
Five-year bond terms are favoured, with 74% of family office bond investments being of that term, with very strong quotas of high quality short to medium duration with high yield stability and some sensitivity to falling policy rates.
At least 7% of allocations are going to terms beyond 10 years, which may partly be explained by the fact that 3% of those surveyed believe that negative interest rates will return in the US, and 73% believe real rates will stay higher for longer.
Concerns
Family offices are most concerned about major geopolitical conflict, climate change, inflation and rates for the next 12 months, but in the longer term they play a less prominent role, the report said.
Nearly half, or 48%, cited high levels of debt as a top concern over the next five years.
Climate risk is a top three risk for five of the seven areas surveyed – except for the US and the Middle East, where it does not appear as a top three concern.
(Reporting by Imogen Lillywhite; editing by Brinda Darasha)
