Family offices are booming. Here's where the trillion-dollar powerhouse is putting its money

Published Thu, Feb 1 20246:58 PM ESTUpdated Sat, Feb 3 20244:34 AM EST

Family offices have boomed in the last few years, thanks in part to the growing number of wealthy individuals. There's been a surge in "extreme" wealth in the last three years alone. In the United States, billionaires are 46% richer than they were in 2020, according to a new Oxfam report . An Economist Intelligence Unit study showed that the combined holdings of billionaire populations jumped by over 10% in 2019 — reaching $9.4 trillion — with Asia showing the highest percentage jump in the number of billionaires. The ultra-high net worth population overall declined in Asia last year, but rose in India, while Europe and America recorded smaller declines, a 2023 study showed. The combined net worth of Asia's super rich population was at $12.13 trillion, above Europe's $11.73 trillion, according to the report. Family offices typically cater to investors with $100 million or more in net worth. According to a 2023 study by KPMG, 26% of family offices most commonly manage between $251 million and $500 million in assets, while 6% manage over $5 billion. A 2022 report citing various estimates said that family offices were managing more than $6 trillion in wealth. UBS told CNBC Pro that "family offices are planning the biggest modifications in strategic asset allocation for several years," adding that this comes "at a time when inflection points spanning policy rates, inflation and economic growth appear likely." CNBC Pro scoured recent surveys and spoke to family office operators to find out how they're allocating right now and in the next few years — in the face of major global shifts. Fixed income versus stocks UBS says the current trend among family offices is a return to fixed income as a diversifier, although stocks in developed markets remain the most important asset class. "Currently, the most favored diversification strategy globally is high-quality short-duration fixed income," said the bank, adding that family offices are planning to buy more developed market bonds over the next five years. "Family offices are also increasingly turning to active strategies: both through manager selection and/or active management within asset classes and hedge funds," it added. The table below shows how family offices are planning to change their asset allocations in the next five years, according to UBS' 2023 survey. Citi's survey of its family offices showed that while 45% planned to increase their allocations to investment grade fixed income in the middle of last year, the situation has changed. Fixed income paid higher yields at that point in time, but most family offices have started to shift toward higher-risk asset allocations, according to Hannes Hofmann, Citi's global head of the family office group. That's also in line with Citi going overweight on stocks in December for the first time since 2020, as it expects earnings growth to broaden across sectors, he added. Still, Ocorian, which provides family office services and has $270 billion in assets under administration, says that while it sees risk appetites increasing, the higher-return, higher-risk strategies are still being complemented by existing lower-risk fixed income investments. One type of fixed income that family offices are positive on right now is U.S. investment grade credit of long duration and high quality, it said. Robin Harris, head of Asia-Pacific at Ocorian, also said there is more hedging in portfolios now than two years ago, with clients using macro trading strategies tied to geopolitical uncertainty. Themes for the coming years What type of assets are family offices looking to buy in the next few years? According to Ocorian, Japan stocks are one area. "The emergence of Japanese equities in portfolios – almost no exposure 2 years ago versus now where it has become a consistent feature in client portfolios," said Harris. "The 'Japan thesis' is built around resurgent inflation, and resulting wage growth, which has created better purchasing power for Japanese corporates. Also better corporate governance." Japan stocks had a bull run last year, and it's continuing into this year , touching new 33-year highs. Other themes that family offices are bullish on include health care and longevity, the energy transition and generative artificial intelligence, said Citi's Hofmann. Overall, tech led the way as 63% of family offices stated it as their preferred sector to invest in, with real estate coming in second (42%), and health care in third position at 40%, according to Citi. Tech was the most popular sector in every region except Latin America. As for health care, family offices in the EMEA region (Europe, Middle East and Africa) and Asia-Pacific are more bullish, naming the sector as one of their top three to invest in — compared with just 26% in North America, according to Citi. UBS says that after planning to trim their allocations to real estate last year, family offices — mainly those in Europe, U.S. and Latin America — anticipate increasing them again in the next five years. "One reason may be that these are the regions where nominal interest rates are relatively high and have furthest to fall. By contrast, fewer Asia-Pacific investors see themselves increasing allocations," UBS said. Alternative assets are also becoming more popular with family offices, such as private equity, private debt and infrastructure, according to the providers. "Typically, family offices also see private equity as a way of accessing growth investments in sectors like technology that are not accessible through public equity markets," UBS said. Ocorian's Harris added, "Private Equity is a play on lower interest rates, given so much of the returns from this asset segment are driven by cost and availability of debt." Markets are largely expecting the U.S. Federal Reserve to start cutting rates this year, after a protracted period of hiking. Family offices are primarily investing in private equity by way of funds, according to UBS. "Generally speaking, funds deliver diversification and the ability to enter markets where the family office does not have in-house expertise," the bank said.