Family offices in Asia Pacific have been navigating one of the most challenging times in recent memory. COVID-19 has had a profound effect on society, economies and financial markets that is likely to leave a lasting mark.
With 2020 now behind them, family offices face multiple trends that have arisen from the pandemic as well as regulatory change, technological advancements and shifting demographics. Our recent blog “Shifting perspectives for Asian family offices” highlighted the changing attitudes towards fund domiciles, structures and technology.
Adjusting the investment mix
Investment portfolios are where a family’s objectives come alive, and it is clear that portfolios are being shaped by several trends that will be a focal point in 2021 and beyond.
Family offices at a global level are beginning to embrace sustainable and impact investing. According to the UBS Global Family Office Report 2020, 73% of all family offices have at least some assets invested in this way.
While sustainable investing has been a slower burn in Asia compared with Europe and the US, there is evidence that it is beginning to gain traction.
In the past 12 months, investment managers in the region have begun to witness stronger demand for their sustainably managed portfolios. The so-called generational shift is believed to be a major driver; younger family business leaders are more aware of the importance of sustainability in business operations and the wider world and are more personally engaged in ESG issues.
This influence from the younger generations is also related to the rising importance – and disruption from – emerging technologies.
Many of Asia’s wealthiest families built fortunes on traditional business ventures: real estate, heavy industry and manufacturing. While these sectors continue to be relevant, today’s economy is becoming increasingly driven by digitalisation, automation and artificial intelligence. This shift towards a digital future is not only disrupting traditional industries, but is spurring investments in technology such as automation and fintech.
At the same time, we are seeing family offices ratchet up the number of direct investments in their portfolios. A 2019 survey of family offices found that 11% of the average family office portfolio was invested directly, compared with 7.7% in private equity funds. Given that wealthy families in Asia are entrepreneurial by nature, it stands to reason that their investment managers will be doing the same. Indeed, in 2018 family offices in Asia Pacific held 15% in private equity direct investments.
Focusing on risk
Given the nature of the wealth they manage, family offices naturally place an emphasis on risk management, but this will no doubt be stepped up a notch given the economic turmoil of the past year.
At present there are several reasons for investment managers to feel nervous about client portfolios as stock markets sit near all-time highs, interest rates remain at rock bottom, government debt piles rise and the path of the COVID-19 pandemic remains uncertain. In this environment, diversification and risk management are paramount.
Research by UBS in 2019 found that risk management was the main priority for family offices. Against a difficult economic backdrop and the potential for a major market pullback, Asian family offices are likely to take a prudent approach to risk management, potentially shifting into liquid assets that offer lower risk and more stable returns where possible.
With more ultra-high net worth individuals than anywhere else in the world and the highest number of billionaires, family office numbers in Asia are also rising. This creates a two-pronged challenge: competition for both investment management and operations talent.
A family office’s purpose is to maintain control over family wealth so that it can be preserved and grown for future generations. However, the talent shortage in the wealth management and private banking sector means it may be difficult to fill vacant roles. One solution may be to expand training programmes to build and nurture emerging talent rather than hire from the existing pool.
Along with the talent conundrum, many families are finding the costs associated with launching a complex investment management operation are considerable. Even when the right investment professionals are in place, there are other functions that require staffing, such as administration and reporting.
For all but the wealthiest of families, the cost of these functions can be prohibitively expensive and it is for this reason that outsourcing is much more viable than building an entire team under one roof.
Succession and governance
Away from managing investments, perhaps the most important issue is how families make decisions about their wealth. However, as many wealthy families are only in their first or second generation, issues like succession and governance are relatively new concepts.
Succession planning is particularly important, as the question of who receives what, how it should be managed and when the transfer will take place can be hotly debated. But as Asia’s population continues to age – by 2040 it is estimated 16% of the population will over 65 – the question of succession cannot be ignored.
The good news is that Asian family offices are world leaders when it comes to succession planning. The UBS Global Family Office Report 2020 found that 70% of family offices in Asia are actively preparing for succession, compared with 50% of family offices in Europe. One reason for this may be the entrepreneurial and hands-on nature of families in Asia, who take a close interest in passing the torch to the next generation.
At Apex, we understand the unique needs of family offices. We provide flexible services for family offices that span governance, succession, reporting, administration and financial solutions. Tailored to your specific circumstances, we offer full-service capabilities through a global team of experienced professionals, underpinned by market-leading technology.
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