Change is inevitable. But sometimes change happens faster than expected. This was certainly true in March 2020, when the pandemic swiftly and significantly impacted economies across the world. As we seemingly move past the eye of the COVID storm, thoughts turn to its consequences and how the world may change going forward. What comes next is uncertain, but something that investors must navigate. And for family offices, this could have a significant impact on strategic asset allocation decisions.
Greater allocations to alternatives increase portfolio risk.
The 2021 UBS Global Family Office Report shows that family offices maintain a risk-on mindset. In 2020, 40 per cent of family office assets were invested in alternatives such as private equity, real estate, and hedge funds. The latest findings show an intention to reduce low-yielding bond allocations in favour of even greater exposure to equities and alternatives. This points to family office portfolios taking on more risk.
According to Goldman Sachs, this increasing comfort with more illiquid investments reflects a need for higher return hurdles and long investment horizons. The expected returns offered by alternative assets appear to have become more attractive to family offices prioritising capital appreciation. This is especially true in the current prolonged low interest rate environment. But wealth preservation and diversification are also identified as top priorities.
The global economic recovery is on-going thanks largely to extraordinary support from governments and central banks. This appears to reinforce the above-mentioned risk-on outlook of family offices. But despite the optimism, several risks remain. Rising inflationary pressures and potential fiat currency debasement to name a few. And with family office portfolios moving further out on the risk curve, it’s natural to think about how to appropriately manage this. Multi-generational investing requires multi-generational diversifiers.
Gold may become increasingly relevant in future strategic asset allocation decisions
Family offices we engage with understandably ask us; when is the right time to buy gold? Although we cannot comment on market timing or provide price targets, we believe that a modest allocation to gold should form part of every investment portfolio, and that it will provide maximum benefits when held over the long term.
Given family offices’ focus on multi-generational wealth transfer, the value of an asset which is a proven store of value over time should not be understated. And gold is, after all, the oldest store of value known to man. What’s more, an allocation to gold could also serve as a ballast to increasing allocations to alternative investments and acting as a source of liquidity in the event of a stock market correction.
Investors are also keen to know if history can provide a guide to how gold may behave in the future? This is a more complex question and not one we can provide a definitive answer to. We can, however, help investors assess and understand the diverse drivers of gold and how it may behave in a variety of macroeconomic scenarios.
Looking at the current environment, many central banks have recently made a hawkish turn in the face of mounting inflation. Should CPI inflation indeed be more persistent than previously expected, history shows that gold could benefit. Our analysis has found that gold can be a valuable component of an inflation-hedging basket. Furthermore, continued concerns about a potential stagflationary environment could also benefit gold investment, helping to offset declines in other portfolio assets.
The benefit of owning gold is something that many family offices already recognise. According to the UBS survey, two per cent of family office wealth is kept in gold or precious metals. What’s more, a net 10 per cent are planning to increase their gold allocations in the next two to three years (table above). Goldman Sachs also highlights that investing in precious metals is a key strategy for family offices positioning themselves for continued low interest rates or an increase in inflation.
It is clear that for family offices capital generation and preservation are at the core of future strategic asset allocation decisions. But uncertainty and risk remain high. The trend of greater allocations to alternative assets looks set to continue, potentially making portfolios riskier in the process. As a result, appropriate diversification strategies, which could include gold, may become even more necessary going forward.
