Campden Wealth survey reveals disappointing European family office returns

European family offices have failed to secure the returns they expected this year. As a result, their focus is shifting to wealth preservation instead of growth for the foreseeable future.

The results of an annual survey of European family offices conducted by Campden Wealth have revealed the lowest returns on investments in the first half of 2012 in the past five years.

Single family offices (SFOs) have managed to make 3.6% on average in that period, while multi-family offices (MFOs) have been even less successful with 2%. These figures mark a significant decline from returns of around 8% reported in the previous year.

Since the onset of the financial crisis, family offices have shifted their allocations from traditional equities and bonds to real assets and riskier investment options.

For the first time since the report was launches five years ago, real estate has become the single largest asset-class for SFOs, with property allocations double those of MFOs. They have also opted for other direct investment options, such as cash and commodities.

But this shift in allocations has proven a mistake, as cash and real estate have underperformed this year compared to both higher yielding assets and even government bonds.

Andrei Postelnicu, director of research at Campden Wealth, commented: “Before the financial crisis, family offices were at the cutting edge of smart allocation to new asset classes, such as hedge funds and commodities, often securing oversized returns.

“The message from our survey this year is that family offices now find it much more challenging to outperform, not least given an understandable need to manage portfolio risk and maintain long-term investment strategies.”

The focus on risk management has increased this year, the survey shows. Family offices are more concerned about due diligence now than previously and take governance into account when choosing an external investment option or financial service provider.

However, the increased volatility of the markets is causing a shift to a shorter time horizons on investments in order to preserve wealth.

One UK-based SFO commented in the survey: “We’ve not performed as well as we would like or need to sustain our growing family’s needs.

“When we conducted an analysis of our investment style we found that we had broken some of the fundamental principles of investing that have serviced the family very well over the years – this hasn’t delivered the right results. We are shifting our style back to what works best.”

But this shift in focus does not necessarily mean low risk investment options. For example, MFOs have increased allocation to emerging market from 14% in 2011 to an average of 20% this year, reflecting a continued need for yield pickup through riskier allocations.

Their allocations to other “risky” investment options, such as hedge funds, are also higher that SFOs. In the next three years, they are expected to hold around 8% in hedge funds, while allocation of SFOs is expected to drop to 0%.

Attitudes to risk also differ depending on how close the investor is to the sources of European turmoil, the report reveals.

The annual report, entitled “Back to business – Family Offices Adapt to the New Normal”, is in its fifth year. It surveyed a total of 60 single- (SFOs) and multi-family offices (MFOs) across Europe, each managing assets worth between €50m and €1.5bn.

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