Investment banker Goldman Sachs has just released a report that takes a peek under the hood into how ultra-wealthy families invest. What we see is something quite different from the conventional portfolio of 60-per-cent stocks and 40-per-cent bonds.
The report, Widening the Aperture: Family Office Investment Insights , gathers insights from Goldman Sachs advisers and draws from a global survey of more than 150 ultra-wealthy families. Two-thirds of the respondents had assets greater than US$1 billion each; the rest had at least US$250 million each.
Nearly all of the families have hired their own investment professionals – often luring them away from investment bankers, even Goldman Sachs itself. The majority of the investment teams, called family offices, are lean, with 10 or fewer staff.
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Family offices provide the structure for ultra-wealthy families to invest directly on their own. An estimated 56 per cent do all their investing through in-house resources, 39 per cent use a hybrid approach and 4 per cent outsource everything.
The survey asked the families to select up to three investment priorities. More than 80 per cent said capital appreciation for multigenerational wealth transfer was important: Wealth preservation was 50 per cent, and 29 per cent was diversification.
The Goldman Sachs report breaks out the asset allocation of the family offices as follows:
- 31 per cent: public equity on stock exchanges
- 24 per cent private equity
- 19 per cent: cash and fixed income
- 11 per cent: real estate
- 6 per cent: hedge funds
- 4 per cent: credit
- 1 per cent: commodities
- 4 per cent: other assets.
This allocation has similarities to the Endowment Model originated by David Swenson, the chief investment officer for Yale University’s endowment funds from 1985 until 2021. Almost half are alternative assets, specifically private equity, real estate, hedge funds and private credit.
The alternative assets are mostly illiquid in nature, and not marked to market as frequently as assets on public exchanges. But they have provided diversification and returns equivalent to, if not better, than public markets – especially in the case of private equity.
Family offices are comfortable with the drawbacks of alternative assets since their investment horizons are very long. Also, most of the families acquired their wealth through such assets as operating businesses and real estate; as a result, they can be more hands-on investing in them.
Alternative assets address some of the families’ current priorities. As for the risk of resurgent inflation, hard assets such as real estate and precious metals can serve as hedges. For low interest rates, the cash flow from operating businesses is increasingly seen as a substitute.
“Family offices also have a barbell-like approach, with a high allocation to cash balances to compliment the high allocation to illiquid and alternative assets,” added one of the report’s authors, Sara Naison-Tarajano. “The result is that family offices can take advantage, as we saw during the March, 2020 downturn, of market volatility when other investors are forced sellers.”
“The small size of family offices in relation to assets is particularly instructive for the investment community,” adds Ms. Naison-Tarajano. This makes them more nimble, able to make quick decisions and be more flexible – thus enhancing their appeal as partners for companies seeking capital.
Further making them attractive as investment partners is the ability for their capital to be more risk tolerant and patient. Unlike hedge funds and institutional investors, there is no need to worry about such constraints as sudden withdrawals of funds, approvals from investment committees, quarterly benchmarks, or exit timetables for selling private companies or taking them public.
Only a few of the families are currently invested in cryptocurrencies but half are considering obtaining exposure in the future. One reason for caution has been questions about cryptocurrencies as a store of value.
Environmental, social, and governance (ESG) issues are at the forefront for a majority of the survey respondents. They are focused on implementing ESG in their philanthropic initiatives, workplace policies and investing strategy. This priority should intensify as technologies for ESG develop, and the next generation takes its place in the family’s decision-making process.
Goldman Sachs’ Widening the Aperture was an inaugural report and future editions aim to discover more about family offices. There is broad value in understanding more about them, as the favourable macroeconomic backdrop in place since the market crash of 2008 has led to an increase in the number of family offices and the capital they manage. Many of them have become significant players in financial markets, operating on par with other institutional investors.