Geographical diversification is becoming a bigger theme among family offices as wealthy investors look to manage risk.Nathan Denette/The Canadian Press
Geopolitical uncertainty and technological advances are leading family offices to revisit their asset mixes more than in previous years.
Sixty per cent of family offices surveyed plan to make strategic asset allocation changes, according to a report from UBS Wealth Management. That’s up significantly from 35 per cent last year and 31 per cent in 2020.
Voyt Krzychylkiewicz, managing director and head of global family office at UBS Canada in Toronto, says several market factors, including sovereign debt issues, are causing family offices to rethink their approach. He notes that 307 family offices were surveyed from 30 markets worldwide between late January and late March.
Globe Advisor spoke with Mr. Krzychylkiewicz recently about holding capital in other jurisdictions, managing risk and inflation and why heirs are less involved in family offices.
Reviewing asset allocations isn’t new, but significantly more family offices seem to be doing so this year. Why?
Both growth opportunities and risk appear to be driving this increased rebalancing of portfolios. The environment has become uncertain, between geopolitical tensions, higher rates and inflation and elevated public market valuations in the U.S.
We’re seeing geographical diversification potentially becoming a bigger theme, with Canadian groups considering moving beyond the North American market. Within Canada, we’re seeing increased interest in developed-market equities and emerging-market equities, Asia in particular.
What surprised you from the survey?
It was interesting to see that families are utilizing several jurisdictions for custody of capital. That’s particularly relevant for Canadian and U.S. family offices where there tends to be a bigger home country bias in terms of investment and custody of that capital.
Increasingly in Canada, we’re having conversations with clients who want to custody capital in other jurisdictions, particularly in Europe. That’s not a tax-driven initiative but motivated by prudent risk management and for access to investment opportunities in other markets.
What other trends have you observed for Canadian family offices?
This broad idea of portfolio resilience and risk management is top of mind in Canadian family offices. There’s increased interest in uncorrelated asset classes, including conversations on hedge funds, quantitative investment solutions, and commodities.
There’s also been a shift toward improving liquidity for family offices, as many closed-end fund vehicles have been slow to return capital. Europe and emerging markets have gained more interest for those looking to diversify geographically.
Canadians are concerned about a higher inflationary environment, so there’s a focus on real assets such as infrastructure. Real estate in Canada is still not garnering a huge amount of interest but there are discussions about whether we have seen it bottom and whether it’s becoming an investable asset class again.
What other new areas are family offices considering where they might have been reluctant before?
AI is seen as a structurally significant trend that’s going to reshape a lot of industries. Themes within AI are going to continue to evolve. Quantum computing and AI applications in sectors like healthcare are good examples of this. Defence, robotics and infrastructure are other themes that came through in the report.
Although your report found that most family offices have a succession plan, the heirs aren’t as involved as they could be. Why?
It’s a persistent challenge for family offices to figure out how to engage the next generation while at the same time build out the institutional investment approach and the family office structure. It’s finding where the heirs want to be involved, where they can add value, and at the same time evolve the governance and institutional approach to investing.
The first generation tends to maintain a lot of the control around decision-making, but over time, they transfer that decision-making to professionals they’ve hired within the family office.
The question for the next generation becomes: What part of the decision-making structure do they want to be involved in? For some, it’s maintaining the family legacy through philanthropic means. For others, it may be getting involved in some aspect of the investment process.
Families need to figure out the governance process that allows multiple people to get involved in the decision-making process. That’s not just the second generation, but it’s also investment professionals and other advisors who may be around the family.
What does the Canadian family office universe look like?
In Canada, there are roughly 100 billionaire families. That’s typically where single-family office structures would be prominent. Broadly speaking, research suggests around 250 single-family offices in Canada of varying size and structure.
This interview has been edited and condensed.