Asia-Pacific Family Office Report: Inflation impact forces a focus on alternative investments, real estate and equities

Family offices based in the Asia-Pacific region are increasingly adopting strategies to mitigate the adverse impact of inflation, according to the new Asia-Pacific Family Office Report 2022 by Campden Wealth and Raffles Family Office.

“Given concerns over inflation, rising interest rates, geopolitical risks and a potential forthcoming recession, family offices in Asia-Pacific have been moving more towards a balanced investment strategy this year, bucking a trend from last year where they shifted towards growth,” says Dr. Rebecca Gooch, Campden Wealth’s senior director of research. “That being said, the need for portfolio diversification is always at play, and family offices' highest returns have come from their more adventurous private equity and venture capital investments. In turn, while family offices are more careful about de-risking their portfolios this year, they are also likely to maintain a reasonable level of growth-oriented investments and to be on the lookout for opportunistic deals.”

The report found that 88% of respondents cited inflation as the biggest risk to financial markets (a marked increase of 19% from 69% in the 2021 Asia-Pacific report), closely followed by rising interest rates (72%) and geopolitical risk (58%). As a result, 42% of family offices are adopting a balanced investment strategy (an increase of 2% from 2021), while 30% are adopting a growth strategy (a decrease of 2% from the previous year). The remaining 28% adopt a wealth preservation-based strategy, a higher proportion than the global average (18%).

“To mitigate against inflation, family offices in Asia-Pacific have been increasing their exposure to real estate, equities and commodities, and reducing the duration of their bond portfolios,” says Dr. Gooch. “With that said, timing is critical since both equity and bond prices have fallen this year, so hedging strategies may have enjoyed only limited success.”

“As inflationary pressures persist in global markets, interest rates are being forced higher, with US and European economies on the cusp of recession,” says Chi-man Kwan, group CEO and co-founder at Raffles Family Office. “Family offices have started to hedge against inflation, with slightly over half looking for investment opportunities for diversification, and a growing number interested in increasing their allocation in direct investments in private equity.”

These inflation mitigation strategies have seen Asia-Pacific family offices increasing their interests in real estate (52%), equities (50%), commodities (29%) and reducing the duration of bond portfolios (34%). However, despite a more conservative investment approach, 54% of Asia-Pacific family offices remain on the lookout for new investment opportunities, with 42% indicating a preference for alternative investments.
 

Reflecting a wider global trend, family offices in Asia-Pacific have been adopting sustainable investing at a rapid pace in recent years.

“We have seen an increase in allocation to alternatives – about 20-25% of assets managed here are in non-traditional products, such as private equity, credit and real estate,” says William Chow, group deputy CEO at Raffles Family Office. “As diversification begins to gain importance, especially during times of market turmoil, we expect to see this figure continue to increase in the next few years, with family offices looking to generate alpha and achieve optimal risk-adjusted returns in comparison to public assets.”

The report found that 42% of family offices are now engaged in sustainable investing, with 29% of their portfolios dedicated to sustainable investments (up 4% from 2021 and 2% higher than the global average). This figure is expected to rise to 50% within five years. Concern over climate change has seen an increased concentration on green tech (62% of family offices already invested), but, in addition, digital transformation (52%), artificial intelligence (44%), biotech (42%) and healthcare (38%) are popular technologies which Asia-Pacific family offices support.

“Reflecting a wider global trend, family offices in Asia-Pacific have been adopting sustainable investing at a rapid pace in recent years,” says Dr. Gooch. “It has long been understood that the next generation is a key driver behind this. It is the emerging generation which is going to feel the effects of climate change more than any that came before it, and this has become a galvanising factor among those who see sustainable investing, mixed with sizeable private capital, as a powerful vehicle to combat it.”

This driven next-generation is also at the forefront of a major succession transition, with nearly a third of Asia-Pacific respondents expecting to see next gens assume control over the coming decade. However, the report found that, while 70% of family offices in the Asia-Pacific region have a succession plan in place (compared to the global average of 61%), three-quarters of these plans are relatively casual, being only informally agreed (18%) or unwritten (25%) or are in the process of development (32%).

“The research highlights the importance of having clearly defined and enforceable succession plans in Asia-Pacific,” says Dr. Gooch. “In a family environment, discussions of succession planning can be a sensitive issue, hence the prevalence of relatively casual plans. However, this can cause issues further down the line when succession takes place and next gens assume control. Families can mitigate this by training family members, other internal staff or engaging outside professionals to provide assistance.”

Click below to find out more about the Asia-Pacific Family Office Report 2022.