How Family Offices Continue to Cautiously Invest Their Cash

Family offices maintain a “watch and wait” approach to their portfolios but for the third straight quarter, they shifted a modest amount of cash to a broad range of asset classes, according to Citi Private Bank.


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Investors who follow the portfolios of family offices — viewed as sophisticated allocators capable of making quicker decisions than institutions — might be disappointed to learn that the ultra wealthy are making few changes to their investments, at least on the surface.

Right now, most Wall Street forecasters (except those at Goldman Sachs) say predicting a recession is like flipping a coin. In line with the consensus, family offices maintain a “watch-and-wait” approach to monetary policy, the economy, and their portfolios, according to a Citi Private Bank report based on the third quarter activity of 1,200 single family offices with assets at the bank.

Generally, family office portfolios haven’t changed much recently at the asset-class level. Right now that means these investors have 46 percent of their total holdings in alternative investments, including private equity and credit, real estate, and hedge funds; 11 percent in public equities; 16 percent in fixed income; and 12 percent in cash, according to Citi’s latest annual survey of family offices.

But for the third straight quarter, most of the bank’s family office clients put a modest amount of cash to work. And the investments they’ve chosen are varied. “Fresh portfolio allocations that they made were far from evenly spread,” Citi’s quarterly report said. Offices slightly reduced their overall exposure to stocks and allocated more to investment grade fixed income. Private equity and real estate allocations changed little.

“Regardless of your investment view — whether you believe a recession is coming or you don’t believe a recession is coming, or you believe we are going to see a problem in the real estate sector, or you don’t believe that — fixed income and credit, on a relative basis, look more attractive compared to other asset classes at this point in time, it’s true,” Hannes Hofmann, the global head of the family office group at Citi, told Institutional Investor.

“And so what we’ve seen over the last 18 months is a move by family offices into fixed income and out of other asset classes,” he said.

Most families followed the advice of Citi’s global investment committee in the third quarter, which was 1 percent underweight cash, 1 percent overweight global fixed Income, and neutral on global equities.

But beneath the surface, some interesting things are happening within each asset class, Hofmann explained. While total fixed income allocations grew, most families leaned into investment grade debt and either maintained or slightly shrunk their allocations to high-yield, emerging market, and other bonds.

Families also followed the advice of Citi and expanded their investments in U.S. stocks by way of an equally weighted — rather than market cap weighted — position in the S&P 500. The index is up 18 percent in 2023.

“A lot of family offices realize the performance of the S&P 500 was in large part driven by the magnificent seven, the super large technology companies,” Hoffmann said. “If you take those out, the other 493 companies in the S&P were kind of flattish and we’re seeing the same trend with mid-cap and small-cap companies. If you’re a smart investor, given how much better the magnificent seven performed, of course you want to look now into ‘are there any buys’ if you want.”

The top 10 companies in the S&P 500 now comprise a record 31 percent of the index.

Other things are happening beneath the surface in family office portfolios. They are reevaluating growth versus value stocks and international assets versus domestic assets, and have a new focus on long-term investment trends.

Reports like Citi’s don’t typically detail more granular shifts on a quarterly basis, such as how much of a portfolio goes into active management versus passive funds, or thematic investments.

“I think what’s going to be important for the next 12 to 18 months is to look at a level deeper than just the broad asset allocation level and to look into how people allocate within the segments,” Hofmann said.