The CIOs of British and mainland European family offices are reconsidering the scale of U.S. investments as geopolitical and economic uncertainty worsens. 

Lili Forouraghi, who leads BlackRock’s family office team, said that doesn't mean families are suddenly risk-off. Instead, “families are asking how to diversify their sources of alpha, focusing more on bottom-up portfolio construction, looking at correlations across portfolios, how much liquidity they hold and if their private market allocation is doing what it's supposed to do.” 

The End of An Era?

In June, Institutional Investor hosted the European Single Family Office Symposium in Lausanne, Switzerland, with attendees from across the continent. Paul Reynolds, CEO at Thamesis, an SFO based in London and chair of the event, told me that the two main questions on the lips of those in the Swiss sun was whether the era of U.S. market exceptionalism is over, at least until the next presidential election, and what is going to happen to the dollar.

“The big question was how you manage money when you literally don’t know what is going to happen every day. It's very hard to make decisions whether as a CEO of a business or running a family office or portfolio when there's so much noise and so much uncertainty,” he said. The question that most people at the event were debating, he added, is whether as an overseas investor without U.S. home bias should maintain an overweight position?

On balance, attendees were looking to reduce exposure to U.S. equities by a few percentage points. A poll taken at the event suggested around 40 percent in attendance have already done so, with a further 30 percent reducing exposure to the U.S dollar.

And for family offices with both a huge exposure to the U.S. markets and a reliance on pound sterling or the euro there is even greater risk: The currency risk that comes from the fluctuations between the pound and the dollar for those families without a natural hedge.

U.K. and EU investors will often buy dollars and then use those dollars to acquire U.S. equities, a process that has historically been advantageous, but that according to Reynolds “has been an absolute disaster” in the year to date.

Following the latest surge, the S&P 500 is up nearly 7 percent this year, but the currency fluctuation between the USD and GPB means the same index when measured in sterling is down by more than 3 percent. The NASDAQ yields a similar swing. In this scenario, simply because your home currency is the pound, you lose well over 9 percent of returns. For Reynolds this exacerbates the question – do you reduce exposure, do you hedge currencies, increase exposure to emerging markets or to Europe, or just hold on and hope for the best?

Family offices have the benefit of being able to take a long-term approach to their investments that others do not. As a result, it is no surprise that families in the U.K. and Europe are uncertain and pondering whether the value of looking beyond the next three and a half years and what a new administration might bring, asking if the signs are pointing to the end of U.S. exceptionalism for good or just for now.

With this potentially double-digit percentage swing for those investing in dollars versus those using dollars the U.S. markets remain an incredibly attractive place to deploy capital.

This article originally featured in the weekly family office newsletter, Officium. To subscribe please sign up here.