Market performance keeps family offices in equities

Multi-family offices are recommending their clients continue to make high allocations to equities, although this position has as much to do with the unattractiveness of other asset classes as it does with faith in global stockmarkets.

Equities have been the best-performing mainstream asset class for four quarters in a row, which is creating a somewhat old-fashioned feel among investors, explains Arthur Grigoryants, head of investments at Fleming Family & Partners Asset Management.

“They are asking why complicate asset allocation, why don’t you just allocate to equities? Our view is slightly different. Most of our clients appointed us to protect their capital, so they don’t necessarily have to be in equities. We added to equities early this year from a relatively cautious base, but then by April we scaled it back.”

He describes equities as the most attractive of some unattractive asset classes, although he fears a possible correction and is somewhat surprised by the strength of stockmarkets, and in particular their resilience during the US budget and debt discussions earlier this year.

“When we thought markets had run ahead of themselves in July, August and September, instead of selling equities we bought some put protection, so we protect 20 per cent of our equity allocation in every client portfolio through put options. If you exclude financials, corporate earnings have plateaued for the last 12 months, but prices are 20 per cent higher. So there is a lot of hope built into valuations.”

Nevertheless, Mr Grigoryants does see some opportunities in the equity asset class, particularly in emerging markets. Although FF&P AM is slightly underweight emerging market equities relative to its target as it has concerns over short-term developments and market sentiment, it believes they are the one market which is attractively valued. FF&P AM recently partnered with Investec to offer its clients a dedicated Africa fund to try to tap into the continent’s growth prospects. Mr Grigoryants recognises that investing in the region can be risky, but at least that risk brings with it the promise of decent returns.

Stonehage Investment Partners, which offers a full advisory service to around 40 families each investing upwards of $10m (€7.5m), remains overweight equities, despite what it believes to be average valuations and the clear risks evident in the market, because it  predicts an environment that will remain supportive of the asset class for a good couple of years, says its chief investment officer, John Veale.

“We pushed up our equity weightings when Mario Draghi came out and said they would save Europe, and equities have done extremely well since then. In the past couple of quarters we have been slicing a little off our allocations because the equity positions are growing by themselves,” he explains. “We aren’t at the limit of what we could allocate to equities, but are at the top of the range of what we would be prepared to do for where valuations are in the markets today.”

Private clients are showing an increased appetite for equities, believes Mr Veale, as many are recognising they were perhaps a bit too cautious post-2008 and were not using the full opportunity set in their portfolios. And as they raised their levels of risk, they went quite naturally into equities, he explains.

What really differentiates family offices from private banks or institutional investors is the ability to be more niche, says Ariel Arazi, managing partner and co-founder of Bedrock, which offers family office services to more than 60 clients. Although Bedrock remains cautiously optimistic on risk assets in general and on equities in particular, it is also keen on hedge funds.

“We believe we are entering an environment which will be less ‘risk on vs risk off’ and as such security selection will be much more beneficial than market timing,” he explains.

“One of the areas in which we have been very active since the beginning of the year is in our fixed income exposure, essentially trying to find innovative ways to earn attractive returns without taking significant interest rate risk and other typical fixed income types of risk.” 

Bedrock has done this by switching part of its fixed income exposure into senior loans and short-term corporate bonds, but also by allocating to certain niche areas, such as catastrophe bonds and peer-to-peer lending. “We have also invested recently in a Brazilian real estate project as well as in a European direct lending fund, which focuses on lending to SMEs mostly in the UK and Germany,” adds Mr Arazi.