Everybody Back in the Water! Deep Diving the Family Office Investment Pool

The investment pool has been a lonely place since the advent of the financial crisis in late 2007. A few investors have supervised small children in the wading pool or nervously stood in the shallow end of the grown-ups’ pool, but until now, only a few have ventured into the deep end since the crisis began.

The latest research from Chicago-based Family Office Exchange, FOX Wealth TrendsTM 2011 Investment Survey, shows that the nervousness is abating and confidence is returning. Family offices are getting back into the water again and some are even willing to use the diving board, but perhaps not the high-dive just yet.

This is FOX’s fifth “deep dive” into family office investing habits since 2008 and the survey shows that confidence finally is returning. According to the report, approximately 85% of families reported that portfolio performance in 2010 either met or exceeded expectations. This strong performance is bolstering family office investor confidence and raising their expectations for future returns.

“As early as January of this year (2011) we observed that families’ confidence in the economy and financial markets was improving and, as a result, they are more willing to make important decisions about their families, businesses and financial assets,” says the report. “Strong actual and perceived investment performance is consistent with this observation: the median family office reported 12% annual pre-tax portfolio returns in 2010. For 2011, families are anticipating a median return of 8%, a figure that essentially mirrors the 7%-8% long-term performance target documented in FOX’s single-family office benchmarking for at least the past five years. In this statistic, at least, families seem to be expecting a return to normalcy,” says the report.

FOX researchers contend that as long as the economy can withstand the recent “soft patch,” families will forge ahead carefully and make investment decisions that previously were sidelined by uncertainty.

Cautious optimism is the mindset as family investors move forward, mindful of investment risk and risk management strategies. According to the report, more than 40% of survey participants cited “loss of capital” as the top risk they face in 2011, which shows that the steep recent losses of previous years remain in the forefront of their thinkng. Prominent in the FOX survey risk lists were: liquidity risksl inflation; general concerns about the U.S. economy; government policies; and geopolitical risks, which included Middle East turnoil and European debt defaults.

The FOX survey also indicates that family office investors are adjusting their portfolios to suit their new more conservative risk appetites. According to FOX, more than 25% of the respondents are shifting their portfolios toward greater liquidity.

“Nearly one in five offices—including many of those wary of further capital losses—are pursuing a more conservative approach to their investments. Given lingering concerns about the U.S. economy and government policies, nearly 10% of offices are shifting away from U.S.-centered assets,” says the report.

Furthermore, the survey shows that families are putting cash that was sidelined after the crisis back to work. According to the report, 52% of respondents will decrease their cash allocations in the coming year, while only 9% intend to increase cash holdings. Almost half of those surveyed will increase allocations to international equities in the next 12 months, while allocation patterns to hedge funds and private equity are less clear.

FOX research further indicates that 59% of family offices surveyed are in the market for alternative investment managers; 49% are searching for traditional investment managers and more than 25% of the investing families surveyed are seeking help from an outside investment consultant.

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