Among the details, the study from the US private bank showed that larger SFOs increased exposures to equities, taking resources from cash holdings. Elsewhere, there was continued enthusiasm for alternative asset classes.

A Citi Private Bank study of 1,200 single-family offices worldwide showed that they switched cash into riskier assets in the second quarter of this year, suggesting that confidence in markets has returned.

On a global equal-weighted basis, the average cash holding was 30.1 per cent, and on a capital-weighted basis, it was 22.4 per cent. The decline from the first quarter was mainly led by the larger family offices, shifting holdings to fixed income and equities, the bank said. 

(In the equal-weighted methodology, each account included in the analysis is given the same weight in the calculation of averages. In the capital-weighted methodology, each account’s weight is proportional to its asset value, such that larger family office accounts have a greater bearing on the average calculations.)

Overall, SFOs boosted fixed income holdings, particularly on the higher quality end of the spectrum, for example in investment-grade bonds, such as government debt and debt issued by financial organizations. Investors have been locking in “attractive” fixed income portfolio yields for five to six years, at levels that are far higher than estimated cash yields for equivalent periods of time. 

The data sheds light on how single-family offices, often regarded as sources of “patient capital,” have been prepared to hold assets such as relatively illiquid private equity and property, as well as more liquid, and volatile, stocks. It is, perhaps, striking that cash holdings for many of those in the Citi Private Bank database are as high as one-third of the total, particularly in an age of inflation.

Risks and moves
While larger SFOs pushed some cash into the equity space, overall, family offices cut equity exposure in the second quarter, the 30-page report said. On an equal-weighted basis, allocation to stocks fell to 34.1 per cent from 34.9 per cent in the first quarter. Within the overall equities segment, developed small- and mid-cap stocks logged “significant” inflows, the report continued. 

The study also found that SFOs raised exposures to hedge funds, private equity, and real estate. With commodities, the pattern was mixed, with all regions apart from Europe, the Middle East and Africa seeing lower allocations. In these regions, holdings of gold rose.

In the report, Hannes Hofmann, global head, global family office group, at Citi Private Bank, and Shu Zhang, global head, global investment lab at the bank, said that so far this year: “2023 has surprised to the upside. The most widely forecasted recession in history has so far failed to appear. Stubbornly high inflation in many places has begun to retreat in the face of ongoing rate hikes from global central banks. Global Equities have pressed higher, adding a further 6.3 per cent in the second quarter of 2023.”

“Again, the technology sector powered ahead. In this environment, family offices put more of their cash to work on average. In every region, allocations to fixed income rose, with high-quality fixed income such as investment grade and US Treasuries now offering income that they have not for many years,” they added. “And while there was a slight retreat from equities overall, we saw increased allocations to private equity, real estate and hedge funds in most regions.”
 

Cash variations
Holdings of cash vary depending on what region family offices are in, the report found. 

On an equal-weighted basis, SFOs in Asia-Pacifc held the lowest proportion of cash (24.7 per cent), whereas those in Europe, the Middle East and Africa held the highest proportion of cash (33.9 per cent).

“Many family offices may be sitting on excess cash to fund tactical purchases of risk assets rather than as a core holding. However, such behavior is contrary to Citi Global Wealth’s investment philosophy. Our approach stresses upon building fully invested core portfolios for the long term. Particularly over longer periods, large cash holdings have exerted a drag on portfolio performance, albeit dampening volatility,” the authors of the report said. 

“Our strategic asset allocation methodology forecasts an annualized return of 3.4 per cent for this asset class over the next decade, lower than that for any other asset class except commodities,” they said. 

Citi’s tactical shifts
The US bank said that at the end of June, it was “neutral” on global equities, having been 1 per cent underweight at the end of March. On global fixed income, it is now 1 per cent overweight – previously it was 2 per cent overweight. It has kept its 1 per cent underweight position on cash.

“Within global equities, we have gone from neutral to overweight US small- and mid-cap, while trimming US large-cap and global pharmaceuticals. Given their lower valuations and the potential for US dollar downside, we also shifted holdings toward equities in Asia, Europe, and Latin America,” the bank said. “Within global fixed income, we have increased our allocation to emerging market US dollar debt by 2 per cent, where yields stand well above those of comparable US Treasuries. While still overweight the latter, we have reduced our holdings,” it added. 

The lender said its analysis is based on investment assets held by single-family office clients at Citi Private Bank. The bank’s family office group said that in definition terms, an SFO has $250 million or more in net worth and one or more dedicated professionals covering 1, portfolio of assets/investments and liabilities; 2, legal matters; 3, finance and accounting; 4, trusts and tax planning; and/or 5, philanthropy and foundations.