Where the Family Office sector is headed
The last few years have been particularly intense for the Multi-Family Office (MFO) sector in Spain, with several corporate shake-ups and most Spanish investment banks selling their wealth advisory divisions. This has stemmed from the fact that this type of business increasingly requires economies of scale, both in terms of regulatory compliance requirements and for investing in analysis and a quality team.
Within the industry, we have been part of this consolidation and now we are seeing the advantages of belonging to a larger group, which allows us to be more focused on portfolio management and provide a better service to our clients. The tax burden on high-net-worth individuals is also becoming increasingly significant, which is why having specialised professionals within the team provides added value for the client.
In general, we are seeing that the Multi-Family Office model is becoming increasingly popular in Spain. It is a good alternative to traditional private banking, offering specialised management and advice to a small number of clients, with the peace of mind that the manager is working 100% in line with the client’s interest, with a more open architecture and without a specific product to sell. In our case, we focus on assets valued between 5 and 100 million euros and we have recently seen single family offices take us on because of the benefits of better economies of scale.
The situation has also changed on the investment side of things. Negative interest rates for nigh on a decade had generated great pressure to invest in illiquid assets; however, there are now good opportunities to invest in liquid assets that are also low risk. Fixed income is once again playing an important role in portfolios. Higher rates mean that the cash flows generated by many companies are going from the shareholder to the bondholder, which often makes debt more attractive than equity.
The family office structure allows for relatively quick adaptation to these changes, with the flexibility to rotate, for example, within the different alternatives offered by fixed income. This could range from investments as simple as the different deposits offered by banks, to more complex areas such as analysing the capital structure of different companies to determine which instrument would offer the most profitable investment.
Geopolitical changes in recent years have also had an impact on the asset allocation of portfolios. In 2024 there will be presidential elections in 70 countries, representing just over half of the world’s population. These include some of the world’s major economies, such as the United States and India.
Having observed the experience of Russia, where many foreign investors suffered heavy losses, we see how a number of family offices are more cautious when it comes to investing in countries under autocratic rule, with China being one example of a country in which many investors have lost a great deal of confidence.
On the other hand, family office portfolios also maintain a certain longer-term investment focus, which is extremely useful. It is often jokingly said that “economists have predicted 9 out of the last 5 recessions”, and since there wasn’t one in 2023, that makes it “10 out of 5”.
It was a year in which economists generally anticipated low returns for equities, as higher rates were naturally expected to slow the economy. However, other variables came together to push indices to record highs. Some corporate earnings continued to surprise on the upside, and inflation growth was subdued. Recent advances in artificial intelligence and new drugs to treat obesity led to strong market gains for some companies. All this contributed to a very positive year for stock markets. Although it is always difficult to maintain a long-term view, we find that the “wealth-focused” approach behind the family office model helps maintain some discipline, and some more stable stock market positions that are less influenced by short-term prospects. Here, investing through specialised equity funds that are focused on company fundamentals, rather than macroeconomic forecasts, has been a great help in keeping us on track.
Of course, while we cannot generalise, as every family is different, we find that the main concern of our clients today is how to preserve wealth and defend themselves in an ever more hostile global environment. An increasingly digital world has made news and data more immediately accessible than ever, but this glut of information has led to a polarisation of opinions and a great loss of depth of analysis. With this in mind, we believe that the role of a family office is to maintain a certain perspective and discipline to focus on investing in quality assets at reasonable valuations. In this context, we are seeing that after many years of index-based management, investing through independent managers who carry out rigorous investment analysis is once again adding value.
Published at Cinco Días 11.01.2024