China's worsening economic slowdown is turning some family offices wary on investing in the market, and leading to intensifying concerns about a global recession.
As a result, they are opting for a more conservative asset allocation focused on maintaning liquidity.
“We are generally abstaining from deals that originate or have links to China and are more open to looking at deals involving US, Europe or Asia. We are abstaining from China as the long-term outlook remains unclear with the “rules of the game” prone to changes (for better or worse),” Bobby Koh, investment director at Singapore-based single family office Panoramic Capital, told AsianInvestor.
The family office places a high priority on liquidity so a large proportion of its allocation is in exchange-listed equities, with the US accounting for a bulk of that, Koh added.
It is considering a “greater weight in Asia (perhaps Indonesia and Vietnam) but suitable investments (in terms of liquidity and size) are few and not easily accessible to us”, he added.
As debate continues about whether the global economy will slide into recession, institutional investors are revisiting aspects of their investment strategies, particularly portfolio liquidity.
“Quite a few family offices that we speak to are very happy to sit on cash and equivalents in the short term, with yields exceeding 5%,” said Leo Lum, investment manager at Singapore-based single family office Khattar Holdings.
This chimes in with the views of Jeremy Lim, chief investment officer at Singapore-based single-family office KMXK Investments who recently told AsianInvestor that several single-family offices are choosing to hold more cash and treasury bills in their portfolio.
“This strategy reflects a belief that maintaining liquidity is paramount in the current investment climate,” he said.
Harry Pang, founder of multi-family office Fountainhead Partners, said family offices are also adopting a barbell approach to investments.
“In uncertain markets, our only tool is a more conservative asset allocation. We are a big proponent of the barbell approach to investing, and the ratio of the left (super conservative) and right side(aggressive) of the barbell is adjusted aggressively when markets are uncertain.”
The barbell strategy is an investment concept that suggests that the best way to strike a balance between reward and risk is to invest in the two extremes of high-risk and no-risk assets while avoiding middle-of-the-road choices.
Even in private markets, family office investors are turning highly picky, although there is a slight preference for private credit.
KMXK’s Lim is mulling private credit in developed markets, encouraged by the stronger governance structures, well-established legal frameworks, and robust reporting mechanisms typically found in these markets.
Private equity (PE), meanwhile, is the most appealing asset class for Khattar Holdings’ Lum.
“As a single-family office, we have a long duration time frame which allows us to take advantage of the illiquidity premium of PE investments, and with the adjustment in the market for valuations, we find the risk-reward profile now better than it was a few years ago.”
Kevin Teng, CEO of WRISE Wealth Management Singapore noted that infrastructure and technology are seeing growing demand for private debt and venture debt capital.
“Geographically Southeast Asia holds a lot of potential, with its dynamic economy and growth opportunities attracting foreign investors," he added.
Other family office investors also spoke about the high potential of Southeast Asia and India to AsianInvestor earlier this year.
According to a UBS Family Office 2023 survey published in May 2023, family offices in Asia (97%) rebalance their portfolio frequently, with most of them doing this at their discretion rather than systematically.
When it comes to the most challenging area of rebalancing – illiquid assets – family offices do not have a common approach. Some said that they drift from neutral weights and rebalance illiquid assets irregularly; others bundle liquid and illiquid assets together (forexample, private equity and equity), while only rebalancing the liquid assets, the report said..
Investors acknowledge private investments often have unique risk profiles that can't be captured fully by traditional performance metrics.
For most private investments, there will typically be a relevant public investment for comparison. After adjusting for liquidity and risk, private investment must return a multiplier of what public markets deliver over the same cycle, said Panoramic Capital’s Koh.
“As to what multiplier that is, it comes down to how much liquidity is worth to the investor,” he said.