# Investment strategies for uncharted waters

Surrounded by unprecedented risks, family investors in Asia are looking to extract any available upside from a tricky environment

In a year that has seen the onset of a pandemic, a near-global economic shutdown and a highly contentious US election, it should come as no surprise that market volatility has been – and remains – relatively elevated.

However, even before these tumultuous events, many wealthy family investors across Asia were becoming more careful with their investments – wary that the longest bull market in history had to end sometime. Their prudence proved well judged when storm clouds started gathering over global markets back in March.

“Family offices were a little bit cautious, even pre-Covid‑19, because it was late in the economic cycle,” says Anurag Mahesh, Singapore-based co-head of global family office coverage for Asia‑Pacific (Apac) at UBS. “So they were already better positioned going into March.”

Fast-forward to the end of the year and private wealth clients are continuing to favour investment solutions that provide them with downside protection, while also retaining some upside exposure. This sentiment has translated into growing interest among the family office client segment in market-neutral and liability management strategies, as well as market access structures such as actively managed certificates.

China has been another focus for family offices, given the strong performance of Chinese stocks this year. Apac family offices are already very active in China but, with recent relaxations to China’s qualified foreign institutional investor scheme, family offices across the region are now looking closely at new investment opportunities in the China market.

This report takes a closer look at the reasons behind each of these emerging trends, and explains how such solutions can serve family offices with the tools they need to navigate a new and challenging investment environment.

### Overpriced

Ask any of Asia’s family office executives about the key challenges and pitfalls facing them in today’s investment environment, and a common theme quickly emerges.

Family offices are concerned about an uncertain economic outlook; anxieties that the strong rally seen in global equity markets since the Covid‑19-driven crash in the first quarter of 2020 has done little to assuage. In this mindset, decisions around which assets or securities to invest in becomes a complex predicament.

“Valuations are pretty lofty across a lot of asset classes – that’s generally what is bothering me,” says Lawrence Lee, chief investment officer of Singapore-based independent asset manager Sino Suisse Capital. “And if you go underweight [on equities] you tend to miss out on the performance.”

Manisha Bhargava, chief executive of Singapore-based Straits Investment Management, which manages money for Straits Trading Company, is wary that equity markets cannot rally in perpetuity. “We’re hedging a little more than we would normally, because the stock markets have had a great run,” he says.

In portfolio allocations, the uncertainty precipitated a flight to quality in the first half of the year. According to UBS’s Global family office report 2020, based on the findings of a survey conducted between March and May, family offices ramped up their exposures to cash, but also to gold, real estate and developed market bonds, as well as equities and private equity.

Kerri Lim, head of global family office sales, global markets, Asia‑Pacific at UBS, says a number of global family office clients have increased exposure to private equity, private credit or real estate, reasoning that these assets are providing a better risk/reward outcome compared with public assets in the current environment.

UBS’s survey of family offices reveals the extent to which reallocation to better-performing assets has been a focus among global family office clients in the past year. In what was a busy trading period, roughly two-thirds of respondents (65%) reallocated up to 15% of their portfolios. Here investors were split into two camps: opportunistic investors exploiting market dislocations and those more risk-averse, who are looking to reduce pro-growth exposure by adding cash and gold.

“Perhaps you’re not fully invested in equities, with maybe 90% of your typical allocation, and you have more in cash and money market exposure than usual,” says Munish Randev, founder of Cervin Family Office, a Mumbai-based multifamily office. “This stance balancing is very important for a family office, along with a focus on reallocating at an intra-asset class level, depending on the key risk changes.”

### Cash concerns

Lim adds that, while the move to ramp up cash allocations is also understandable, it is unlikely to be beneficial in the longer term. Family offices’ clients suspect that central banks will continue to pursue accommodative monetary policies so inflation could, at some point, become problematic for cash investments. “So they have a conundrum,” she says. “They are cautious, but they don’t think that sitting on cash will help.”

That is one reason many family offices have been increasing their exposures to assets such as gold, which offer a safe haven against inflation and currency debasement. “Holding gold is something they see as essential as a hedge in the current macroenvironment,” says Lim.

Gold has rallied strongly since March, reaching a record high of $2,060 per ounce in August. After positive news on the development of vaccines for Covid‑19 bolstered hopes of a smooth economic recovery, the price fell back to$1,780 per ounce at the end of November. However, the precious metal is still seen as a safe haven and continues to be favoured by investors for its diversification properties, says Lim.

A case could be made for a bout of deflation or inflation materialising in the not so distant future, says UBS’s Mahesh. Gold would be an ideal hedge against either scenario.

If demand and therefore prices fail to pick up post-pandemic, causing deflation, the Federal Reserve would be expected to keep interest rates low, resulting in negative real rates and benefiting gold. On the other hand, gold is a customary hedge against inflation, because it typically preserves its value over time and therefore offers protection when currencies start depreciating, says Mahesh.

Family office allocations to the precious metal remain relatively small, but have been growing over recent months from 1% to perhaps 2% or 3% on average, says LH Koh, Hong Kong-based co-head of global family office coverage for Apac at UBS

### Signs of recovery

Family offices ought to keep in mind how quickly market sentiment can change on the back of events, and be ready to adjust their investment portfolio allocations accordingly.

Pharmaceutical companies begining to roll out Covid‑19 vaccines, as happened in the UK in December, is one such game-changing event.

The question on the minds of many family investors is when will it be time to rotate into so-called ‘recovery stocks’, such as cyclicals, as the virus’ impact appears to be receding? Mahesh says family offices have already been pondering this question for some months prior to the recent vaccine announcements.

“[Family offices] had a huge run, so part of the profits from that are going towards buying some protection. They’re also moving from outright long positions into some relative-value opportunities. For example, they may not be long technology outright, but long technology and short some other sectors, such as financials.”

Family offices know that at, some point, it will be time to reconsider the securities of companies in industries most heavily damaged by the pandemic, such as the travel and hospitality sectors. That said, some uncertainty remains around how long it will take for business to return to normal once effective vaccines arrive and the recovery trajectory of hard-hit sectors and the global economy in general. In this ‘new normal’, family offices are likely to continue pursuing cautious strategies that incorporate some downside protection while avoiding large directional bets on asset prices. As this report details, there are a host of new investment products now on the market that can help family offices achieve just that.

Family office investing – Special report 2020