Private-banking executives tell Euromoney that family offices have pulled back from investments in many of the large EMs and the trend in favour of developed markets (DMs) is likely to continue this year.
David Bailin, global head of managed investments at Citi Private Bank, says that family offices have retreated from investments in Brazil, eastern Europe, Russia and India.
“From a growth-rate perspective, emerging markets are doing okay, but there are three underlying factors that are causing buy-and-hold investors to change allocations," he says.
“The first is that commodity exports have slowed. The second is the tapering policy of the Fed is now under way and has removed some liquidity from the market, and the third is that rates are artificially low in emerging markets, so it is difficult to attract capital.”
In December, JPMorgan Private Bank surveyed officials at 60 US family offices about their investment preferences. The survey revealed that EMs were still favoured in equity investments, but that Europe had become a close second.
It found that 67% of respondents felt that equities would perform best during the next 12 months. Within that, 42% said they preferred EMs, followed by Europe (35%), the US (19%) and Japan (4%).
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| David Bailin, global head of managed investments at Citi Private Bank |
Bailin says family offices in EMs are also diversifying to DMs – a blow to Bric policymakers who have long called for greater south-south equity flows, as a buffer from western financial-market instability. “They want equity exposure outside their countries and currency exposure,” he says, adding that families from Brazil, Colombia, Mexico and parts of Asia are increasing their exposure to the US, Japan and Europe – with the latter being the favoured location.
A London-based portfolio manager, with family-office clients, says: “A number of houses seriously cut their exposure in January amid the emerging market rout – so much for their reputation as long-term investors.”
According to global family-office adviser Privos Capital, in New York, family offices are shifting assets to the US.
In its 2014 family-office update, the firm says: “For really the first time since the global crisis, the US is becoming more of a safe harbour for international family offices.
“Our people report a huge uptick in foreign family offices looking to the States, and we are getting more and more enquiries every week by international family offices looking for investment opportunities in America.”
Nevertheless, Bailin points out that Taiwan and South Korea, and China to a lesser extent, are still attracting family-office investments.
Meanwhile, debt syndicate bankers and investors see brighter prospects for family-office allocations to emerging-market hard-currency debt, with sovereigns outperforming corporates year-to-date and the latter now offering double the spread of European high-yield counterparts.
Rob Drijkoningen, EM debt portfolio manager at Neuberger Berman, says: “Despite headline outflows from EM debt, smaller family offices are still interested in allocations [for dollar-denominated debt],” attracted to the strength of sovereign balance sheets and spread-premium relative to DMs.
A debt syndicate banker at a European investment bank adds: “You will absolutely see greater allocations by family offices for hard currency, in particular, given yield-pick relative to developed-market credits and the cyclical drop in allocations last year.”
However, a portfolio manager, with knowledge of family-office flows, cautions: “European family offices in the debt space tend to hold European government debt and investment-grade blue-chip corporates, but very few hold EM debt exposure directly.
“Of the little EM debt they held last year, some offices sold that to add to developed-market equity exposure. Many family offices are total return investors and, therefore, that’s not an odd asset-allocation change: they wanted more equity exposure so unwound from the riskiest bonds.”
Given the underperformance of EM equities and corporate credit last year, bankers say investment consultants to family offices are mulling their allocations, given bargains in the market, and increasing divergence in market performance of surplus and current-account deficit nations, underscoring the value of active management.
Some family offices are an established investor base for EM issuance in niche currencies. For example, in November, ABH Financial – the holding company of Russian issuer Alfa-Bank – purchased 7% of the five-year SFr85 million ($93.2 million) issue through UBS, which offered a 4% yield, with private banks purchasing 60%, according to Euromoney’s sister publication, EuroWeek.