Investor trends: World's ultra-rich are shifting money to low-risk bonds

Rich families are putting more money into safe investments like bonds because they expect interest rates to keep going up, making bonds a better way to earn money with less risk.

The world's richest families are adjusting their investment strategies, according to a new report by UBS. The survey of family offices, which manage wealth for the ultra-wealthy, reveals a significant shift towards bonds and other fixed-income products issued by developed countries.This trend highlights a growing appetite for "easy yield" among the ultra-rich. As interest rates rise globally, bonds are becoming a more attractive option for investors seeking a steady return with lower risk.

Strategic asset allocation 2023

Source: UBS

The UBS Global Family Office Report surveyed 302 single-family offices, each with an average net worth of a staggering $2.6 billion. The report found a clear increase in the allocation of assets towards fixed income in developed markets. This allocation rose from 12% to 16% in 2023, while investments in areas like emerging market stocks and real estate have declined.

 

Why the shift? 

The rise in interest rates is the primary driver of this investment change. Bonds typically offer a fixed interest rate payout. As overall interest rates rise, the value of existing bonds goes down, but newly issued bonds become more attractive due to their higher interest rates. This makes bonds a more competitive option for investors seeking a reliable return on their wealth.

Regional breakdown for 2023

Traditional asset classes: 

Alternate investment asset classes:

Family Offices: Managing Wealth Across Generations

Family offices are private firms that manage the investments and assets of wealthy families. These entities play a crucial role in preserving and growing wealth across generations. The recent surge in economic growth worldwide has contributed to the increasing popularity of family offices.

The family offices’ allocations to developed market bonds have increased by the largest amount seen in five years, reintroducing greater balance between bonds and equities. On average, they allocated 16% to developed market bonds in 2023, up from just 12% in 2022, and plan to maintain this level in 2024.

Family offices with fixed income investments are prioritizing high-quality bonds. On average, 40% of fixed income investments are allocated to investment-grade corporate bonds and 36% to high-grade government or supranational bonds.

Investment-grade and

high-grade bonds are favored:Type of investments (family offices with fixed income investments in 2023)
 

Moreover, family offices are chiefly concentrating on bonds with tenors of up to five years, which have the attractions of high yield, stability and sensitivity to falling policy rates. On average, 35% of their fixed

income investments have tenors of up to two years, with a further 39% having tenors of two to five years. Family offices are reluctant to hold tenors of more than 10 years, with an average allocation of just 7%. 

When asked why they are holding fixed income, most family offices (60%) with fixed income investments reply that it is to diversify portfolios. Half (50%) say it is to balance risk and almost half (49%) want to benefit from high yields. Forty-eight percent say they do so to receive a steady stream of income.

What this means?

This shift in investment strategy by the ultra-wealthy could have a ripple effect on global financial markets. As demand for bonds in developed countries increases, it could further influence interest rates and impact other asset classes.

Fixed income allocation reaches new high in 2023; Annual change in strategic asset allocation

Family offices continue to hold their highest weightings in developed market equities, which accounted for almost a quarter (24%) of portfolios in 2023 on average, slightly less than 2022’s 25%. In 2024, family offices plan to lift this allocation somewhat to 26%. There is a striking contrast with equities in emerging markets, which made up only 4% of allocations on average in 2023 – half the 8% level reached in 2020 and 2021.

While the immediate focus is on bonds, the report also reveals a more nuanced investment strategy for the future. Here's a breakdown of family office plans for 2024 and beyond:

• Real Estate Rebound: For 2024, family offices plan to partially reverse the decline in real estate allocation, with the average allocation recovering to 12%.
• Cash to Cool Down: Allocations to cash are set to fall slightly in 2024, likely due to central banks signaling future interest rate cuts.
• Long-Term Diversification: Looking forward over five years, family offices plan to increase allocations in a range of asset classes:
• Developed Market Equity: Almost half (46%) expect to raise their allocations.
• Private Equity: More than a third (39%) plan to add to direct investments.
• Developed Market Fixed Income: Over a third (35%) intend to add to these holdings.
• Reduced Reliance on Cash: More than a quarter (28%) plan to cut cash allocations, suggesting growing optimism.

Private equity and real estate

The top concern for investors in private equity in the next 12 months is the lack of exits and liquidity.

Potentially seeking diversification, family offices mainly invest in funds, although direct investments are also popular.

Real estate investors favor direct investments in fully-owned physical property, although co-investments are almost as popular in the US

Where are the rich investing? 

On average, family offices have also kept their largest regional allocations in North America (50 per cent), over a quarter (27 per cent) in Western Europe, and 17 per cent in either the Asia-Pacific region or Greater China, the firm said. Looking ahead, North America and APAC (excluding Greater China) are expected to be the top destinations of added allocations, with over a third looking to increase allocations to each of these regions over the next five years (38 per cent and 35 per cent respectively).

Regional investment trends:

US: US family offices have the lowest fixed income allocations and the highest tilt towards North America. They prioritize high-quality short-duration fixed income for diversification and are most concerned about geopolitical conflicts in the next five years.

Latin America: Latin American family offices favor fixed income for capital preservation, risk balancing, and high yields. Inflation is their top concern in the next 12 months, followed by climate change and technological disruptions over the next five years.

Asia-Pacific (APAC): APAC family offices are keen to add developed market fixed income and equities to their portfolios. They also show increased interest in alternative investments like private equity and are more likely to integrate philanthropy into their investment strategies. Healthcare is a top theme for APAC family offices.

Europe (excluding Switzerland): European family offices have a strong home bias towards Western Europe and are the most likely to be concerned about geopolitical conflicts. They also have the highest rate of being covered against financial risks.

Switzerland: Swiss family offices hold the highest allocations to equities and the least intention to change their strategic asset allocation. They share the view that US real interest rates will remain near zero.

Artificial intelligence (AI) topped the list of investment themes, with more than three quarter, with more than three quarters of family offices stating that they are likely to invest in generative AI in the next two to three years.

Active Management makes a comeback: Confidence in active management as a diversification tool is increasing. This approach is seen as advantageous in a time of rapid technological change and uneven growth.

Sustainability gains traction: Sustainability is becoming a more prominent factor in investment decisions, with family offices seeking sophisticated information and advice in this area.

North America and Asia-Pacific will attract assets

Asset allocation changes by region in the next five years