A 7-step guide to single family office investment 

Clear foundational principles like risk tolerance, asset allocation, and return targets are all intrinsic to the success of a family office portfolio.

Deciding how to allocate capital between structural growth trends and short-term opportunities, as well as which asset classes to target, is a start. Defining potential overlays, such as environmental, social and governance (ESG) approaches can also help create a structure that supports decision-making in the face of market volatility. So too can decisions around balancing liquid and illiquid assets, active versus passive fund exposure and hedging or thematic strategies. Which of these decisions remain in-house and which are outsourced can also help to frame an office’s long-term approach.

A much longer investment horizon than many conventional portfolio managers means single family offices can harness the potential of complex structural trends as sources of long-term investment returns. They should identify which of these trends are potential opportunities to preserve inter-generational wealth.

Risk management around such trends as demographic shifts, technological advancements and climate change relies on diversifying the portfolio across various future outcomes, scenario-testing to identify the best firms and casting off the laggards.

Performance here should be measured over five years.

More frequent short-term inflation shocks and prolonged periods of elevated inflation should see single family offices prioritise the real return of a portfolio.

While strong nominal returns may seem attractive, they do not automatically equate to an inflation hedge in all inflationary environments.

A strategy here needs to provide quick and easy solutions to short bursts of inflation or more persistent bouts of price rises.

Strong investment governance enhances portfolio outcomes for family offices with long-term horizons. While pursuing maximum returns, some may overlook the benefits of good governance, which can improve returns and manage risk effectively. Our experience shows that sound governance allows portfolios to adapt to market changes, mitigating risks and seizing opportunities during upheaval. Key elements include allocating to illiquid assets for better risk-adjusted returns, expanding diversification across asset classes, and implementing dynamic asset allocation to respond to market conditions. Governance must evolve to remain effective over time.

We believe a total portfolio approach to investment management is more effective than a siloed strategy, which often neglects overall returns and risks, leading to poor diversification and missed opportunities. A cohesive strategy increases the likelihood of achieving long-term goals. Our four-stage approach starts with defining investment objectives, then identifies strategic asset allocation (SAA) that aligns with those goals. We incorporate dynamic asset allocation (DAA) for shorter-term views and emphasise careful manager selection, particularly in private markets, enhancing governance and risk management for optimised portfolios that reflect a family’s unique values.

Long-term opportunities often found via private markets can appeal to single family offices. Multi-sleeve programmes can ensure a portfolio’s exposure is providing multiple benefits, such as being linked to the transition towards a sustainable economy and offering an inflation hedge, or catering to several family members’ investment beliefs.

Dividing private markets exposure into sub-portfolios that focus predominantly on yield, capital gain, and higher-return co-investment and secondary holdings is a strategy that can potentially perform well in many macroeconomic environments.

Hedge fund allocations can balance risk and reward while maximising opportunities for growth, but a detailed understanding of the underlying managers is required.

We believe that to effectively allocate to hedge funds, a single family office must first determine the role of the hedge fund sleeve in their portfolio – whether it is for risk reduction, return enhancement, portable alpha, or portfolio hedging.

Diversification is key, along with past performance and the likelihood of persistent returns. The sources of return, strategy and manager must be complementary to the overall portfolio, accentuating different risk exposures and profiles to provide a robust hedge for the wider portfolio.