A 10-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 or more, with an active multi-manager, multi-theme portfolio often preferable over global equities in the long-term.

More frequent short-term inflation shocks and prolonged periods of elevated inflation should see single family offices prioritize 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.

Long-term opportunities often found via private markets can appeal to single family offices. Multi-sleeve programs 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.

Our four guiding principles for equities – invest broadly, invest sustainably, invest actively where appropriate, and invest in diversifying return drivers – aim to provide a solid framework to assist in the construction of equity exposures.

Segmenting equity exposure into a core of mainstream stocks, broader investments (like emerging markets and small-cap equities), and specialist exposures (such as listed real assets) can provide risk-balanced alpha opportunities.

To support single family offices in determining when to allocate to active management, we have created a decision tree framework that accounts for factors such as time horizon, tolerance of tracking error, sensitivity to higher fees, and internal due diligence resources. These can help guide family offices on a suitable split between active and passive management.

A well-constructed fixed income allocation can help to balance risk and return objectives for long-term investment goals by providing a source of liquidity for portfolio rebalancing, implementing allocation changes (strategic or tactical), accessing new investment opportunities, meeting income distribution requirements, and covering operating costs.

Government bonds can offer defensive qualities in recessions, growth-focused fixed income can provide diversification benefits and duration management, and private credit can offer higher yields and indirect inflation protection.

Hedge fund allocations can balance risk and reward while maximizing 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.

Transition-aware real assets can be a key strategic choice for long-term investment as traditional market-cap weighted benchmarks may not sustain optimal results throughout the shift towards a low-carbon economy.

Transition-aware real assets present a fresh thematic perspective on a broad spectrum of traditional investment classes accessible through both public and private markets. These could be natural resources (like certain types of timberland, farmland, forestry or transition-related metals), infrastructure (such as grid enhancement) or real estate (such as carbon-negative buildings). 

For clients keen to keep global warming to 1.5°C we advise that investors measure their portfolio-level carbon emissions, set net-zero-aligned targets to reduce those emissions and create a transition plan to achieve those reductions.

To achieve decarbonization, investors should aim to ensure their net-zero commitments focus not just on portfolio construction but also on actions that reduce real-world emissions. They should also look to reduce carbon exposure using exclusions, divestment or portfolio construction techniques, and active stewardship where possible. If your goal is to achieve a real-world impact on carbon emissions, we believe it is important for asset owners to work with asset managers that are stewarding the climate transition through robust engagement programs that focus on influencing companies’ transition strategies.

In 2020, our Sustainable Investment team launched a new framework approach, designed to help investors who are establishing, or even just considering, net-zero targets. This framework included the Analytics for Climate Transition (ACT) tool, which we created for this purpose.

Nature is likely to become one of the prominent ESG themes for wealth managers and financial markets in the next few years. More than half of global GDP depends on nature ₁,  so biodiversity loss poses significant systemic threats. 

The frameworks for incorporating nature and biodiversity considerations into investment portfolios are still emerging. Nevertheless, there are four steps that single family offices can take today to help integrate nature as an investment theme. 

The first is to revisit the office’s ESG beliefs and policies and reassess how nature positivity could be incorporated in addition to their investment objectives. 

The second is to ensure that the stewardship activities of underlying asset managers are monitored and ESG themes are identified.

Next, we recommend a nature-focused audit of asset managers and their exposure to nature-related risks. Finally, we believe there is a growing opportunity set in natural capital and see opportunities for single family offices to partner with managers allocating to ideas that aim to produce a positive impact through protecting or restoring natural ecosystems.