Assume that inflation is here for a while and that interest rates will go higher, experts say. So HNW families are looking for new opportunities but are patient
David Israelson • Financial Post Published Dec 28, 2022
The new year is usually a time for taking stock, but in the current economy, family offices aren’t necessarily buying in.
“It’s a matter of staying safe right now. Right now, we’re dramatically underweighted in equities. You can still be opportunistic in the markets, but cash is good,” says Neil Nisker, co-founder, executive chairman and chief investment officer at Our Family Office Inc. in Toronto.
“The market is always six to nine months ahead of the economy as a whole, so you can tell what’s going to happen as it moves down,” he says. The Bank of Canada has raised interest rates seven times in 2022 and has indicated that it may keep raising them in 2023.
“There’s hope for a soft landing for the economy in the new year, but I think it’s misplaced,” Nisker says.
His views are shared by others who manage the wealth of high- and ultra-high-net-worth families. “With inflation high, central bank liquidity flagging and interest rates rising, family offices are reviewing their strategic asset allocation,” says UBS’s Global Family Office Report 2022.
“They’re reducing fixed income allocations and sacrificing liquidity for returns, as they increase investments in private equity, real estate and private debt.”
To protect wealth, Nisker suggests moving far away from the traditional 60/40-per-cent split between equities and fixed-income investments, keeping as little as 20 per cent in stocks until the economy shows signs of stable growth.
“The markets are always six to nine months ahead of the economy as a whole, so when they’re going down, you can see what’s happening. You can be opportunistic and buy stocks when the markets are down, but overall, it’s a matter of staying safe,” he says.
On the fixed income side, Nisker says changes are in order, too.
“Seeing that interest rates are going up, we made a tactical decision to only be in floating rate, short-term debt instruments. There will be a time to go longer and buy 10-year bonds, but we’re not there yet,” he explains.
“We should assume that inflation is here for a while and that interest rates will go higher than you expect. Remember, just a short time ago a whole bunch of people didn’t think interest rates would go this high, yet they did.”
Inflation weighs heavily on many peoples’ minds, the UBS report says. Statistic Canada reported that Canada’s inflation rate in November was up 6.8 per cent year over year — not as nasty a rise as in other countries, such as Britain, but still well above the 2-per-cent target that economists consider to be tolerable for overall growth.
When asked about their key concerns, 25 per cent of UBS’s respondents said inflation was their top worry, while 21 per cent listed global geopolitics and 20 per cent are worried about valuations of all classes of assets.
“Levels of anxiety about each of these factors rise and fall depending on where a family office is based. Latin Americans are the most concerned about inflation (50 per cent), while global geopolitics is on the minds of Swiss and Middle Eastern offices (both at 36 per cent). In the U.S., high asset valuations (31 per cent) rank a close second to inflation,” UBS said.
Investment opportunities for 2023
"Wealthy families and family offices in Canada have the luxury of not having to invest in emerging markets or politically unstable or volatile regions,"
says Arthur Salzer, founder and chief executive officer of Northland Wealth Management.
“It’s easy for such families to limit exposure to China or Russia right now, for example. If we look at geographical opportunities right now, we like real estate,” he says. Some geopolitical issues have actually improved in the past few years, he adds — for example, the supply chain woes that plagued industry during the COVID-19 pandemic are easing as North American companies seek raw materials and services closer to home.
Commercial and residential properties both look promising, though real-estate buyers and sellers are engaged right now in what experts call “price discovery” — trying to figure out what the market will bear for different properties.
“Inflation and higher interest rates will continue to weigh on investor decision making in 2023 as the market continues on [its] journey of price discovery,” Colliers Global Investor Outlook Report for 2023 said.
“Overall, Colliers’ consensus is that the stabilization of the global real estate market will take hold by mid-2023 as more certainty emerges around the interest rate and economic outlook,” the report said.
Wealthy investors can afford to be patient, Salzer says.
“It takes time to improve properties and to increase rents, but it does happen and it does produce better inflation-adjusted returns than bonds produce over periods when inflation is higher.”
“Overall, the families I work with are concerned about the future, but they’re not overly concerned, says Jill Sing, a Victoria-based family office advisor who works with families and First Nation groups. For example, there is no great rush to make sudden moves such as selling off assets in one sector or country because of something that was in the news.
One area that is getting more attention and is likely to get more in 2023 is ESG — environmental, social and governance in investments. It is not necessarily changing investment approaches yet, but families are considering the ESG implications of their investments more and more, Sing says.
“It’s on their checklist when they look at their investment choices. And many families are paying more attention to ESG in the businesses they already control,” she says.
“That’s one of the things about successful families — they look for new opportunities but they’re patient. They plan for the future,” Sing says.