How Family Offices benefit from a longer-term view and shifting trends

Looking back to the beginning of 2020, clients and their advisors were witnessing the longest bull market since the post-World War II, leading some to complacency. Family offices and external asset managers had already positioned portfolios more cautiously, building cash reserves by systematically taking profit on outperforming names.

Yet, those advisors recommended to clients that “time in the market” matters more than “timing the market,” and leveraged J.P. Morgan’s market expertise and research prowess to protect their core exposure through derivatives or overlaid client portfolios with bearish ETFs or less directional managers.

March Madness: what happened

Mid-March, a black swan took flight when headlines reported Covid-19 cases not only in China, but also in Europe, thereby derailing markets and stopping the longest bull run in the recent history. By April, most family offices unwound their shorts and legged-in through a mix of short put positioning, tactical purchases in the distressed high yield space and rebuilding on oversold quality names. Finesse of execution has proven to be critical in such dislocated market conditions.

Usually privileged as a safe haven, gold played a diversification role as real yields plummeted and emerged as one of Financial Intermediaries’ best recommended trades of 2020, recording a +40% performance from March’s trough to its USD 2,050+ peak in August.

They also benefited from the Fed’s newfound flexibility, early decision to cut rates and update to its average inflation target policy. This helped mark the end of the USD hegemony, sparking the beginning of a “new normal” business cycle.

The COVID-19 silver lining

This new cycle also came with a silver lining: the recent working-from-home paradigm, a focus on cleaner energy and de-globalization driven by strategic supply considerations.

In a lower for longer low interest rates environment, our strategy team identified three top positioning themes:

European Multi-Family Offices and Financial Intermediaries take the long view and trade less around events. For example, U.S. elections did not particularly spark a trading peak. Only later, once results pointed to a split U.S. Congress and blue wave fears faded, did the pro-cyclical shift in family office portfolios start. The rotation then accelerated with positive Covid-19 vaccines reports.

The continued drop in efficient frontiers

The J.P. Morgan Private Bank Multi-Family Office team welcomes this new risk-on sentiment and return to active management as long-term yields in EUR denominated 60/40 portfolios erode: the firm’s Long Term Capital Assumption yearly publication points to lower the efficient frontiers again – see below/illustration.

Long-term themes to follow closely

The investment specialists of the Multi-Family Office team have been articulating our strategic convictions, secular growth trends (Clean Energy, technological innovation and new working standards with increased digital usage as adoption barriers have been broken) and our regional preference to Asia within Emerging Markets and specifically China (quicker growth recovery). Longer-term, Financial Intermediaries are factoring in the rise of Millennials and Generation Z, which are driving behavioral and paradigm shifts. Blockchain is an area where innovation may generate niche returns as part of a diversified portfolio as well.

Finally, Actively Managed Certificates keep resonating with continuous asset under management growth over the past years. As a trusted partner of Multi-Family Offices, we encourage such flexible solutions that allow them to offer innovating and efficient alternative investment solutions.

We believe the use of such structured products alongside more traditional assets will help promoting a differentiating offering.