Family offices have become influential players on the world’s investing stage. Like any institutional investor, family offices are looking for asset managers that can work with them to develop solutions based on their evolving needs and investing opportunities. PIMCO partners with single- and multi-family offices and family foundations across the globe, so we understand the complexities facing family offices as they decide on their investment choices and how to delegate elements of their portfolios to asset managers. In the following interview, Marcio Bogoricin, Caleb Pitters and Davide Gysi discuss some of the challenges facing family offices and how PIMCO partners with clients to support their evolving goals and objectives.
Q: How has the family office market changed over the past five years?
Marcio Bogoricin: We have seen a significant increase in the number of family offices over this time period, and they have continued to evolve and institutionalize. There is a greater focus on governance and efficient decision-making structures (such as investment committees and boards), as well as partnerships with service providers to maximize investment returns and efficiency. In addition, family offices have been hiring increasingly sophisticated teams of investment professionals to develop deeper specialist expertise and expand the investment opportunity set. Intergenerational equity and managing the transition from one generation to the next are also issues that family offices are addressing in a more structured manner.
Another trend we have seen is that family offices continue to expand connectivity beyond their regional peers to develop a global network. This enables them to understand what other family offices are doing, adopt global best practices, and invest alongside peers in markets that might be unfamiliar.
Q: How does PIMCO partner with family office clients?
Davide Gysi: One of the most common reasons that family offices choose to partner with PIMCO is to optimize their time and resources by delegating certain portions of their portfolios to us. It is often much more efficient for them to focus on specific areas of expertise – such as direct private equity investments or management of a proprietary portfolio – while partnering with asset managers for the remaining allocations. We have assisted clients on a broad range of solutions, including traditional fixed income portfolios, credit portfolios, alternative investments, liquidity management, and, for those in the U.S., municipal bond investments.
PIMCO’s global footprint can be a factor for family offices in deciding to engage in a strategic relationship with us. For example, family offices located outside the U.S. may have expertise in their local or regional real estate market but, given the size and complexity of the U.S. market, are looking to partner with a manager that has a more comprehensive understanding of this sector.
Q: What are the potential benefits to family offices of delegating elements of their portfolios to PIMCO?
Caleb Pitters: PIMCO takes a consultative approach when working with family offices. Initially, we seek to gain an in-depth understanding of their investment objectives, liquidity needs and risk appetite. We will often offer to conduct a tailored portfolio analysis to identify what may be the best solutions for our clients in accordance with their specific goals and objectives.
We offer a variety of solutions, ranging from mutual funds that may meet the needs of many family offices, to separately managed accounts for those family offices that require greater customization.
As an additional benefit to partnering with PIMCO, we organize networking and educational events specifically tailored to family offices, along with exclusive access to our senior portfolio managers, renowned research and tailored solutions studies from our client analytics and solutions team. These studies can include custom stress testing/scenario analysis and peer review. In each region of the world, we also have dedicated account managers, providing regular contact and high quality, institutional-level service to our family office clients. For example, during market dislocations, our account managers have provided our family office clients with tactical investment ideas, such as during the early 2016 energy/high yield sell-off and, more recently, with opportunities in collateralized loan obligation (CLO) equity, which can be a very complex asset class.
Q: Which asset classes have been discussed the most with family offices seeking to delegate elements of their portfolio?
Bogoricin: There are three main areas where we can assist family offices:
- Liquidity management. We offer short-term cash management solutions for family offices for a variety of different liquidity needs. For example, some family offices might need to draw on funds within the next six to 12 months, but want to earn more than a bank deposit in the meantime. Other family offices might require effective liquidity management that will allow them to make swift decisions, for example if they need to make an acquisition or to meet private equity capital calls.
- Core strategies: Fixed income and credit. We are experiencing increased demand from family offices for potential solutions in this area. Historically, many family offices used to manage their fixed income allocations in-house, buying individual bonds and relying on industry reports to assist them in making their selection. Over the last three to five years, in line with the increasing complexity of financial markets, we have seen a growing trend towards delegating the fixed income and credit portions of family office portfolios to external asset managers. With our 47-year track record in fixed income investing and 60+ credit analysts, PIMCO offers a wide range of fixed income investment strategies that we have developed to help our clients meet their evolving needs and investing goals.
- Alternative investments. A growing number of family offices are looking for investments that are not correlated to the “traditional” markets. We have seen an increase in the opportunity to partner with clients on alternatives, including private equity-style or drawdown strategies, hedge funds and alternative risk premia strategies. In regions of the world where interest rates are high, family offices may be seeking higher yields and returns from their investments. As a result, we have seen a growing demand in Latin America and Asia for alternative investment solutions.
Q: What is PIMCO’s approach to partnering with family offices on allocating to alternative investments?
Gysi: Alternatives often represent a significant portion of a family office’s portfolio. They typically offer the potential for higher returns and lower or no correlation to traditional asset classes, but less liquidity and greater exposure to risk.
When working with family offices to identify which alternative investments may suit that client’s needs, we take into account expected returns, tolerance for volatility, liquidity requirements and the overall fit within a client’s portfolio (e.g. correlations to other assets and regional or sector exposures). With the help of our client analytics and solutions team, we conduct tailored analysis to assist family offices in identifying their risk profile and income generation needs. Then we work with them to select the alternative offerings that are believed to best address their requirements and fit into their overall portfolio.
PIMCO has been using quantitative strategies within fixed income for three decades, and we have been managing dedicated alternative strategies for over a decade. Our strategies emanate from core competencies in quantitative analytics, credit analysis, and residential and commercial real estate investing. They leverage the strength of PIMCO’s deep resources and experienced personnel, our extensive relationships with global financial institutions and other sellers of risk, and our renowned macroeconomic and asset-level research.
Q: How do you expect family office needs will change over the coming five years?
Pitters: We expect family offices will increasingly focus on strategic relationships, where they can extract investment and analytical expertise across multiple asset classes. We expect to see persistent interest in “club deals” and co-investments as well as more demand for separately managed accounts with the flexibility to tailor mandates to their needs. We also believe that the number of European and Asian family offices will continue to grow significantly.
In terms of investment opportunities, we anticipate that illiquid co-investments will continue to find favor with family offices. As capital market return assumptions continue to decline, after tax returns will likely become increasingly important. Consequently, in the U.S., some family offices are focusing more on opportunities in municipal bonds, while others are considering the merits of tax-efficient investing in alternative strategies via private placement life insurance (PPLI).
Family offices will continue to seek asset managers that can act as an extension of their own in-house capabilities. In our view, family offices are increasingly looking for partners that can understand their needs and adapt to accommodate them. PIMCO focuses on delivering excellence for our clients in every aspect of our relationship, particularly in terms of the service we provide via our account managers and investment teams. We are committed to delivering value to our family office clients including and beyond investment performance.