W

e have known for some time that Asia'€™s wealth is rising; in no way is this more evident than in the sharp growth of the region'€™s ultra-high net worth individual (UHNWI) population. While the number of UHNWIs in the United States grew by 35 percent between 2003 and 2013, the population in Asia nearly doubled over the same period on the back of the region'€™s surging economic and capital market activity.

Characterized by wealth of at least US$30 million in net assets, the UHNWI population expanded particularly fast in China '€“ where the population more than quadrupled '€“ while Singapore and Hong Kong have the second and fourth largest populations in Asia. One trend which has been slow to catch up with this wealth, however, is the family offices to manage it. While the Asian UHNWI population accounts for nearly one-third of the global total, the number of family offices in Asia '€“ estimated at between 100 and 200 '€“ makes up less than five percent of all global family offices. Asian family offices are springing up, but their level of sophistication is at an early stage.

Where do they stand?

To take a look at how they'€™re progressing, we put together a report on The Institutionalization of Asian Family Offices. A family office'€™s level of institutionalization is an important signal of its expected investment performance with increased institutionalization leading to more consistent (but not necessarily better) investment performance via more stringent assessment of investment opportunities and the management of investments afterwards. This more exacting approach should in theory reduce the volatility of portfolio returns and lead to improved wealth preservation.

So how do Asian family offices stack up? Most of the ones we interviewed are still at an early stage of institutionalization, characterized by minimal process-driven investment decision-making and diversification. In many cases, family members maintain a firm grip on both tactical and strategic investment activity.

Reflecting the relatively new wealth in Asia, many of the families we interviewed continue to operate the business that originally produced the family fortune, while others own legacy assets or significant stakes in the listed equity of the original family business.

Furthermore, our interviews revealed a high reliance on the original entrepreneur for both investment and non-investment decision-making within the region'€™s family offices.  This reflects both the tight grip on family interests maintained by first generation wealth creators and underscores the importance of implementing effective succession planning. Family offices at more advanced stages of institutionalization have stronger governance processes in place, often with non-family members in key decision-making roles, which contribute to more consistent decision-making.

When it comes to portfolio management, our survey shows that advanced-stage family offices and wealth creators with financial services backgrounds tend to employ less risky strategies. While less institutionalized family offices often maintain a high allocation to equity investment - up to 65 percent in one case - portfolios at advanced-stage family offices tend to be more balanced and managed by professional investors both internally and externally.

How they do it

Investment in most family offices in our survey is managed by the family, with professional CIOs at the helm of only six out of the 20 single family offices interviewed. Below are two examples which illustrate the wide differences in approach.

One family we interviewed with a history in the resources sector had a CIO overseeing two investment teams based in Hong Kong and Singapore with ten investment professionals each, a risk manager and dedicated legal, accounting and control functions. The operation is overseen by an investment advisory committee consisting of several family members, two external advisors and a family office executive, while a family council of the same size governs strategic aspects of the office. On the other hand, one Singapore-based family office we talked to was controlled by the first-generation wealth-creator and his son. While two investment professionals are employed by the office and four advisors support investment activity, decision-making is often based on intuition with minimal due diligence. A formal investment process was implemented in 2011, but abandoned two weeks later. The family office'€™s early stage of institutionalization is also reflected in the 15 banking relationships it maintains for investment ideas and execution.