Family offices in Europe are continuing to review their portfolios in response to the effects of the COVID-19 pandemic, according to the latest issue of The Cerulli Edge—Global Edition.

"The market turmoil of March 2020 has abated, but concerns over volatility persist," said Fabrizio Zumbo, associate director, European asset and wealth management research at Cerulli Associates.

"Family offices need to balance liquidity and returns for clients spanning multiple generations."

The factors family offices are weighing include the strong likelihood of COVID-19 remaining the dominant market factor in 2021 and beyond and the prospect of returns over the next decade being less robust than those of the past 10 years. Cerulli believes that such considerations will see some family offices increase the risk in their portfolios to ensure that they can meet their long-term return objectives.

In response to the increased market volatility, family offices are ensuring they have a good level of liquidity in case of unforeseen events. "Previously, expenditure was relatively predictable. That has changed significantly. Family offices may now hold disproportionate assets at each end of the spectrum: both cash and higher-risk private equity-type assets," says Zumbo.

Cerulli research shows increasing demand for real assets such as infrastructure, farmland, some commodities, and certain real estate. Family offices are interested in assets that are uncorrelated to traditional equity markets and that may offer protection should inflation rise more quickly than expected.

They have also increased their gold holdings and added other precious metals such as silver and platinum. In addition, some view cryptocurrencies as a potential refuge in the event of currency debasement. Within equities, there is wide recognition that a global recovery could see emerging markets enter a period of outperformance that will, by association, benefit European companies.

The typical family office's view on cash in a balanced portfolio appears to have changed since the onset of the coronavirus pandemic. Many are now focusing on holding just enough cash to meet their expected use, so they do not lose purchasing power in an extended low-rate environment.

The coronavirus pandemic has accelerated demand for sustainable investing right across the board and family offices increasingly regard it as mainstream. When Cerulli asked asset managers in Europe what level of demand they expect for environmental, social, and governance funds in selected channels over the next 12 to 24 months, 39% predicted an increase in demand from family offices, whereas only 7% said they expect interest from that group to decline.