Inflationary markets: families take stock

Global inflation hit almost 9% last year, according to the IMF. What’s the initial reaction been like from families in response to that inflationary environment?

Daniel Channing (DC): From an investment point of view, the response from families has largely revolved around how their portfolios can adapt to beat market conditions. It’s certainly brought about added scrutiny around returns and put added pressure on investment performance.

The reaction has been reflected to a certain extent in the ESG investment space. While families might previously have been happy to accommodate perhaps lower-yielding ESG investments as part of a wider high-performance portfolio, in the current environment returns have taken on greater significance, prompting families to review their strategies with a view to achieving inflation-beating investment performance. Achieving that has become more difficult – though actually what we’ve seen is ESG-rated investments continuing to deliver decent returns. Morningstar, for example, found that sustainable investing generated returns similar to those of the overall market in 2022.

The point here is more about avoiding knee-jerk reactions to the environment, rather than ESG investments themselves. The IMF is predicting global inflation to fall from 8.8% last year to 6.6% this year, and then 4.3% in 2024 – which, although still above pre-pandemic levels of about 3.5%, provides some useful medium-term context. Families are keen to take that longer-term view and, although some have seen the current conditions as an opportunity to review their portfolios, what we’ve seen play out on the whole is actually a sustained commitment to ESG, and a disciplined approach to their strategies. In that context, the environment has actually helped reinforce family investment strategies and risk-return appetite as a whole.

Are market conditions impacting succession planning too?

DC: Another implication of the high inflation environment is the challenge of determining real asset values – or, more accurately, managing a decline in asset values in real terms. And that makes the transition or allocation of wealth to nextgen family members more complex.

For families who are currently putting in place plans for significant wealth transfer, for instance, the environment has thrown up some interesting challenges – for example, creating the potential for difficult conversations with nextgen beneficiaries whose expectations may be wildly off the mark because of the current impact on asset values. It is definitely providing an opportunity for families to make sure they have robust, independent, good quality legal and advisory frameworks in place to avoid current and future intergenerational disputes.

Are families putting in places certain mechanisms to mitigate inflationary conditions?

DC: What’s become clear is that those families that have already got in place robust governance structures and frameworks are in a good position to navigate the challenges of a high inflation environment. Having those good governance protocols in place – a clear vision, comprehensive family documentation such as letters of wishes, and robust support from external advisers – is putting those families in a strong position to avoid the temptation to make knee jerk, emotively-driven decisions.

It can ensure that families are capable of making pragmatic, rational decisions that are in line with agreed family values. That’s good for the long-term sustainability of family wealth planning.

Are there opportunities too in the current environment?

DC: As well as challenges, there are opportunities created by the inflationary environment, for those families that are agile, have the right frameworks already in place and have put the preparatory groundwork in to their structuring.

We’ve seen a number of occasions where families have looked at direct investment opportunities, for instance, or explore co-investment opportunities, where they can identify co-investors that bring additional expertise to the table and enable them to access high quality deals that might otherwise have been out of their reach. Private equity has seen particularly stark rises in allocations from family offices in recent years and that is expected to be a trend that persists, despite the inflationary market.

There are opportunities, for instance, for those families that have ensured they have cash available to allocate at short notice – though those opportunities are as bespoke as the families themselves. From a structuring point of view, there is real benefit to not having overly complex structures, or having sufficient flexibility built into their structures to make sure they can react quickly as they arise – but at the same time backed up by the family values and governance processes outlined above.