Panelists: Simon Minder, Independent Family Office Advisor at M76 - Family Office Consulting Ltd. & Filippo Taddei, 1875 FINANCE Ltd. – Multi Family Office
Moderator: Dr. Peter Lorange
Additional Questions: Per F. Lorange
1) What are some of the most significant/particular changes when it comes to Family Offices’ investment behaviors, now with the pandemic?
There are clearly fewer physical meetings occurring now. In general, virtual meetings are bountiful and seem to entail much more intensive contacts amongst participants, as well as activities. Family members seem to be better informed, more involved, have more interests in opportunities, and so on. The technology associated with video calls and Zoom meetings, is now more or less fully mastered by most family offices. They are comfortable with technology.
In terms of the types of investments now being pursued, the investment style in portfolios has changed with more focus and more risk-taking going on. There seems to be major attention granted to some industries that appear to be relatively less impacted by COVID-19, such as pharma, technology (software/hardware for virtual meetings), logistics, some real estate, etc. Portfolios that were highly diversified in the past are now more based on careful selection, with sustainability, infrastructures, private equity, gold and cash for example, being cautiously chosen.
So-called sustainability investing is becoming very much in focus. Institutional investors are significantly driving this development and impacting the market because of their size. The key also seems to be how such investments “drive”/impact the market – other types of investments are “losing out”! For companies not in the sustainability category when it comes to the strategy they are pursuing, an ultimate consequence would thus be that their cost-of-capital could go up.
So a major focus for most of today’s family offices is to determine which stocks to pursue, above all from the so-called sustainable category.
When it comes to the particular portfolio run by family offices today, it appears that there is an element of fright or nervousness: How to realistically preserve wealth? These behavioral archetypes seem to emerge, above all, to try to ameliorate this:
Those who emphasize cash, gold
Those who de factor might be increasing the risk their entity is taking, through higher exposure to assets with more risk, but, then also of course, more favorable upside
Those who try to modify their overall portfolio, perhaps by incorporating elements of the above two factors, following their investment style by rebalancing the risk with the opportunity.
Various non-stock, so-called private markets, are coming back, such as some types of real estate: distribution/logistics due to e-commerce spike; renovation and re-designs; hotels, land, etc. Tangible assets are interesting to families. In general, investors seem to stay away from classic retail, and traditional hotels and residential (often becoming too expensive, say, here in Switzerland, due to “competition” from pension funds).
2) What are the key roles of a Family Office/Investment Committee now?
The family office/investment committee seem to become more intensely involved. And there seems to be a wider array of asset classes that are being considered, including rare shares (such as diamonds), antique cars, art, wine, in addition to the focus on cash. Crypto-currencies, such as bitcoins, are now actively considered, and more and more seen as safe and simple (relative to our typical currencies, including the main ones – USD, EUR, GBP, JPY, CHF) due to inflation, market uncertainty, devaluation of currencies.
As a consequence, given this broader and often novel agenda at the investment committee/family office, it is now more often seen as advantageous to involve outside specialists to assess the quality of those assets and to make the right choices:
On arts, jewelry, antique cars, wine, etc.
On specific geographic regions (North America, Asia, Europe).
This might, of course, create additional expenses, which many family offices/investment committees seem to accept.
Some family offices/investment committees may be relatively large and/or specialized in themselves, thus perhaps requiring relatively less expert personnel from outside. Others, often being smaller might require more (and expensive) outside support here.
3) What about free liquidity? (Cash, bitcoin, gold, rare assets, collector items)?
Cash is now widely recognized as an important asset class in its own right. In many portfolios there seems to be, say, 10-15% in cash!
However, cash is generally expensive, with negative interest rates! So, liquid alternatives to cash might come on the agenda: art, gold, etc.
Cash/free liquidity generally is seen as being very critical today, in that it adds flexibility:
To be able to go after unique, rapidly emerging new opportunities. And, one might keep in mind that most markets seem to have become less predictable, even more volatile. Witness the more than 20% drop in the blue stock SAP’s value in a short time. Speed is key, to buy (and to sell)! Cash is central for this.
Family investors who still own a particular business (“legacy investment”) may want to keep a relatively high cash reserve, to retain flexibility and autonomy so as to be able to self-finance expansions. They seem to recognize that to rely on outside sources for lending (e.g. banks) in difficult times may be unrealistic. One such company could represent an extreme example of this: two asset classes only, namely, the “legacy business” and all the rest is in cash.
Liquidity planning seems to have become a particularly important agenda item of family offices/investment committees. The family office has to understand its own needs, looking holistically at its activities.
While Swiss family offices in general appear relatively more conservative, many families in other parts of the world look to be more willing to go for relatively higher leverage (Russia, China, …).
4) Seed investments and growth projects (with no immediate positive liquidity). How are these seen these days?
There seems to be relatively less interest in early stage investments as well as in high growth entities. More cash-focused investments may have become more in vogue in March 2020 and due to the market correction due to COVID-19. And it seems to be particularly hard to be able to secure corporate funding for this stage immediately after the early/seed investment phase, before more firm footing for aspiring corporations. This “Death Valley” phase is critical, and to get “follow-on” funding or high-tech firms is not only important but may be particularly difficult. However, there are signs that the market for such early investments may be coming back.
Critical due diligence is however now even more key than ever! Such in-depth and quality due diligence may be hard to pull off, however, unless the investor has specific contacts with founders, key customers, competitors, and/or know-how of the particular industry.
In general, the valuation of many new ventures seems to be too high. A dilemma for many family offices/investment committees is therefore neither to be too late (thus incurring at times too high cost/price) nor too early (too much risk).
Some relatively large, well established corporations may see employees leave from their payrolls in order to start their own venture, built on a business concept perhaps instilled in the company itself. Then, later, if things tend to work out, they then buy this company back to re-dominate the sector space. Migros is perhaps a good example with the acquisition of Digitec.
In general, there seem to be much more available capital in the US to finance the evolution of start-ups to the next stages. Switzerland has great angel investors, but lacks VCs. How to “help” companies to get to the next stage is perhaps more of an issue to be addressed at specific country-levels, rather than by individual family offices/investment committees.
5) How are risks changing?
The risk appetite has changed. And risk has to be dealt with by all family offices/investment committees whether for wealth protection or wealth preservation. To manage risk seems to be more critical now than ever for family offices/investment committees: more focus; relatively less leverage; relatively more liquidity! Relatively more focus on commodities such as gold! And relatively less focus on emerging markets. China is perhaps a special case here – indeed attractive for many family offices/investment committees, but, in general, difficult to understand. To rely on resident experts in this market is key, including, say, to make use of targeted index funds for investing here.
Each specific family’s attitude when it comes to the issue of risk is critical. For some, the establishment of foundations and/or trusts may be more important than for others. And the choice of where to live may have a lot to do with one’s propensity to risk. There have been significant increases of wealthy inhabitants now residing in Gstaad, for instance, a location with relatively less of a COVID-19 problem.
So, in the end, each individual family’s attitude to risk is indeed critical.
Some family firms are now seeing a return to more entrepreneurial activities. A challenge: how to manage this part of a family office/investment committee’s broader portfolio? It seems vital to involve outside support in activities such as reporting/accounting, where the family’s own time might not have to be spent! Do not waste time on administration if possible and consider delegation in order not to loose opportunities!
Additional issue: Index funds vs. Individual stock picking? How are you doing your primary stock investments now?
The issue of the degree to which to rely on index finds vs. specific stock picking would, in the end, be up to each individual family office/investment committee. Index funds require less time and specific know-how. In contrast, in depth knowledge is called for when it comes to good/consistent stock picking performance, but in some markets, such as China, index funds may be the only realistic option (as already discussed).
Additional issue: How to establish an Investment committee?
Again, this largely depends on the individual family. Should one attempt to attract specialists? And, is one ready to accept the associated costs? It should be noted that, while in the past, there may have been much fewer outside advisors, today the situation is different. The use of specialists is more common, and it looks like the cost of being in business has been accepted, besides going up, in general, for many family offices/investment committees. Family values and culture are seen as very important and need to be considered when setting up an investment committee who can assure the right investments.
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