Family offices and institutional investors think in long terms in the investment sector. Markus Hill spoke on behalf of FONDSBOUTIQUEN.DE with Martin Friedrich, Lansdowne Partners Austria GmbH, about topics such as strategic asset allocation and the selection of asset managers. The similarities and differences between the fields of activity of family offices and fund boutiques were also discussed, as well as previous experience as a portfolio manager and last but not least the reference to an interesting book.
Hill: You have many years of experience in the field of asset allocation and have worked for a long time in the family office sector. What is your new role with an asset manager?
Friedrich: Two years ago I decided to apply the experience I had gained over the past decades in a very special fund. The fund can be seen as a synthesis of everything I have learned in my professional life in the financial sector, which has now spanned more than a quarter of a century.
Hill: Your “parent company” is located in England, you work in Austria. What are the current activities of your company in Germany?
Friedrich: Lansdowne Partners is a provider of alternative investment funds founded in 1998. This makes it one of the longest established investment houses in the Anglo-Saxon world. In 2009, the Vienna office was added. The logical next step is to consider expanding the investor base in line with the geographical expansion of the operating business. After all, Lansdowne Partners Austria is a 100% Austrian asset manager, fully licensed, and under the strict supervision of the FMA. And with the Endowment Fund, we now have a strategy that we hope will meet with a long-term response in German-speaking countries. According to the BVI, the majority of the net inflows of mutual funds have been going to multi-asset strategies for years, including the Lansdowne Endowment Fund.
Hill: What is special about your concept?
Friedrich: The fund differs from most of what is otherwise offered, primarily in its focus on asset allocation. Secondly, we have to talk about very broad diversification. I have rarely seen this in the fund shell. The importance of asset allocation is nothing new in itself. Gary Brinson set the “big bang” with his 1986 study, in which he asserts that 94% of performance is not generated by stock selection but by asset allocation. In contrast, many investors are more focused on “tips”. They want to find the one security that will make them rich quickly, and in this way, they often slide into risks that are too much for them to bear.
Hill: This is often the case when investing with private wealthy people. What does this process look like for institutional investors and you?
Friedrich: As investment professionals, many pension funds or family offices, for example, have a clear advantage here. They monitor and manage risks primarily at the level of the asset classes they invest in. The first step is to determine a long-term, strategic asset allocation, which serves as a central guideline for the entire asset management process. In Anglo-Saxon, I have also heard the term “central risk portfolio” used for this. In the second step, consideration is then given to the extent to which one deviates from this long-term weighting in the short term. The difference between the strategic and actual weighting of individual portfolio segments is then called “tactical allocation”.
Ultimately, each of these segments must of course also be invested. It is only at this point that stock selection comes into play. Large investors such as university foundations, insurance companies, or pension funds often outsource this decision to specialised external asset managers. They decide, to give an example, what percentage of the assets should be placed in high-yield bonds. But they leave it up to a specialist to decide which high-yield bonds to buy because analysing credit risks requires a great deal of effort and a form of expertise that differs greatly from that of the asset allocator.
So I have already outlined what my concept is. We want to make available in single security precisely those processes that have proven themselves over decades with such professionals. The most important difference is that institutional investors invest significant parts of their asset structure in illiquid investments such as real estate, private equity, or private debt. The Lansdowne Endowment Fund, on the other hand, is subject to UCITS regulations and is therefore limited to investments that are also UCITS-compliant and can therefore generally be traded daily.
Hill: What is the process for selecting individual asset managers?
Friedrich: As already mentioned, we first determine the proportion that a certain type of investment should take up in the portfolio and then look for managers in a precisely defined niche that can implement this in the best possible way. So we know exactly what we want right from the start. Then we filter the universe using a database to focus our search. Low fees are very important in this process. Secondly, a strategy should already have a certain history so that we can estimate how it will behave in the portfolio. Only then do we look for the most promising candidates. Those funds that are shortlisted are then checked for their risk and correlation characteristics using our models. Besides, the behaviour that our target funds reveal on a quantitative level must also be qualitatively comprehensible.
Hill: How important are fund boutiques in this selection?
Friedrich: We have no explicit focus on large or small fund houses. What is important is the expertise in the respective asset class. Boutiques often have highly interesting strategies, which is why we regularly exchange information with many independent managers. In addition to a consistent investment process and a comprehensible strategy, the corporate culture is also important. You always buy into that culture to some extent.
Hill: You have held interesting professional positions. As mentioned at the beginning, you worked for a German family office before you became a portfolio manager. If you compare both positions – what is different, what is similar in your field of activity?
Friedrich: The main difference is that in a multi-family office, a central investment process interacts with client-specific control mechanisms for a large number of asset holders. At my former employer, for example, between 20 – 30 different custodian banks were involved in each restructuring. Customers also often had individual specifications that were relevant to implementation. The investment process had to allow for all this through a high degree of modularity, and that is very demanding. The resulting need for coordination makes quick fixes almost impossible in practice. In the fund, however, there is only one objective and one management team. Of course, the gap between decision-making and implementation is much smaller there.
Hill: The fund has now been in existence for just over a year, what is your summary?
Friedrich: Actually, we could have waited another year, because the value of the fund has returned to its initial level thanks to Corona. Of course, that wasn’t planned, but if we now consider how the individual parts of the portfolio have behaved during the crisis, we are not far from our expectations. So the concept has just passed a test under absolutely exceptional conditions. For us, this confirms the outstanding importance of the broad diversification that such an endowment portfolio offers.
In some places where there have been deviations from our expectations, there are of course starting points for improvements. I see this as a never-ending process under the motto: “If you stop improving, you stop being good!
Hill: What are you currently reading?
Friedrich: Unfortunately, I can’t read much because of all the work on the fund, which of course forces me to read a lot of research and specialist literature instead. But at my bedside is the book “Why Nations Fail” by Daron Acemoglu and James Robinson.
Hill: Thank you very much for the interview.
Martin Friedrich is the portfolio manager of the Lansdowne Endowment Fund. He joined Lansdowne Partners Austria in January 2019 from HQ Trust, one of the largest independent multi-family offices in Germany. Mr. Friedrich has been employed there since 2009, most recently as Head of Capital Market Analysis and Co-Chief Investment Officer. He also managed customer portfolios and was responsible for the investment process of LIQID, a Fintech company in Berlin. He was also active in the Wigmore Association. Wigmore is an innovative global cooperation of eight different single and multi-family offices.
LINK to Lansdowne Partners Austria GmbH: https://www.lansdownepartners.com/austria