“Family Office in a Box”, foundations, asset allocation, funds of funds, fund selection, and fund boutiques – Markus Hill spoke for FINANZPLATZ FRANKFURT MAIN with Martin Friedrich, Lansdowne Partners Austria GmbH, about these topics as well as about the importance of capital market research for one’s investment process, 3-year track record, as well as the pleasure of exchanging professional ideas in Frankfurt, am Main.
Hill: What exactly does the term “Family Office in a Box” mean in the context of your house?
Friedrich: That is a really interesting question. I sometimes use this term to succinctly describe the Lansdowne Endowment Fund that I initiated. The term fits very well for several reasons: Firstly, it is a classic total wealth concept: the fund is massively diversified in itself, and yet can be conveniently invested via a single securities transaction. Secondly, many high-net-worth families implement a comparable investment process as part of their in-house asset management. Family offices – just like endowments – are institutional investors with deep pockets and a long-term investment process. So we share the same investment philosophy with family offices, even if there are regulatory differences in the actual implementation.
Hill: What exactly is behind the term “endowment approach” and in what sense exactly is there a connection to the generally known term “foundation” in the German-speaking world?
Friedrich: Well, the literal translation of endowment is probably even “foundation”. Endowments have been known in England for hundreds of years. The idea is quite simple: to endow non-profit institutions such as universities or hospitals with assets that secure the institution’s existence and thus also ensure its independence. Endowments do this by subsidizing the operation of the beneficiary institutions – in the case of Yale University, these contributions account for about a third of the entire budget! Seen in this light, the purpose of endowments is often comparable. Admittedly, there are also differences, especially in terms of regulation and the design of investment policy. In Germany, the state has taken the liberty of influencing the “business development” of foundations to a much greater extent than is the case with US endowments.
Hill: What does your investment process look like in concrete terms?
Friedrich: We offer our investors an investment process that is typical for large institutional investors. I can say this with authority because I have dealt with many such institutions in the course of my already almost 30-year career in the financial market. I have learned that of course, every institution is individual. Nevertheless, such assets always have a strategic asset structure, which of course has to be implemented. In the case of endowments, mandates are almost always given to external managers. Thus, strategic allocation and manager selection are elementary basic components of such an investment process. We then add tactical allocation and overlay strategies. These process steps are also frequently found among institutional players, even if the scope and design vary greatly in practice; clearly, opinions differ here. But the principle of structuring one’s investment process into a value chain of several successive steps is beyond debate.
Hill: What significance does capital market research have for you here?
Friedrich: Well, we haven’t talked about the investment success of our identity donors yet. But, especially the Endowments US elite universities like Yale, Harvard, or Stanford are really interesting role models. One reason for this is that these institutions created highly specialised investment offices staffed with experts from around the middle of the 20th century onwards. These units then benefited from the proximity to capital market research that was and is conducted at these very universities. As a result, Yale’s endowment has delivered annual returns of over 12% since 1998 – in a period when stocks have delivered 4.5% and bonds 4.7%. The Lansdowne Endowment Fund takes advantage of this observation by consistently using scientifically validated methods in our design and optimization processes. Likewise, we are constantly working on the further development of our models using scientific methods.
Hill: You are a fund of funds manager. How do you identify excellent fund managers?
Friedrich: In the same way as other institutional investors: through databases, search requests, and personal interviews. The criteria for selection are always the same: first, the quality of the people behind the funds. Secondly, the qualification of the players. Thirdly, we try to understand their motivation: what incentives are given to the decision-makers by the organisation surrounding them. In investment management, there are always so-called principal-agent conflicts; depending on the design of the incentive systems, these can be largely mitigated or intensified. Finally, we must of course understand the investment process of our target funds as well as possible. We may have a slight advantage here because we run tactical models for the endowment fund asset classes. This forces us to understand the return drivers and risks of the individual capital market segments very well. Equipped with this knowledge, we can discuss it with our managers at eye level. I hope that this helps us make good decisions when it comes to selection.
Hill: What role do fund boutiques play in this process?
Friedrich: Boutiques play an important role in our fund. In asset management, a bigger team is not always better. Small units that are efficiently managed and have short decision-making channels can often act very successfully. Their independence helps them to remain true to their style. However, we have to assess on a case-by-case basis whether the team has all the necessary resources available for its task.
Hill: You now have a 3-year track record for your fund. How has the fund performed during this time?
Friedrich: I recently looked at an old presentation from 2019. At the time of the fund’s launch, we had formulated the expectation of being able to generate a return of 3.91% on average over seven years with our special asset structure. I was told at the time that this was too little. Today, with a total return of 13.1%, we are at exactly 4.1% annual return, and thus surprisingly close to our model calculation at that time.
However, it gets exciting when we put the Endowment Fund against the investable alternatives: because that’s where you find that the fund is in the top 10% of the peer group. We were able to leave some big names behind.
Hill: When you look at the current macroeconomic environment, what is your “world view” here for the next few years?
Friedrich: Before I answer this question, I would like to preface it by saying that we do not make forecasts for macroeconomic variables such as economic growth, inflation, or the like as part of our investment activities. Our positions are therefore not dependent on a particular “worldview” or the like.
Nevertheless, we naturally observe the accompanying macroeconomic circumstances very closely and must also understand their interaction with the price development of all capital market segments. On this basis, our interpretation of the current situation can be summarised as follows: the global economy is in a more or less synchronous slowdown. Some economies are probably already in recession today, others are heading towards it. The size and number of the various shocks – corona-induced supply chain failures, de-globalization, war, overshooting commodity prices, and the highest inflation in almost 50 years – make it hard to draw any other conclusion. However – and most commentators are oblivious to this – in a classical economic cycle, inflation is always a lagging indicator. This means that one should be able to expect that a weakening demand due to the economic cycle will also be reflected in the development of consumer prices in the medium term. Therefore, I am quite confident that we will see significantly lower inflation rates again in 12 months. However, the interest rate hikes on the way there will not go unnoticed in the capital market. Investors are well advised to diversify their portfolios broadly and to pay more attention again to the valuation component – which has fallen out of fashion in the meantime.
Hill: You are active in Vienna. Do you also travel more often in Germany?
Friedrich: Sure, I’m already back in Frankfurt in the third week of July, and then I’m planning a series of additional appointments for the autumn. Maybe we’ll even see each other in person, at an exciting lecture, and at a professional exchange of ideas on-site, I value these conversations very much.
Hill: I wish you interesting appointments in Frankfurt in advance. Thank you very much for the interview.
Martin Friedrich is Portfolio Manager of the Lansdowne Endowment Fund and Head of Research. He joined Lansdowne Partners Austria in January 2019 from HQ Trust, one of the largest independent multi-family offices in Germany. Friedrich had been employed there since 2009, most recently as Head of Capital Markets Research and Co-Chief Investment Officer. In addition, he managed client portfolios and was responsible for the investment process of LIQID, a fintech company in Berlin.
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