“Family Office in a Box” – foundations, asset allocation, funds of funds, fund selection and fund boutiques
Markus Hill spoke for FUNDBOUTIQUES.COM with Martin Friedrich, Lansdowne Partners Austria GmbH, about these topics as well as about the importance of capital market research for one’s own investment process, 3-year track record as well as the pleasure of professional debate in Frankfurt am Main.
Hill: What exactly does the term “Family Office in a Box” mean for your company?
Friedrich: That’s an interesting question. I have used this term to succinctly describe the Lansdowne Endowment Fund that I initiated. The term fits very well for several reasons. Family offices – just like endowments – are institutional investors with deep pockets and an investment process optimized for long-term results. Many high-net-worth families implement a very similar investment process as part of their in-house asset management. We therefore share one and the same investment philosophy with family offices, even if there are regulatory differences in the actual implementation. Lastly, the fund is massively diversified in itself, yet conveniently investable through a single transaction.
Hill: What exactly is behind the term “endowment approach” and in what sense is there a connection to the generally known term “Stiftung” in the German-speaking world??
Friedrich: Actually, the literal translation of Endowment is probably “Stiftung”. Stiftungen = Endowments have been known in England for hundreds of years. The idea is quite simple: to provide a non-profit institution – such as a university or a hospital – with financial assets that ensure the institution’s continued existence and, at the same time, ensure its independence. Endowments do this by subsidizing the operations of the institutions they serve. In the case of Yale University, these contributions account for about one-third of the total budget.
In comparison, the purpose of Stiftungen is often similar, but there are also differences, particularly in regulation and, partially in consequence, the design of investment policies. The German state has decided to regulate its Stiftungen much, much stricter than is the case with U.S. endowments.
Hill: What does your investment process look like?
Friedrich: We offer our investors an investment process that is rather 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 finance. What I have learned is that, while of course each institution is individual, there are some common features. For example, the largest investors almost always give themselves a strategic asset structure, which then has to be implemented. In the case of endowments, mandates are mostly awarded to external managers rather than pursued in-house. Therefore, strategic asset allocation and manager selection are universal, basic components of an institutional investment process. In our case, tactical allocation and overlay strategies are added. These process steps are also frequently found among institutional players, even if scope and design vary in practice. 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: Research has played a crucial role in the investment successes enjoyed by endowments. We believe this makes the endowments of US elite universities like Yale, Harvard or Stanford really interesting role models. Starting around the middle of the 20th century, these institutions created specialized investment offices and staffed them with experts. These organizational units greatly benefited from their proximity to the capital markets research that was (and is) conducted at these same universities. Fast forward to today, and Yale’s endowment has delivered annual returns of over 12% since 1998 – a period when stocks and bonds have delivered a mere 4.5% and 4.7%, respectively.
The Lansdowne Endowment Fund takes advantage of this observation by consistently using scientifically validated methods in its conceptual design and optimization process. Moreover, we are constantly working with scientific methods to further develop our models.
Hill: You are a fund of funds manager. How do you identify your investee managers?
Friedrich: Just like other institutional investors: through databases, search requests and personal interviews. The criteria for selection are always the same: the first and most important is the quality of the people behind the funds. Second, we look at the qualifications of these individuals. Third, we try to understand their motivation: what incentives are given to the decision makers by the organization surrounding them? Investment management often gives rise to so-called principal-agent conflicts; depending on the design of the incentive systems, these can be largely mitigated, or they can be amplified.
Last, of course, we need to understand the investment process of our target funds as well as possible. We may have a slight advantage here because we run our own tactical models for the endowment fund asset classes. This forces us to understand the return drivers and risks of the individual capital market segments extremely well. Armed with this knowledge, we can have eye-to-eye discussions with our managers. I do hope that this enables us to make good decisions when selecting our target funds.
Hill: What role do fund boutiques play in this process?
Friedrich: Boutiques play a very important role in our fund. That’s because in asset management, a larger team is not always better. Small units that are efficiently managed and have short decision-making paths can often operate very successfully. Their independence helps them stay true to 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 developed during this time?
Friedrich: Well, I recently pulled out a pre-launch presentation from 2019: At that time, we had formulated an expectation that we would be able to generate a return of 3.9% on average over seven years with our particular asset structure. I was told at the time that was too low. Today, with a total return of 13.1%, we have an annual return of exactly 4.1%, which is surprisingly close to our model calculation at that time.
However, it gets exciting when we put the Endowment Fund up against the investable alternatives: because that’s when you find that the fund has attained a position in the top 10% of its peer group. We also just received a 5-Star rating by Morningstar. We were able to leave some big names behind.
Hill: If you look at the current macroeconomic environment, what is your “world view” here for the next few years?
Friedrich: Before I answer this question, let me emphasize that we do not forecast macroeconomic variables such as economic growth, inflation or the like as part of our investment activities. Therefore, our positions are not dependent on any particular “world view” or similar.
Nevertheless, we are of course keeping a very close eye on macro-economic conditions, and must understand their interaction with the price development of all our capital market segments. With that said, our interpretation of the current situation can be summarized as follows: the global economy is in a more or less synchronous slowdown. Some economies may already be in recession today, with others 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 – hardly allow for any other conclusion. However – and this is something that most commentators are unwittingly overlooking – in any economic cycle, inflation is always a LAGGING indicator. This means that we should fully expect the coming cyclical slowdown in demand to be reflected in consumer price developments over the medium term. I am therefore quite confident that we will see significantly lower inflation rates again in 12 months’ time. However, the interest rate hikes on the way there will not go unnoticed in the capital market. Investors would be well advised to diversify their portfolios broadly and to pay more attention to valuations, a discipline which has fallen out of fashion in the meantime.
Hill: You are in Vienna. Do you sometimes spend time in Germany as well?
Friedrich: Sure, I’m already back in Frankfurt in the 3rd week of July, and then I’m planning a series of appointments for the fall. Maybe we’ll even see each other in person, at an interesting presentation and exchange of ideas. I really appreciate these occasions.
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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