When a foundation puts together a fund portfolio today, it does so in the knowledge of the low-interest rate and the key performance data of various funds. What suggestions could foundations get from decision-makers in family offices? Possible keywords here would be a calendar year, investment style, performance as a hygiene factor. If one assumes a natural pleasure in exchanging ideas and curiosity on the selector side, all sides can enter into a professionally fruitful dialogue – as a rule, one does not become dumber through a conversation; here, too, the “qualified diversity” (QD) factor can be enriching in investment decisions!
Family wealth is often something shrouded in legend, it is often a mass that is hardly tangible from the outside. It is hard work to preserve these assets and to manage them. Family offices take on this task. Much of what they do has similarities with what foundation stewards have to do in day-to-day practice. Ideally, foundations also have a very long-term investment horizon and do not have to focus primarily on performance. They follow an overriding goal in the management of their foundation assets: the realization of the foundation’s purpose. In this context, mutual funds are often used, often labeled “endowment funds”.
It might be interesting to take a look at how a family office would approach fund selection. If the parameters are fundamentally similar to those of a foundation, then perhaps parallels can be found for the selection of foundation funds or funds suitable for foundations. This brings us directly to the first point: A family officer – and other fund selectors, too, of course – would rarely be irritated by a label such as “foundation fund”. He is generally interested first in the figures, investment process, investment style, etc., and less in the prose on the front of the product flyer. For a family office, endowment funds are a fund category like any other. You could often basically just talk about balanced funds, which in one format or another are a bit more accommodating to foundations in their needs.
Funds – substance versus label
A mixed fund is selected by a family officer according to its task in the portfolio, and this can vary. Either a mixed fund is a low fluctuation basic investment, i.e. a building block to fill a foundation in the portfolio. Then it is more defensive mixed funds, which then may well include endowment funds. In another case, however, the mixed fund can also be the building block with which a distribution component is to be brought into the portfolio. Both tasks also have to be “taken care of” in the foundation’s assets, with the focus on the ordinary return, i.e. the distribution. What a foundation can learn from a family office, however, is how to define the scope of a fund and, based on that, how to analyze certain performance data.
A family officer who is not “foundation-minded” would, however, always disregard fund categories and compare foundation funds with income funds, for example, because these two categories could be used to accomplish the task at hand. Likewise, they would free themselves from looking solely at performance. For family officers, performance is often a hygiene factor; it provides orientation, but it is not the central criterion for fund selection. Return is considered with risk, and the asset manager’s track record, for example, is equally important. In addition, it could be a question in the future whether a fund grants ESG criteria a comprehensible role in its investment policy. Currently, an interesting controversy is still taking place in expert circles. The increased consideration of ESG criteria (time horizon argument, opportunities for influence – direct and indirect, etc.) may mean that performance could suffer in the short to medium term.
ESG ante Portas
For some time to come, the topic of ESG may be viewed with a different focus by different groups of investors. Foundations are required by their very DNA not to invest in anything that – roughly speaking – harms the common good. Family assets are likely to be invested according to the same overriding motto in the future. Accordingly, family offices will confront the funds they prefer in this regard with questionnaires and naturally also demand an open approach to the subject. Foundations can also take a leaf out of the family office’s book and demand – in their case – foundation-specific information. Family offices would never be satisfied with a factsheet and an annual report as a source of information; they would want to know what was done in the fund in this or that phrase to be able to assess the management quality.
A key point when selecting asset managers: can a fund deliver what it promises over the long term, in terms of performance, in terms of distribution, in terms of drawdown, in terms of correlation, in terms of asset allocation? Practically no family officers would look only at the last year or the last three years for a fund; he would always expect a stocktaking since the fund’s inception. At the very least, a set of information that has been available since inception. Conversely, this also means that family offices take time off from the calendar year, and that can be a valuable cornerstone for foundations. The family officer tends to think in terms of capital market scenarios and adjusts the portfolio accordingly, for example, to be a little more offensive or a little more defensive. Regulatory freedom, thinking in terms of generations – this is perhaps a key advantage of this approach.
In addition to breaking away from the calendar year, family offices often use another approach to managing the portfolio: mixing investment styles. For the various, long-term scenarios, one investment style is better and the other investment style is less suitable. However, since no one knows which scenario will ultimately occur, a mix of investment styles and also strategies is a good idea. The positive effect of this technical measure is primarily felt in the medium and long term, which is of course also a fact of relevance for foundations. Because a foundation is not helped if its foundation assets only succeed in one year, which is why the trick with the mix of styles can also be a very decisive one for foundations.
A family officer is a special “problem solver” with in-depth, independent expertise for family assets. To do this, he or she must be technically up to speed and be able to look at and “manage” a sufficiently long-term investment horizon. Foundations can learn a few things from the family officer, but also in the details. After all, putting together a family wealth fund portfolio follows a surprising number of considerations that foundations should also make. Especially those who are looking ahead to the year 2030 when aligning their assets, and who are thinking of throwing some of the familiar or accustomed things overboard. But as Johann Friedrich von Allmen quotes so well in the first part of the Allmen films: “The gods smile on the bold”. Or – boldness combined with risk management: foundations and family officers seek and cultivate the professional exchange of ideas before 2030!
Event information – FAMILY OFFICE-Panel (21.10.2021)
21.10.2021 – 13:55 Panel Discussion – Asset Allocation: Family Offices Views
The geopolitical and financial worlds are changing rapidly and are requiring investors to reassess their allocation strategies. COVID-19 leads to a higher need for risk management. How do supply-chain issues and trading inhibitions affect wealth management moving forward? There has been a rise of investable wealth leading to more single and multi-family offices, along with technological advancements and market disruption. Now, family wealth is focused on preservation rather than growth. How are family offices adjusting their asset allocations and strategies? How are costs adjusted to improve returns? How are family offices managing non-asset allocation investments that are interest-driven by principals and finding that delicate allocation “balance”?
Markus Hill, CEO & Founder, MH Services
Thomas Borghardt, Member of the Board, Marcard, Stein & Co
J. Christian Stadermann, Partner, Logos Patrimon
David Pieper, Chief Executive Officer, Skyland Wealth
AGENDA „Private Wealth Forum Germany“ 20.10. – 21.10.2021 – TOPICS – INFORMATION / REGISTRATION (INSTITUTIONAL INVESTORS): MARKETS GROUP – PRIVATE WEALTH GERMANY FORUM
- Family offices, fund initiators, and the “burning passion” factor (Interview – Markus Hill, Thomas Caduff)
- Fund Boutiques, Think Tanks and Investor Relations – “Art”, Fans and the Treasure Island (Comment, Markus Hill)
- Family Offices and Fund Boutiques – Seed Money, Incubators, and Goethe (Comment – Markus Hill)
- Family offices and fund boutiques have many similarities (Interview – Thomas Caduff, Markus Hill)