Family Offices Discuss Investment Strategies for 2009

Opal's Family Office & Private Wealth Management Forum held July 8-10 in Newport, RI was attended by nearly 400 people, with approximately 70 speakers, including representatives from family offices, service providers, consultants, and wealth management advisors. I was able to attend, courtesy of Seeking Alpha and though the event was good for networking, it covered by now familiar territory from an investment perspective. Despite the large turnout, service providers seemed to outnumber investors and at times, service providers were pitching other service providers. Smaller single family offices doing one thing are now trying to market that to others but many don’t appear to be up to snuff.

Family offices, which appear to be the ultimate in closed door investment strategy, actually share the same concerns as even the lowly individual investor. These keepers of ultra-high net worth investors assets are concerned about liquidity, transparency and regulations, just like the common folk.

A number of issues were on the minds of the attendees. One common thread was concern over inflation. Although many speakers voiced concern, and there was a general consensus that the concern was legitimate, there seemed to be very few addressing the issue from a portfolio standpoint. Family offices, once uncommon, are more prevalent today and they have become just one more form of institutional investor mind think. Hedge funds, fund of funds, manager selection and asset allocation were featured topics.

Here’s a quick run down of the more interesting points.

According to Greymount, an institutional investor, the risk premium for stocks for the last 30 years has been 8%. They believe this will be 1% going forward and that portfolios should therefore be positioned 50% fixed income, 50% equity. You need to be ‘more nimble, more active and more tactical to prosper in the future.”

One speaker noted that the stimulus package won’t work because we didn’t co-ordinate it with everyone else.

Spring Creek Advisors is concerned about weakness in the economy, the capital gains rate, inflation. government regulation and how to protect against it. How to play the inflation theme? TIPS, (not tax efficient) real assets, commodities, distressed assets and portfolios and emerging markets.

Jim Crystal, CIO of Rockefeller and Co, is more constructive on growth in Asia than elsewhere, recommends keeping the duration short on fixed income and sees opportunities in dislocated credit. Due to dislocation of assets, new opportunities are cropping up but most consultants don’t know what box to put them in. In a sense, they are retarding the adoption of potentially profitable investment ideas. (My thoughts not Jim’s.)

Perhaps the most refreshing and interesting speaker was Richard Masino who is managing his own family office, is ‘not interested in managers who say they have a mandate’ and is seeking managers with ‘mental flexibility’ as opposed to ‘rigid conviction’ He cautioned to beware of ‘trap doors’ which he identified as data mining. It was good to hear an investor tell it like it is rather than buy into the institutional party line.

One opinion on what will work was expressed by the panel on asset allocation. There was some feeling that debt - floating not fixed, senior secured and short term collateral will be attractive.

In terms of the real estate market, there are currently buyers for distressed properties but they’re buying the debt and looking for returns of 25%+ and can afford to be greedy. Land seems to be bottoming out in California and most of the land sales are FDIC for 10-20 cents on the dollar. The FDIC will not ‘force banks to sell’ because they can’t afford to. They have 85 more banks to take over this year and have only taken over 45. Watch for the announcements on Fridays!

According to Paul Green, there are analogies between emerging markets and equities, i.e. country picking vs. stock picking, overvalued countries vs overvalued stocks, based on fundamentals. More institutional investors are recognizing the opportunities in fixed income in emerging markets. While it’s typically been viewed as a roller coaster ride full of risks, some trustees are going into bond investing as they feel more comfortable that countries will pay off their sovereign debt first because they have to come back to market.

Emerging markets will be over 50% of world GDP in 10 years. Most institutional investors have allocations of 2-3% which doesn’t match where the markets are going, Asia ex-Japan was10% of local GDP in 2003 and now it’s 17%. One of the speakers pointed out that you can buy a 20’x20’x20’ bar of gold or all of emerging Asia’s market cap. It’s a $6 trillion trade.

McDonald's (MCD) are open 24/7 in China and have home delivery. In one week, 500,000 people in China opened up brokerage accounts. The growth of the middle class in China almost makes up for other macro economic issues. Chinese consumption will make up 20% of all global consumption in 20 years.

At least 160 countries in the world are emerging markets. Legal systems in emerging markets have become more sophisticated in the last 10 years.

Gold was discussed. 70% of gold mined is for jewelry and 10% is for industrial use. While investment demand has been strong, the weakness in other markets has impacted the price of gold. Longer term, it’s felt that the impact of the Asian central bank allocations will have a major (positive) impact on the price of gold as will the dearth of major new discoveries.

Another compelling speaker was Candice Beaumont, Managing Director of a family office who opined that commodities and energy would outperform all other asset classes for the next 5-10 years. Her office’s investment ability has been uncanny, starting with the call that oil was undervalued at $10 when everyone was calling for it to go to $5.

Overall, investors seemed by and large directionless, still shellshocked and dispirited. The investment business better come up with something better than directionless to get the ball rolling again.

Comments

[Old Trader:]

Sounds like an interesting, worthwhile conference. I'll have to see if they (Opal) do one here (in Chicago).

Jul 23 06:04 PM