(Pictured: Steve Hall)
Brookvine, the fund manager and third-party marketer, has put together a dossier on the investment behaviour of family offices and high-net-worth investors, highlighting their differences compared with super funds. Managers and advisors should take note.
The dossier followed a gathering, which Brookvine called ‘Whiteboarding 1.0’, which included family offices, managers and researchers. It was prepared by the discussion’s facilitators, Brookvine directors Steve Hall and Jack Gray.
The discussion was designed to question conventional wisdom, which Hall and Gray believe has developed in the context of the behaviour of large US institutional investors. It is not necessarily suited to the family office (FO) or high-net-worth (HNW) markets.
They included in their dossier a list of characteristics which are represented in the different investment model employed by FOs and HNWs. The list includes:
> Advisors/CIOs are educators and influencers, not just allocators. They need to be good advocates and listeners as investment objectives are informed by expectations of both financial and lifestyle values.
> Less concerned with volatility or tracking error, more concerned with the possibility of not meeting objectives and protection of capital.
> At times opportunistic, typically with higher conviction, far less diversified by investment opportunity and style. HNW/FO decision-makers tend to be more idiosyncratic in their preferences with less attention paid to industry norms.
> Limited use of Modern Portfolio Theory including optimisers and other risk management tools. As well, cash is an active component of portfolios, at times held at quite high levels. Transparency is important with a strong desire to eyeball managers.
> Stronger preference for local managers probably allows for greater transparency (than HNW/FOs might get from offshore managers) and greater understanding through heightened bonding and trust, an aspect of the domestic bias likely to have positive benefits.
> Broad endorsement for alternative investments, tempered by access, difficulty explaining risks and exposures, and lack of quality independent manager research. Some tolerance for complexity and illiquidity. Greater preparedness to invest in niche opportunities, whether local or offshore.
> Most favour active managers supported by a strong belief in their ability to identify and access top tier managers. Some HNW/FOs however are strong advocates for index and ETF investing, reflecting their scepticism about active management (in some markets) and the ready availability of specialised ETF opportunities in others. Most have a strong preference for managers with a strong alignment of interest.
> Very cost conscious but focused more on net-of-fees returns, thus more accommodative of higher cost opportunities where justified by complexity and/or capacity constraints.
> Limited use of asset consultants, but great value placed on external and independent investment committee members. Finding people with the requisite experience is demanding.
> Typically flat investment team structure with a high degree of delegation to individual team members and a lack of specialisation by asset class or investment opportunity. Top-down experience across categories of investments matters greatly. Deal with many high-touch bespoke issues, and can have a tough job keeping on top of all asset classes and all the things the HNW/FO expects.
Brookvine plans to host further discussions in its ‘Whiteboarding’ series.