Summary: Family offices are investment vehicles used to manage and grow the wealth of high net worth individuals. While setting up a family office is not a feasible strategy for most investors, there is lots to learn from how family offices invest.
Key take-out: Australia’s wealthy are increasingly exiting long-held assets, investing in alternatives, looking to Asia and holding different currencies. Retail investors could equally adopt a long-short equity strategy, learn from the Asia approach, and diversify across currencies.
While not everyone has $1 billion or more to invest, everyone can learn from how billionaires are currently managing and growing their wealth.
The family office is a good place to start – an investment vehicle used to manage key family assets and core wealth holdings.
This week Eureka Report met with one of Australia’s largest family offices, Myer Family Company (MFCo), boutique operator Boyce Family Office, and a private clients partner at PwC Australia, to shed light on how the wealthy are investing.
According to UK-based research firm Campden Wealth, there are more than 5300 single family offices in the world today, with 17 per cent in Asia Pacific. In addition to operating as investment platforms, family offices also manage philanthropy, succession planning, tax, budgeting, risks and insurances.
‘The Family’ is almost a fabled term, but these days, the family is being inked in the books as a core vehicle to broker deals in a brave new world, even beating investment banks to some opportunities.
For seven years prior to joining PwC, Dale Sanftl worked at the Myer Family Company. There he rode out the GFC, when high net worth families were compelled to change their strategies.
Cashed up and ready
PwC is currently working alongside 20-30 family offices nationwide. Sanftl said, in terms of investments, “cash is first” for many of the high net worth families he works with today.
“A lot of families are cashing up their portfolios and taking risk off the table,” said Sanftl.
“In some cases, they are selling long-held real estate assets because the yields in the market are so low that the prices on offer to marginalise these assets are too good to be true.
“We’re seeing some exit family businesses they have been in for a long time to convert a significant portion of the balance sheet into cash. Cash is their dry powder to buy assets at the right time.”
Sanftl said “the shape of some of these families’ portfolios is changing quite quickly” and “long-short equity strategies are in favour”.
He said ordinary investors can learn from the long view by practicing patience and assessing investments from “a multi-generational point of view”.
“If I rewind pre-GFC, very few family offices would have considered long-short strategies and were just long in their equity portfolios, riding the cycle, holding high-quality companies - setting, and more or less, forgetting,” said Sanftl.
“There’s a concern about equity valuations at the moment and where markets might go from here. More family offices are investing with active managers with some degree of shorting in their portfolios, so hopefully if we see more volatile market conditions or declining markets, there’s the ability to go forward.
“They are more risk adverse these days and navigate around risks by choosing sticky or non-traditional investments.”
Alternatives and Asia
In terms of non-traditional investments, Sanftl said he knows of family offices taking lending into their own hands. Similar to how family office philanthropy is filling a government gap, family offices are diving deeper into first and second mortgage lending and providing finance where the banks no longer can.
“On the one hand, these are quite simple investments – a property loan which pays interest – but they are much more complex than that,” said Sanftl.
“You need to look very closely at the risk you are taking and the underlying quality of the assets. Family offices might partner up with third party financiers, who source and find the deal, and they then provide a portion of the capital.”
Family office veteran Richard Boyce is also seeing firsthand more funds getting funneled into alternative and emerging investment markets, which ordinary investors can perhaps emulate more easily.
Richard Boyce is fifth-generation of the Boyce Family Office, which caps itself to managing the wealth of 12 family offices. The Boyce family set up their first business in publishing in Australia 150 years ago and has since diversified into law, accounting and retail.
Before breaking out on his own, Boyce ran EY’s Asia Pacific family office team, where he was exposed to more than 200 families in a region where wealth is growing faster than anywhere else in the world.
He said more of his clients have gazes fixed across the Pacific.
“Australia has the highest tax out of all the Asia Pacific jurisdictions, so by default, you take a geographic portfolio approach and set up legal structures across jurisdictions for tax effectiveness – of course there’s the political risk factors you must consider too,” said Boyce.
“Sophisticated families don’t just look into their single jurisdiction and are really looking across Asia Pacific. But if you are going to become more sophisticated in that way, you really need to have the right infrastructure.”
For those who don’t, there could be ways around it.
“A big takeout for the ordinary investor is diversify your portfolio across financial markets, across businesses with exposure across geographic areas, and into alternative markets,” said Boyce.
“If you look at wealth in Australia, percentage-wise across the whole population, we are overweight in local property and blue-chip shares. If something happened in Australia, from a generational point of view, there’s considerable risk from a geographical point of view.”
Currencies, not markets
Looking broadly, Sanft agrees with Boyce. However, for his clients “it’s more about currency diversification than chasing any particular market opportunity”.
“I have more families interested in holding US dollars than US equities because they are thinking valuations look quite stretched but they would like to maintain global purchasing power,” said Sanftl.
“They aren’t, for example, buying up Google and Apple shares, and instead looking for active and opportunistic managers in those markets.”
Sanftl said investors can attach themselves to some of these opportunities and co-invest alongside single family offices – who typically have $200 million-plus in assets – and are “often supported by four or five other families to hedge their infrastructure costs”.
Boyce encourages entrepreneurship, believing “there’s no certain dollar amount you create a family office on”.
“For a family with $10 million in investable assets, their daughter or son might run the administration internally, as they tap into best of breed external managers,” said Boyce.
“In terms of what professionals you should hire, it really depends on what type of assets you're going into. If you’re going to invest directly into businesses, you might need to contract more sophisticated M&A-type individuals who can review 100 different opportunities and select a handful.
“The investment markets generally put a figure of $100-150 million to run your own family office with all your own infrastructure, but the market is changing.
“You can set up a cloud-based family office quite efficiently and gain access to major wholesale funds. Because of this, family offices are really impacting the investment banks who owned the market back in the late 90s and early 2000s.”