Senior figures from the investment and family office world debated subjects as varied as macro-economic guesses over monetary policy to the case for art-based financing at the recent asset allocation summit in New York as organized by this news service.

An investment-themed conference in New York City touched on a full spectrum of concerns ranging from the approaches family offices take to direct investing to seemingly interminable ordeal of trying to generate returns in a world of zero, or even negative, interest rates.

The Family Wealth Report Asset Allocation Summit, held at the University Club, included multiple panels covering a range of topics, including their macro-economic views, the best approaches to asset allocation; direct investing opportunities and use of private markets; and the range of options, or tools, for executing wealth protection strategies. 

Sponsors were Columbia Threadneedle; Crown Global Insurance Group; Mackay Municipal Managers; Marsh Private Client Services; Nationwide Wealth Management; TIAA Global Asset Management; Nuveen; Pioneer Investments; PKF O’Connor Davies and Voya.

Kicking off the event, Avi Sharon, head of multi-asset marketing at Blackstone, talked about how 2016 was shaping up to be the “Year of the Unimaginable”, with the US Presidential race in mind, following on the Brexit vote in June. He commented on how investors, confronted by performance headwinds impacting public equities and bonds, should consider the potential benefits of allocating to private market, alternatives. “These less liquid investments provide both a return premium and an additional area to pursue diversification,” he said. ”Just as investors have learned to diversify across large and small cap, growth and value, so they should consider diversifying across the spectrum of less liquid investments, including private equity, direct real estate, and other “alternative” categories.

1st panel
The first panel, involving a collection of senior investment figures confronted challenge posed by low/negative interest rates and how distortions caused by such policy meant there is indeed a case for considering the merits of less liquid asset classes. The theme for this panel was Lower for Longer: Global Rates and Investor Reactions.

Speakers on this panel were Jeffrey Levy, principal, Casey Quirk by Deloitte; Charles Melchreit, director of investment grade portfolio management, Pioneer Investments; Rebecca Patterson, chief investment officer, Bessemer Trust; Marc Rinaldi, director of investments, PKF O’Connor Davies Family Office. The panel was chaired by Stephen Harris, chief executive, ClearView Financial Media, publisher of this news service.

“If you want to pick up yield in the credit markets at the moment then just tread carefully,” said Bessemer’ Patterson. “We don’t want to chase [equity] dividends at this point in the economic cycle,” she said. 

Melchreit, meanwhile, stated how the low-rate environment drives M&A activity rather than significant amounts of capital spending - this is one of the distortions caused by low rates, he said. Jeffrey Levi said that any consideration of appropriate asset classes for a client had to be framed by looking at the overall cost of managing a portfolio. Rinaldi, chimed in that the largest risk for Western economies at present was the “crowding-out” of private capital as a result of the accumulation of heavy government debt burdens.

Panelists were asked about what they think about gold, often touted as the ultimate safe-haven asset. Bessemer’s Patterson said gold’s volatile price behavior was a challenge. However, if the price were to fall, then there is a case for adding to holdings at the current state of the economic cycle, she said. Gold should be in a “defensive bucket”, maybe no more as a share than 6 per cent of that, she said. Hedge funds have their place as a defensive strategy and, despite some recent sluggish performance, it is worth paying to obtain non-correlated assets.

One of the benefits of periods of market volatility was that they were good points for wealth managers to communicate with clients, she added.

Levi was asked about what is called “factor investing”, aka “smart Beta”, and he argued that such an approach had not yet been fully proven through an economic cycle and through volatile market conditions. Patterson said that with the explosive growth in AuM of exchange traded funds, the sheer weight of dealing caused by ETFs can create sharp moves in individual stocks that bear little relation to the underlying qualities of companies. At present, ETF turnover is now a high portion of total market turnover, she said. 

2nd panel
In the second panel, under the strapline of Responding to the Return Gap: Alternatives and Private Market Premiums, panelists debated the case for private equity and other private routes to earning returns. The panelists were Candice Beaumont, managing director, L Investments; Shai Vichness, head of senior leveraged lending, TIAA Global Asset Management; Kelly Westfall, director, investment strategy consulting at PKF O’Connor Davies, and Jamie McLaughlin, who was chairman of this panel, and founder and chief executive, JH McLaughlin & Co.

The panelists agreed in broad terms that direct lending, direct real estate and private equity seemed the most likely routes for obtaining returns, and that the “direct” route required levels of due diligence and expertise that not all family offices had at their fingertips.

A good deal of the focus of the panel was on the issue of liquidity and family offices’ and other investors’ understanding of the constraints. PKF O’Connor Davies’ Westfall noted how, in the world of hedge funds, for example, investors could suffer if years of patiently acquired returns were suddenly reversed by the imposition of onerous redemption constraints. “Liquidity isn’t free and you are going to be paying for it,” Westfall said. 

For investors who wanted to have high liquidity, private credit is “probably not the place” to be in, TIAA’s Vichness said, but for those who have a tolerance for illiquidity, options abound. He referred, for example, to structures that investors might find of interest such as Business Development Companies (BDCs), which are publicly traded closed-end funds that make investments in private, or in some cases public companies. 

On the subject of direct investment, Beaumont said one benefit of direct investment is its educative value for younger generations of investors, as they can learn about the specifics of companies, finance and products. It is particularly useful if the sector in which a direct investment takes place is the same as that of the family office, she said. Another area of interest, which in fact has seen activity for a long time, are “club deals” among investors, she said. “This is in some ways democratizing the market for deal flow,” she said.

McLaughlin, observing that he sees some evidence of “green shoots” of progress among family offices developing more institutional character to their investment due diligence processes, asked panelists to respond.

3rd panel
Family offices gave their own experiences of direct investing, with a spectrum as wide as could be, ranging from investment in classic men’s bespoke tailoring in London to anti-missile defense systems. 

One of the take-home points from the third panel was that direct investing is intellectually challenging, potentially rewarding and also a good way for a family-run business and office to leverage its own business expertise. Speakers on this panel, entitled Families and Direct Investing, featured Elijah Duckworth-Schachter, partner at Point One Percent; Harris S. Fried, chief executive, The Fried Family Office; Steven H Hirth, founder & principal, S. H. Hirth & Associates, and the chair was Joseph W. Reilly Jnr, family wealth advisor.

Steven H Hirth, for example, spoke about how he was able to find interesting firms in which to invest during his regular trips around the world and how some of these opportunities presented themselves almost by accident. He referred, for example, to an IT investment proposition in Berlin, Germany, from such a recent trip. It is also important, he said, for would-be direct investors to stay with subject areas where they had strong knowledge and not make the risk of venturing far outside a field of expertise. “I know what I know and I’m comfortable with what I don’t know,” he said. The benefits and rewards of travel in pursuit of investments are considerable, he continued, noting that some people don’t like to spend on a long-haul flight and hotel visit. He also referred to his dislike of internet-driven investment networking and marketing. “People who know me know what I like and don’t like and I can’t get that on the internet….I am not a man for all seasons,” he said.

Fried referred to how his family office had set up a “mini-think tank” to look a direct investing ideas. “Our focus in the last three years or so has been missiles and missile defense,” he said. In checking out such ideas, however, he stressed his firm uses experts to carry out the due diligence needed in such areas. He likes direct investing in part, he said, because it is “intellectually challenging”.

In direct investing, Duckworth-Schachter said in his case, he believes it is important for family offices to share ideas with other FOs, and he does this a lot. He gave the example of how his FO inverted in a 150-year-old menswear firm in London’s Jermyn Street, making use of the experience his family’s business has had a similar field. 

Asked about what share of total investments is in direct investing areas, Duckworth-Schachter said that in his FO’s case, the slice is about 20 per cent; Fried said that his FO’s direct investing share is about 15 per cent and that share might increase. Hirth said that if real estate is included, then the total share of assets invested directly is between 40 and 45 per cent.

4th panel
In the fourth panel, the theme was Protecting Assets - Making Full use of the Financial Toolkit, and the panelists and delegates explored the different ways investors can mitigate erosion of their wealth at a time when legislators are constantly seeking ways to change the rules. 

Speakers on this panel were Arthur Bavelas, founder of Bavelas Group Family Office and Family Office Insights; Robert DiMella, co-head of MacKay Municipal Managers; Jay Judas, managing director, Crown Global; Ivan Sacks, chairman of Withers Worldwide, and the panel was moderated by your correspondent.

Different jurisdictions, structures around insurance and trusts in all their various permutations were discussed by the panel. Speakers were asked about structures such as private placement insurance (PPI), for example, which is said to provide certain protections. Crown Global’s Judas said that with this sort of insurance, it was not so much a product around risk as about tax efficiency. Hedge funds are interested in this space and separately managed accounts can be held inside PPI, he said. 

DiMella noted that with tax mitigation approaches, the client has to realize that people should not invest solely to mitigate tax but to consider the underlying investment proposition. 

A member of the audience asked about the asset-protection benefits of moving offshore. Withers’ Sacks quipped that the most sensible thing a person can do if thinking about moving to such places is to spend at least two weeks there to appreciate the limits, as well as the supposed benefits, of such locations. 

Turning to the subject of trusts, Sacks noted that there has been a mixed bag of court case rulings over structures such as asset protection trusts and their ability to shield those with liabilities against creditors. For certain professionals, such trusts do have value, and he noted that in domestic US life, there are benefits in protections for children. 

At one point, when considering risks to wealth and general wellbeing, Bavelas asked delegates to consider the potentially dangerous features of social media, given the erosion of privacy. “I say this: if you have a Facebook account, then delete it.”

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5th panel
The conference took a decidedly aesthetic turn when panelists discussed the world of art and investment and the issues that wealthy clients and advisors should consider.

Speakers on this panel, taking the title of Passion Killer: Can Art and Investing Mix?, were Evan Beard, National Arts Services Executive at US Trust; Harris S. Fried, CEO of the Fried Family Office; Diane Giles, business development executive at Marsh Private Client; and your correspondent chaired the session.

Panelists discussed topics such as the growth of a secondary market in art, the need to understand how liquidity can suddenly evaporate and the need to understand that investors could become “obsessed” with building a collection and lose sight, without guidance, of financial sense.

US Trust’s Beard said that at present, about $20 billion of loans, where art is collateral, are outstanding, having risen from around $2 billion in 2000. The situation is hardly a “bubble”, he said, arguing that there is more data available about the market, more transparency and more liquidity than ever before.

Marsh’s Giles discussed the insurance/protection issues arising with art. One risk that people might not appreciate, she said, is undervaluing an art collection by not understanding how much a piece is actually worth. There are a series of risks, such as the geographic location of collections. In the recent Hurricane Sandy storms, she noted, artworks kept in warehouses for safekeeping were damaged. There are also well-chronicled problems around accidental damage and damage in transit, as well as the racier stories of art forgeries, she said.

At present, about half of art sales are by private exchange and don’t show up in the auction data. Beard said that he sees a “big philosophical shift” among clients, with the younger generation more interested in the investment and commercial aspects of art. “We are getting to see more applications come out such as Collector IQ,” he said. “We are getting into an era where pricing data is becoming more readily available,” he said. With more data, it becomes easier to use art as security, he added.

Fried said that with art investing/collecting, there is no substitute for direct study and learning. To collect and invest requires the serious investor to put in time and effort: take course, visit galleries and talk to experts.

As far as holdings in portfolios are concerned, Fried said that art makes up no more in total than five percent. “Over 30 years of collecting, I have seen serious financial opportunities in the art space,” he said. 

Beard added that a strong value-add for any advisor is to explain to clients the tax implications of buying and selling art, and how to minimize that.

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6th panel
Chief investment officers from some of the largest names in the family office and wealth management space gave their favorite asset class positions and debated the challenges of making money in the fifth panel session of the conference.

The theme of this panel was Investment Trends And Best Practice: Leading CIOs Speak. Speakers were John Apruzzese, CIO at Evercore Wealth Management; Bill Kennedy, CIO at Fieldpoint Private; Carol Schleif, deputy CIO, Abbot Downing, Robert Wedeking, CIO, Geller & Co, and Tom Carrier, senior managing director in Blackstone’s Multi-Asset Investment Group. 

Abbot Downing’s Schleif referred to the problem of how central banks, especially the Fed, had arguably exhausted the impact of monetary policy by the “forward guidance” approach. In such an environment, where returns are often hard to find and certain market valuations are stretched, investors must work harder in examining areas such as alternative investments. Apruzzese said he is seeing increasing exposure to alternative asset classes. 

Wedeking noted that with hedge funds there has not been a simple narrative: some large institutions, such as state pension schemes, are sticking with hedge funds but others have withdrawn from the sector.  He said this is because of tighter capital rules and because it has become more expensive in recent years to take short positions in securities, which may explain why long/short hedge funds have struggled relatively in recent years.

Given the way that central banks are trying to shift sentiment and drive entire markets, this means that everyone has to be a “macro-manager” at the present time, added Kennedy, when considering investment approaches.

The panel also discussed such hardy perennials such as the debate over whether actively managed funds make more or less sense than passive funds – and the general consensus was that this was a pointless debate as the answers depended on issues such as the liquidity and efficiencies of different assets.

Apruzzese was asked about regional/global diversification and he said that his preferred overall split is to have 75 per cent of a portfolio in US assets, with the rest overseas; once currency costs and other issues are taken into account, a higher exposure to non-domestic assets did not make full sense, he said. 

Finally, the panelists gave their preferred asset classes: Kennedy said he liked insurance-linked securities; Apruzzese named consumer lending; Schleif chose global equities, and Wedeking said his favorite is niche private equity.