With the volatility in stockmarkets – has there been a satisfactory answer as to why the Dow Jones dropped 1,000 points in 20 minutes last month? – and the ongoing sovereign debt problems, wealthy families and their family offices are not alone in wondering how the current problems will resolve themselves, writes Marc Smith.
I spoke to Richard Oldfield, chief executive of specialist investment manager Oldfield Partners and former CEO of a family investment office, to discuss the current climate and attempt to find some answers.
What is your assessment of the economic situation?
There is a sense of here we go again. This is 2008 revisited with the same types of chain reactions although in different places – ie, problems are occurring with sovereign debt rather than the banks. Sovereign debt poses a big risk and is the number one issue for investors although, ironically, the probability of it causing widespread damage is not as big as people may think. I think the economy will get better as governments are doing something concrete about the deficits. The public sector is also where the problems are – the private sector is actually in rude health.
What should families and family offices be doing with their wealth?
First and foremost they should keep things balanced. You must establish what your cushion of comfort is and keep that cushion in relatively risk-free assets. Once this is set you can then afford to make more risky investments.
Should investors be more proactive in the current climate?
For many years I have followed the Investors Intelligence Survey of Advisory Sentiment, which rates every advisory newsletter as bullish, bearish or looking for a correction. We are now at a situation whereby it is more bearish that bullish, which is encouraging from an investment point of view as it means people are under-invested.
I've never believed in set and forget but nor do I believe in a hyperactive asset allocation policy. Sometimes the best advice is to do nothing, but I think the best way is using a brake and an accelerator when required to manage around your central investment policy.
I would not advocate large-scale movements – by the time you are in a state of mind to make such a move, the movement in the market has already happened. Little steps in regard to asset allocation can be very helpful. In times of great volatility there is an argument to make those small steps more frequently.
Are there any sectors, industries or geographies that are particularly hot at the present time?
We pick out individual companies rather than sectors so I wouldn't want to comment there but in terms of geography, emerging markets are not significantly cheaper than developed markets today compared to a few years ago. In the long term, you need 15-25% of your portfolio in emerging markets and I think you need to be at the bottom of that range currently.
Do you see this period of volatility continuing?
Yes, in general we are in much more volatile times. The fall in volatility that occurred until April this year was a dangerous lull before the storm and what it did was to set markets up for a big shock, which turned out to be Greece. I suspect volatility will continue for some time to come.
There has been talk about a new financial/investment model emerging from the ashes of the financial crisis. What is your view on this?
People are now more cautious of alternatives. In many cases what started out as "alternative" has finished up correlating with equities so there will be recoil from such investments going forward. However, I think things will revert to the norm.
What message or advice do you have for families and their family offices?
Given their private nature, family offices are in the extremely privileged position of being able to do things that others cannot. I suggest that they should dare to be unconventional because it is by acting in such a way that they will do best.
Richard Oldfield will be chairing Campden's Family Investment Workshop, which takes place in Zurich on 23-24 June.