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Wealth preservation or maximisation?

In the fourth of an occasional series, Melanie Stern chairs a roundtable discussion at Campden's Family Investment Workshop in Lausanne on whether family offices are more interested in preserving wealth, or maximising it – and how they fulfil their mandate

Roundtable panel

Gero Bauknecht is manager and executive board member of Beekay Family Office, a single family office in Zurich.

Marko Musulin is managing partner of DALE Investment Advisors based in Vienna, managing liquid wealth for some 12 business families.

Thomas Wyler is chief executive officer of InCentive Asset Management, a single family office based in Zurich managing first generation wealth.

John Dorrance is director of Ivy Advisory, a single family office based in London managing offshore assets.

Can we compare each family offices' key strategy?

Gero Bauknecht (GB) We are a classic single family office, managing a portfolio of direct holdings and companies. We also manage real estate in Germany and various investments all over the world.

John Dorrance (JD) We manage offshore assets based outside the UK and the US. We do the full A-to-Z investment process, from asset allocation to meeting with the fund managers and managing as best we can from the front end. We also do a lot of the back office as well – from risk consulting, working with the custodians and fund managers to reconcile reporting to the basics of banking. We make sure dividends and fees are paid, schedules are met, etc. We do not have any actual operating assets – we're solely asset management.

Thomas Wyler (TW) We started out as a single family office and remain more or less so – but we have adopted an entirely different model. Our single client made their wealth in the capital markets so our operation is naturally very close to that market today, and I would say we are almost a 'hedge fund family office'. Given that the family created their first generation wealth in the capital markets, we often have very concentrated bets there. We are willing to take huge positions where we can influence our own destiny directly. However, not being a bank we can afford to stay on the sidelines for as much as one or two years if we want. It means also taking risks when there are opportunities but avoiding risk when there is no need. Our raison d'etre is not to be constantly active, so we can afford to have what we call a 'multiple-year investment sabbatical', or to triple or quadruple our existing investment leverage. I think families like that kind of thing as an add-on – therefore we have added a selected number of additional clients – because they know the principle and the fact that the family is willing to take risks with their own money means they must be convinced about the strategy we are taking. So sometimes we are very active but sometimes we are very quiet. In fact we are very passive these days because we have lots of cash, nothing out there and lots of time to search for ideas! We have years like this where we aren't investing in anything new.

Marko Musulin (MM) Sounds like a good model! We are a multi-client family office, and our families have anything between $10 million and $150 million, so we look after those assets, though they may well have other activities elsewhere like direct industrial holdings or real estate investments which we do not get involved in. We look after the liquid part of their fortunes. We also have other clients who have funds and endowments, but we will as a rule advise their total wealth portfolio. We are very much absolute return-oriented to the extent that our families are extremely risk-averse, and they want to see positive results every six months. They are quite happy if we make slightly less from the up markets. It was actually in the down markets where we made our name, maximising wealth over the years. We operate very much top-down, using public mutual funds and the traditional asset classes. We also use private equity, commodities and hedge funds to complement our approach.

What is more important to your clients: protecting existing wealth against all odds, or maximising the pile?
 
JD The family motto focuses on preservation of wealth, so we do not have to try and score a home run every time – this has already been done by the ancestors. With the idea of risk aversion we don't need to pay ridiculous fees or chase managers. On an asset allocation basis you might say we are very slow to adjust, but I would say we are very calculated; we don't chase the next trend and we definitely aren't looking for the next tech bubble. We may lose something on the upside this way, but hopefully we are fully protected against the downside.

Hedge funds remain controversial for many but still make popular discussion among family offices. Asian hedge funds are the next hot topic there; what's your view on this and who invests there?

JD Our approach can make meetings like this very boring because everyone's asking each other what they're up to with hedge funds, whereas I think there is too much free capital in the world. Giving a hedge fund manager 20% of our profits when they have zero capital at risk just isn't within the model of our office. We don't use them at all. We try to do all of the hedging within our own office through the tactical allocation of assets to different asset managers, for example, large- versus small-cap, or equity versus fixed income.

MM We don't use them because they don't fit in with our philosophy of a fully diversified portfolio, and we do not invest in any country-specific funds because that is too much risk. We only invest in broad-ranging, large hedge funds that are well-diversified. I don't know of any family offices that make a point of investing in Asian hedge funds, certainly none in Austria.

GB We believe very strongly in Asia and invest in Asian hedge funds. What is very high risk there, though, is the operational risk from the manager, so we try to be as thorough as possible with due diligence. We work with a consultant on Asian hedge funds for this reason, who is based in Hong Kong.

TW We do very little there because we are always searching for what we call 'catalyst for change' projects, and we need more than the assets we have to get involved. We have a long list of partners waiting to invest with us, but we are only willing to accept that cash when we have found a real idea, and for the last four years we haven't had one!

JD It is interesting to observe that we are all willing to wait until the appropriate risk-return qualities are seen in any investment before we get involved. It seems no one here is pushed into investing by our family clients.

What about structured products?

MM We don't get involved in structured products because we believe that a properly diversified and well-­managed portfolio ­doesn't need them. I think structured products are often quite self-­serving and we don't want to pay ridiculous fees and all kinds of hidden costs to have structured products when we can serve our needs without them.

GB We are evaluating structured products, but have just limited exposure to the sector.

TW We issue structured products on our own behalf. One such issue for example was quite successful – $30 million on the AMEX gold bugs index, where one of InCentive's companies was the issuer, with UBS as the lead arranger. We had another on the oil service industry – both public issues. We believe in the concept of structured products because it enables us to properly design the risks around our needs and it keeps open for InCentive the window for public capital markets transactions.

Thomas, your family office stands out among others here in that you take a far more aggressive approach to risk when you see the appropriate project. I know in the past your office has made approaches to acquire companies by building a stake up. Can you tell us more about this?

JD [to Thomas] Do you think your niche is being filled by other people bidding for projects? Do you find that the prices are being driven up – so you're making the decision to invest capital in the company before others can jump in?

TW Actually, last year we liked the prices so much we started to accumulate a particular stock in a company. But then someone else drove it to such a ridiculous level that now we've gone the opposite way; we are now short on a project we wanted to be long. So we are able to change our ideas and strategies quickly if necessary. We always buy very early into an industry, building up stakes in an industry that we can help develop. We team up with industrial specialists knowing that we are financial investors. Ten years ago when we were involved in Cablecom, we teamed up with Alcatel. They bought us out in the end. We are always inviting industrial specialists to join us – the big household names. Our initial investment was with Siemens Pension Fund. We know that we cannot run a company ourselves since we only have limited knowledge and scale. But we like to participate in these projects because they really add something to our portfolio. Though usually we exit too early and leave it to the industrialists!

It sounds as if the traditional image of a European family office, somewhat parochial and dominated by the whims of the family, have been replaced with a far more sophisticated, corporate mandate. How deeply involved do your families become in your decisions as professional money managers?

GB Since we manage separate portfolios for different family members, the answer is that it depends on the circumstances. Some are more involved, some are less so. But the last decision is, and will always be, with the wealth owner.

MM They generally leave us to get on with the business of investments and strategies, though we meet with them from time to time to update them on what we are doing.

Would it be fair to say that European family offices have moved towards the 'professionalised' style of many American offices?

MM Well, American family offices have had a 20-year head-start on us. They have been around a lot longer, have more capital behind them, have more mature strategies and management, and a lot more history in general. That is not to say that they are more sophisticated than European family offices, but they have that time advantage. Because of this I think they are more comfortable taking bigger risks than European families. Perhaps European family offices will eventually follow this model. A lot of European family offices are managing first-generation wealth and they are more risk-averse, whereas US ones are often managing multi-generational wealth. Many of our families in Vienna are first generation wealth because a lot of old fortunes were destroyed in the second world war.

GB American family offices are much more open than their European counterparts. The typical asset allocation of American family offices shows a higher allocation in alternative investments. The typical US office interacts a lot more with other family offices in their country, and there are large network groups. This is something I think Europeans should pay more attention to.

Do you think US family offices have a bigger risk appetite because of their maturity and historical proximity to the capital markets, for example?

GB It depends – I would not say that just because they invest more in alternative investments, that means they have a bigger risk appetite. It could even indicate the contrary.

TW Sometimes we are leveraged up to four times on our equity base. That's enough risk for us.

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