Michael Moquette, Managing Partner, Equinoxe Investments, Switzerland
Martin Jenkins, Founder and Chief Executive Officer, Oxford Place, UK & USA
John Bender, Non-executive Director, Investment Office, Matthew Bender & Co Holdings Ltd, Switzerland
Robert Vinal, Representative Rentrop Family Office, Switzerland
Elias and Marion Stassinopolous, Family members, Franz Haniel & Cie GmbH, Switzerland
We are meeting at a very interesting time given all the uncertainty surrounding the world economy at the present time, but on a scale of 1–10, how worried are you?
E Stassinopoulos: Extremely, I would say 10. I don't see any personalities in politics anymore. I don't have any confidence in any of the politicians. I think we are in a crisis and if this crisis is not solved there can be only one solution – war.
Moquette: I would be a little more optimistic. I am concerned about the future but I'm probably more a 7. I think we've got enough intelligence around the world to avoid a war but that does not say that we will not have a civil strife as we have seen in Greece. I think we will work our way through it but the next three or four years are going to be very tough. But I think this also creates wonderful opportunities.
Bender: I certainly think that we are in challenging circumstances but would say 5 or 6. There are some economies that may not recover for perhaps 20 years. There are others, however, that are taking the necessary reforms. I remember Britain at the end of the 1970s and Canada in the
early 1990s. Both experienced challenging times but they turned themselves around.
In terms of one's own positioning in this environment there are asset classes that I think are very valid but I personally will be attracted to hard assets such as some precious metals and some currencies such as the Canadian dollar, the Swiss Franc and the Norwegian Krone.
Vinall: I'm actually quite optimistic, so pretty close to 1. I know what the short-term challenges are, but the truth is there are always challenges. You never open a newspaper without finding things to be concerned about. But I think if you look at our overall development over the last several hundred years it's been a very steep upward curve. The wealthiest person 50 years ago probably wouldn't be able to have any of the experiences that anyone of modest means would have today such as air travel and access to medicine. So I think there are plenty of reasons to be very optimistic about the future.
Jenkins: Well I think there are two very different ways to answer the question – from a geopolitical point of view and from a family office point of view. Geopolitically the world is not in a particularly great state, so I would give it a 7 or an 8. But the families that I work with have learnt huge lessons in the last few years and all of them have done incredibly well from this crisis. For example, people have wised up to the management fees that a lot of alternative asset managers were charging – they can't get away with it now. People are re-basing the ways in which they're structuring portfolios. I think with the euro being devalued, there are huge opportunities for investing in European equities, and according to each individual family, depending on how they are structured and what particular interest they have there are huge opportunities to acquire distressed assets. So from this perspective I would give it a 2 or 3.
This range ceartainly demonstrates the real uncertainty that exists out there. Michael, two years when we sat down at this same conference, you said you had not made any significant changes to your portfolio. Given all that has happened in between, have things changed?
Moquette: No, it's largely the same. We're cautious, we're careful and cash is still king. Our asset allocation is largely unchanged. We've been disappointed by some managers and any adjustments we have made are to take money back from independent asset managers. We are extremely long-term investors who invest for our great, great grandchildren, so we rarely sell things.
Bender: Our approach has always been conservative. There is a preference for liquid, transparent and flexible assets. We are reluctant to invest where one's holding is locked up or it is difficult to understand the methodology. Complexity can be a danger sign for hidden excessive charges and margins. In this environment, I would be attracted to hard assets, such as precious metals and currencies. It would be possible to have a comprehensive investment strategy with an asset allocation comprised purely of cash alternatives, such as Gold, Silver, Platinum, Palladium, Canadian Dollars, Swiss Francs and Norwegian Krone. Such an approach would be transparent, liquid and inexpensive.
Vinall: We've always had a more or less 100% allocation to public companies. That was the case two years ago, it is still the case today and it will probably be the case in 10 years time.
The equity markets have their ups and downs, but over time the best companies create wealth for their owners – all the great fortunes have been created by companies, not through other means.
E Stassinopoulos: I have heard some obvious statements and I have one comment to make. All of us here come from a family business/family office background, but this is not the only world that exists. There are also socially weak people and people who do not have as much money as families do. These people are not satisfied and that is going to be a very big social problem. Take Greece for example or maybe Portugal and Spain in the near future. If we don't find a solution then wealthy families will have a problem and we're not ready.
What solutions do you see?
Moquette: You must start with educating the young, and bring them around so they see how one should behave and necessarily the way the grandfather and father behave. In Greece, the tax authorities reported not so long ago that just six individuals in the whole country pay tax on income greater than 1 million euros. This is shocking, it's a farce.
Bender: There are many economies with far too much debt, but what is important is the approach that governments are taking to handle this particular situation. Investors have been encouraged by the British government's prudent budget with discernible steps to reduce debt levels.
Jenkins: I think what the world fundamentally lacks is leadership with both charisma and integrity – that's the great gaping chasm that underpins the whole of this conversation. I lecture at Harvard and part of the course I teach relates to the great changes in world history.
We study the psychology and mindset of the business people and the politicians that either amassed enormous fortune or shifted the world. First of all humans love to be led, it's a basic tenant of human psychology. What the world needs is someone with integrity that people can follow, that can structure things in a different way.
My greatest fear is if we don't get charismatic leadership from good people with integrity what you'll get is charismatic leadership from bad people with no integrity and the debasement we were talking about in our economies driven by greed will take the world in a way that we don't want it to go.
Bender: If I may just interject, there are exceptions. It may be too early to make a conclusive assessment of David Cameron but he seems to have made a strong start.
Stephen Harper in Canada has done very well and he has led the country without a majority for four years now. Columbia has had decent leadership that has changed the country's direction. In Sweden, Fredrik Reinfelt has been a superb prime minister.
What are your main concerns at this point in time? Is it sovereign debt, for example?
Moquette: All of this debt is going to be rolled over and we'll have a bout of inflation. The one positive is that it will reduce the cost of debt.
E Stassinopoulos: Whether the Euro going to last or not is a big question. I don't think it will.
Moquette: I think it will last because it will be far too expensive and disastrous to unwind. We may have to change the rules and be much more disciplined.
Jenkins: From a family office perspective, I don't think these problems fundamentally affect that many families at all. All the smart intelligent families have already adjusted their risk portfolios and their risk profiles to make sure they don't expose themselves to problems such as sovereign debt. The truth is a lot of people have made money out of it. It's just a macro fact of life that you take into consideration.
Moquette: I'm surprised that the word trust has not come up yet. If there is one thing that has been a problem and has made everybody, and families particularly, more careful who they are dealing with and whether they can count on them. Are they going to be there and are we going to be able to respond to the liquidity call? These are the kind of things that keep families up at night.
Jenkins: I've had a huge number of calls in the last six months alone from families who are looking to set up family offices. They all want to know which advisors would I recommend because they don't know.
Isn't this the problem; families on the one hand have lost trust in the banks and yet unless you have enough to sustain a single family office, you're stuck in the middle and not quite sure which way to turn?
Bender: I agree that the banking industry has suffered from a crisis in confidence. Nevertheless, there is still a need to maintain constructive working relationships with such institutions. Dealings with banks can be managed well by single family offices, which can focus on making good investments rather than meeting sales targets.
Many firms have high overheads and must concentrate on bringing in new clients in order to survive. This priority, however, can detract from following a long-term strategy in managing wealth. Accordingly, a family needs to assess exactly what motivates a prospective service provider and look beyond the marketing rhetoric.
Jenkins: I think the overall context for family offices, following the last two years, is that some of the fundamental ways families used to look at their portfolios are broken.
Bender: Conflicts of interest exist outside of the banking industry as well. A target-driven culture can prevail amongst law firms, trust companies and accountants, who may prioritise 'billing' over providing an appropriate level of advice.
It is therefore important to work with individuals of integrity within such organisations, who can provide expertise and see beyond the internal pressures to make sales.
Moquette: We have people to do that policing for us as it's difficult in old relationships to be the bad cop. We pay a very small fee, perhaps 5–10 basis points, for the purpose and I highly recommend it as you get a wonderful service. It's well worth it.
There is talk about a new model emerging out of the ashes of the financial crisis. Does anyone think that will happen or will things return to the status quo? Have lessons been learned or will people plough on as before?
Bender: Although there will no doubt be new regulations, one cannot envisage all possibilities. History has shown that periodic asset bubbles are inevitable whether they be in tulips, equities or collateralised debt obligations. The trick is to maintain a balance in regards to one's investment strategy. Debt can be capital's worst enemy. It can do far more damage to a portfolio in a bear market than good when market values are appreciating.
E Stassinopoulos: The biggest lesson that people have learnt is that liquidity is the most important thing today. If you are not liquid today, you're lost.
Vinall: You shouldn't expect to wake up one day and see that everything is different. Change will be gradual. What I think will happen is that mechanisms will develop of their own accord over time, whereby if countries or banks or individuals lose money they're the ones that are going to have to step up to the plate and carry those losses themselves. Greece has been very fortunate, because Germany has said it will pick up the tab this time round. But I don't think one should expect that to be the case indefinitely.
Bender: The relative positioning of different countries will change. Britain, Ireland and the Scandinavian countries have taken prudent decisions in reforming market abuses and distortions. Some other countries, however, have not made the necessary changes to their economies. The single currency will continue to be challenged over the next twelve months because the economies of the European geographic area are so diverse.
Where does this leave the next generation who are coming into wealth today?
Jenkins: I think it's vital for all children of wealthy families to become educated in the notion of control. Parents are looking to the future with a whole set of fears regarding the way in which their wealth is managed. And I think those fears are being passed onto the children and what the children need is to be supported in really understanding how finance works on a macro level and also in a relation to the way which their families portfolios are structured.
Communication breakdown is the one of the great diseases of our day. Parents who look to structure wealth to help their children use it effectively go first to a lawyer who more often than not will create structures that relate to the parents' fears. If you don't have a conversation with your children to say, 'This is what we're afraid of,' then the structure you're creating will almost inevitably unravel.
The next generation need an educated view so that they can learn to work with managers in an effective way instead of just worrying about the fears of their parents.
Bender: It is no bad thing for members of the younger generation to begin their careers working for intermediaries.
They need to be aware of what their future advisors will be saying to them and why. It is also healthy to experience having to be responsible to people outside of one's family.
Moquette: This is difficult because not all are suited for it. Fundamentally, if you enjoy what you do, the better you will be at it. I personally find the biggest challenge is responding to the diverse interest of the inheritors'. For example, I have one daughter who wants to invest in everything that's green but we know that not everything that is green is good.