Do family offices exhibit enough common characteristics to discuss asset allocation for family offices as a group?
If the question is whether there is an asset allocation template that works as a starting point for all family offices, I would say no, because they vary too greatly. I would, however, say that family offices tend to have more endowment-like characteristics in general. These include higher equity allocations, lower allocations to bonds and, depending upon their liquidity constraints, the ability to take on illiquid investments. Certainly the ones we work with tend to be pretty long term in their outlook. One of the reasons they come to us is we are advisors to endowments and have a reputation for very long-term strategies.
So if you wanted to point to a comparison with any other investor segment, would endowments be it?
I think for our client base, yes; certainly more so than pension funds. I think they share more of the characteristics of endowments in that they are, for the most part, long-term in outlook, able to stomach volatility and have an appetite for illiquid investments. While most similar to endowments, some family clients still differ as they spend less and have a greater focus on wealth preservation and hence take less risk.
How adventurous are they when it comes to equities? Do they tend to buy their chosen asset class through funds or do they tend to go direct? Traditionally they are thought of as relatively fund-orientated?
That is the case with our client base and that is our area of expertise: helping them pick the best fund managers across all asset classes. After the up-front asset allocation discussions, the lion’s share of the work we do with families will be in helping them choose funds. That is not to say that they don’t occasionally make their own direct investments, but it is relatively unusual among clients I work with.
Are there any notable regional differences in that regard between family offices in the UK, US and Asia?
I am really focused on UK and European families and the major difference compared with my US colleagues is tax. They have to have much greater awareness of tax efficiency in the US, whereas in the UK and Europe it is more common for the families to set up vehicles that are tax efficient. Therefore once they have set up an appropriate structure, we generally have a freer hand in manager selection.
Do the families tend to want to be involved in the investment decision-making or do they leave it to the fund managers?
More often than not, as we work with larger families, there will be some kind of fiduciary set up involved, such as a board of trustees and/or an investment or advisory committee. As a result, the family is often not directly involved and will tend to rely on their advisors to police whatever Cambridge Associates is recommending.
However, we do have cases where the families are smaller and more nimble and where the family principal will take a more hands-on role in decision making.
Where there is a board of trustees or a family office, if there were conflict within the family about what to do, would it be addressed by those structures or do you find yourself getting involved?
Any conflicts would typically be addressed by the Trustees/Advisors. We may be consulted but ultimately our role is to implement an investment strategy that is in line with the family’s objectives and constraints. These should be agreed and documented so examples of conflict are relatively unusual.
How often do they tend to review their asset allocation strategies?
Most families will have an investment committee meeting quarterly. At one of those meetings during the year you would probably review the asset allocation. But a formal strategic review, going back to principles and assessing whether you have the right long term policy targets, would probably be undertaken every three to five years.
When it comes to their philanthropic activities, do families tend to have a separate pot for that or do they tend to fund these activities out of their overall pool of investments?
It depends, some will draw down capital from their overall pool to use for charitable purposes each year and others have a separate pot that they have set aside. I would say the latter is more commonplace, but either can occur.
