Here’s what one family office CEO says about active asset managers: “We find they’re not good fiduciaries. They’re in the business of collecting management fees.”
OK, not all investment managers of family offices feel that way, but a lot do. And the CEO’s strong words are likely to add further concerns about the value of actively managed public equity funds at a time when passive investment strategies are hugely popular. Last year, $429 billion flowed into passively managed assets, whereas $326 billion left actively managed funds, according to the investment research group Morningstar. And since the start of the year, passive asset management specialist Vanguard has attracted more than $1 billion a day into its funds.
But little of this money is from family offices, or at least not directly. No, family offices are very much active investors, but the difference is, they’re doing it themselves. “Our vision: ‘we will create enduring value and leave lasting footprints’, does not allow us to engage in passive investments,” says Johan Andresen, chairman and principal of the Norwegian family investment group, Ferd. “Family investment companies/family offices have some extra responsibility to move societies forward by being entrepreneurial and take the kind of risks that only very long term, but impatient owners, can take.”
Andresen says that Ferd’s main strategy is to take 10% to 100% stakes in companies and develop them through active ownership. That approach is increasingly the mantra of single-family offices around the world - real active management of assets through influencing outcomes by taking significant minority stakes and/or majority stakes in businesses.
It is a big reason why so called shadow capital - direct investment by family offices, sovereign wealth funds, pension funds, and university endowments into privately controlled businesses - is growing so fast. According to research group Triago, shadow capital accounted for around 28% of total private equity fundraising in 2016, up from 22% in two years, and its highest level on record.
The ability to influence investment outcomes through board representation on companies they invest in is a big reason why family offices are going down the direct approach to investing. As one family office CEO told Family Capital: “I’ve achieved 700% returns in three years through private equity deals that I’ve done for the family through controlled buy-outs. Where am I going to get that type of returns in public markets?”
But funds aren’t being completely eschewed by family offices. Indeed, hedge funds and other specialist-type funds are still popular among many family offices. “Our outside mandates are all very specialised and active, and are a combination of pledge structures, hedge funds and co-investment options in both of them,” says Andresen. Of course, the emphasis here is on highly specialised funds, like impact investments, where active management might just make a difference.
And there’s one area where family offices are likely to use passive investment strategies - to the further chagrin of active fund management - and that’s between private equity transactions. “The only exception (to our active approach) that explains the rule, is when proceeds from exits are temporarily placed until we reinvest them in actively managed mandates or companies,” says Andresen.
Looks like the traditional active fund manager is being squeezed from all sides. From the retail side as the popularity of passive investment strategies rises, and from the very sophisticated investor level, where they want to pursue an active approach themselves, largely through investing in privately controlled businesses.