Business

Family office profile: J.Stern & Co – aligning its interests with other families

European family offices try to build income built up in their glory years, to cover their outgoings, while striving to leave their inheritance to the next generation.  J. Stern & Co, based in London and Zurich, tries a little harder.

Rather than backing third-party products served up by advisers, it has developed a 24-strong team of financiers and investment specialists to develop equity and credit opportunities over the last seven years. 

We invest alongside other families through our private investment office – I don’t like the term multi-family office because our accounts are aligned 100%

Its core World Stars global equity strategy has beaten the index since 2012 by delivering an annualised 10.5%, net of its 1% fee, from a mix of quality stocks, frequently with a technology bent. J. Stern’s credit team invests in an eclectic mix of sectors ranging from football finance to emerging market bonds.

In football, J. Stern lends money to clubs for the purchase of players and improvement of stadia, soundly secured against future league receipts. It owns dollar bonds issued by Argentinian oil giant YPF because they are serviced by oil priced in dollars. 

It sees an edge in trade finance because banks have withdrawn from the sector. It likes royalties from future drug receipts, which are relatively secure. It loves uncorrelated bets, plus credit whose underlying strength is overlooked by market participants, often because of where they are listed.

Credit opportunities have been invested in a multi-asset strategy alongside World Stars since 2015. The strategy has returned 6.8% a year – way ahead of diversified growth funds which prefer to trade a cocktail of derivatives. Emerging market bonds have returned 4.9% a year, over the same period.

Managing partner Jérôme Stern says: “As a family, we have seen a lot of good things, a lot of bad things and some horrific things. We have learned that if you need to have a PhD in complex physics to understand what is going on, that strategy is not for us. We like clarity and transparency. And we like to do our own research.” He isn’t keen on indexation either. 

To pay its way, J. Stern & Co offers access to investment strategies to other families: “We invest alongside other families through our private investment office – I don’t like the term multi-family office because our accounts are aligned 100%.”

J.Stern also offers its family network access to separated managed accounts, currently in vogue among family offices who are ceasing to trust mutual funds to act in their favour after the Neil Woodford fiasco, which has left its stricken equity income fund suspended for more than a month.

Stern says: “Managed accounts mean we can offer a bespoke deal where families might have their own requirements. I certainly wouldn’t expect them to change their existing custodians.”

Stern says his firm now runs more than $500 million drawing on 50 families, seeking refuge from assorted hedge funds, private equity and derivatives products: “They want something simple. Something they can understand.”

Stern sees no reason to trade frenetically. “We fight to do nothing. To let our companies compound their return, over the years. One of the greatest dangers our sector faces is rushing around doing too much.”

Originally a wine merchant, Jakob Stern established the family’s first banking business in Frankfurt in 1805.  His children financed Europe’s industrial revolution and married into the Rothschild family. They funded governments and companies, and bought a stake in the Panama Canal. 

The world wars were not kind to the Sterns: but they rebuilt their business in New York, but sold it to Swiss Bank Corporation in 1988, following diverging views between family members on strategy. Stern shrugs his shoulders. It happens. 

The sale left the Sterns with a well-funded family office and a sixty-year reputation for investing in quality businesses. Not a bad start. Jérôme Stern agreed to take it forward in 2012 following a career as a banker at such firms as Salomon Brothers, Credit Suisse and Lehman Brothers, which he joined just before it crashed in 2008. He neither carps, nor criticises: “Lehman was a wonderful place to work.”

To develop his family office, he teamed up with Christopher Rossbach, a former hedge fund manager at Lansdowne Partners and Perry Capital who had become weary of using leverage to nick short-term profits. Over the years, he realised that long-term prospects were far more alluring. 

Jérôme Stern knows there are limits to how far family resources can stretch, and he has no interest in building large asset gatherer.  He regularly advises families on their potential – and their constraints – principal to principal.  

He recalls the time when a family came in, after leveraging to invest in real estate and private equity before the credit crisis: “The deals were restructured but they cost a lot of money.” 

Rossbach’s equity strategies have learned from the Stern approach, which requires good-quality, well-managed, companies to be given the time and space to develop.  Rossbach has been critical of activists lobbying for faster returns at quality stocks like Pernod Ricard and Nestle. Stern says: “These were two great companies doing nothing wrong.”

From the outset, Rossbach and Stern decided technology would play a growing role in the economy, and the stock market, via corporate disruption and the provision of services. This was exactly the right call for World Stars and its 20 to 30 stock portfolio, although J.Stern does not seek to follow technology fads and fashions. It knows it takes time to win acceptance, while also noting that success comes in a rush, when this takes place.

Its top five holdings are Amazon, Alphabet, Adobe, American Tower, the wireless infrastructure specialist, and Pernod Ricard.  Nestle is still in the mix. Stocks like these have helped Global Stars beat the index over much of its existence net of fees, although its performance in 2014 and 2015 was more mixed.  

Stern says: “To be honest, I would view 10.5%  a year as a pretty good return since 2012, no matter what the index did.”  

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