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Seek family-backed asset managements for sustained investment performance

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What you put into life is what you get out of it, according to Clint Eastwood, whose skill in movie deals helped make him one of Hollywood’s wealthier individuals, worth $375 million.

Successful family offices have learned the same lesson in negotiating property and business deals, where they know persistence and attention to detail produces economic success.

They like a hands-on approach. Johan Andresen told Family Capital in the past that his family investment group, Ferd Capital, likes to take stakes of between 10% and 100% in businesses and develop them through active ownership. 

People like Andresen feel family offices are uniquely placed to take a patient view, while taking an impatient approach to businesses which start to move in the wrong direction.

Wealthy investors often grumble about the fees they charge.  Some of them are putting money into cheap passive styles instead. But is this always the right view to take? 

You can also run across families who have reaped rewards from developing asset management businesses, which tend to be relatively progressive, thanks to their involvement. The long-term approach taken by family offices is a perfect fit with long-term investment, proved by consultants to produce outperformance.

Fidelity, developed by the Johnson family, has become the largest active manager in the world, though judicious expansion. The Rockefeller family backs Rockefeller Capital Management, a wealth and asset business led by Greg Fleming, formerly at Morgan Stanley, currently targeting assets of $100 billion. 

Schroders has remained pre-eminent in the UK, while other large managers have come and gone, courtesy of the long-term approach (plus an occasional change in strategy) inspired by its founding family. 

The UK-based Cayzer family nurtured Gartmore, which only fell from grace after they sold out. The Cayzers later started a smart boutique called Polar Capital run by Gavin Rochussen, one of the best UK chief executives in the sector.

The Barlow family is behind Majedie Asset Management, now the largest UK active equity manager. Troy Asset Management takes a cautious approach to investment, just like its founder, the late Lord Weinstock, who named it after his 1979 Epsom Derby winner.

A new kid on the block, Equitile Investments, profiled in Family Capital last month, twins an affordable fee structure with backing from Norwegian family office AS Vidsja. 

In each case, a family hand on the tiller and access to sufficient long-term capital can make all the difference. And, despite rising costs, operating margins are still an encouraging 32%, according to advisory firm Casey Quirk. 

Wealthy investors often grumble about the fees they charge.  Some of them are putting money into cheap passive styles instead. But is this always the right view to take? 

Seasoned market participants say active average performances have been pulled down by managers who are either incompetent or out of favour.  They point to a vast “frozen middle” of unrated funds with poor performance. They add that active managers also tend to outperform in a slump, helping to improve money-weighted returns for investors.

If you cut out the dross,  84% of US managers with a three-star rating from Morningstar, or higher, have produced net returns higher than the S&P 500 index over twenty years, according to Neuberger Berman.

Jon Little, outgoing partner at Northill, an $83 billion asset management business backed by Swiss pharmaceutical billionaire Ernesto Bertarelli, is the first to accept there are plenty of poor managers out there.

But Bertarelli argues there are quite a few who outperform over the long term, thanks to their focus on a relatively narrow asset class in which they are an expert. And he should know, because Bertarelli has bought quite a few of them. Logic and discipline, rather than emotions and behaviour traps are the true test of a good manager, including those occasions when stocks need to be sold.

The late Jim Slater believed investors could succeed by becoming an expert in a narrow field, through his so-called Zulu Principle. His son Mark has stuck to this approach, and refused distractions. Over the ten years, he has made 302%, against 159% from an FE Analytics peer group. His interest in under-researched smaller growth companies has helped.

Generation Investment Management has returned 150% since 2007, against 66% from the MSCI World index, by diving deeply into sustainable investment opportunities.

Managers ranging from Warren Buffett to UK-based Terry Smith have outperformed by paying close attention to the strength of corporate franchises, as well as finances.

Managers fall from grace when they allow themselves to be distracted by diversification and business issues. There is little doubt for example, that Neil Woodford hit problems at his UK boutique after taking on too much.  A family-office backer would never have allowed that to happen. 

Most of the time, however, it is fair to argue that boutiques focus better on their core beliefs than asset gatherers. And US-based Affiliated Managers Group produces data which shows that boutiques outperformed their indices by 1.35% a year, after fees, over twenty years. 

Mercer’s data base suggests that a top quintile of global equity managers, which take the biggest bets away from the index, produced an annualised 9% against 7.1% from the most cautious ones. You need to have conviction, to do that kind of thing.

Family offices will always need to work hard to find the right manager. You may even need an investment consultant to help you. But don’t be put off.  Even Clint Eastwood never pretended the road to riches was easy.

Mike Foster advises Montfort Communications, which retains as clients some of the firms mentioned in the article

 

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