Investment

Cambridge Associates, the pandemic, and the stupidity of liquifying family office portfolios

With stock markets in delicate shape, Cambridge Associates is keen to encourage family offices to stay true to their long-term strategy plans. So far, so good. 

Heather Jablow, head of its Americas private client practice, says: “Every client is very different. But we have a framework that thinks through liquidity planning. It starts with considering the cash needs of each family so we can build diversified portfolios to serve them. We work in close partnership to make them comfortable.” 

Our investment philosophy is to build highly diversified portfolios, focused on liquid equities and private investments. We’re anticipating many types of market environment

She adds: “Navigating volatile markets smoothly, including rebalancing, is a long-term strategy. We avoid trying to time the market, although we do like to make sure our assumptions are still holding true.” 

In effect, clients follow plans drawn up with Cambridge, a top-rated family office consultant, which meets their spending targets and stops them fretting over the stock market. Along the way, they will have learned that panic sales during a crisis destroys capital and saddles you with cash when markets recover. 

In March, research by Schroders showed investors who switched to cash after the 1929 crash faced a 34-year wait to break even. Those who sat tight only waited 15 years. 

Those who liquidated their portfolio during the crashes of 2000 or 2008 are still out of pocket. Those who stuck with stocks regained their wealth in less than five years. 

This year, the rebound of big tech stocks to record levels has been painful for investors who ditched them in March when their ratings looked high. Global equities have recovered two-thirds of their losses and opinions are split on the direction of the next move.

For now, family offices are likely to make the easy decision to continue with their liquidity plans. Jablow, a former EY consultant, confirms discussions have gone well with clients, comprising 230 global family offices.

From the outset, Cambridge Associates agrees solutions with clients which suit the liquidity needs of different families, taking account of spending patterns and taxes. 

It views cash as a sub-optimal allocation, except where needed for housekeeping. 

According to Jablow: “Our investment philosophy is to build highly diversified portfolios, focused on liquid equities and private investments. We’re anticipating many types of market environment.” 

Where clients need bonds, Cambridge prefers high-quality credit. It isn’t keen on portfolio leverage, except to meet capital commitments.

However, it believes investors invest heavily in private assets, including venture capital, taking the overall allocation as high as 40%. 

The policy seeks to maximise performance, over time. It also provides an opportunity to engage the next generation, keen on VC sectors like impact investing.

But private asset allocations need to be accompanied with meticulous liquidity planning to ensure client needs are met until investments start throwing off cash.

Jablow says: “We are always evaluating the portfolio and ensuring that there is liquidity for clients to meet spending needs, particularly during this year’s volatile markets.” 

Cambridge likes clients to allocate money to late-stage VC investments to benefit from cash and dividend distributions at an early stage. It also seeks a spread of funds with a range of inception dates, with quality a key driver. 

Rebalancing takes place to boost long-term returns and reduce dependence on overpriced sectors. This requires a great deal of thought following a market shakeout which can produce a range of contrasting opportunities.

Jablow says: “We’re always looking at relative valuations across different asset classes and looking for opportunities.”

Further opportunities arise when talented managers lose clients in difficult markets and open to new business: “What has been interesting about this environment is the opportunity to access high conviction managers that have been closed to new investors or new capital.” 

Consultants who provide access to high-calibre managers will always earn the gratitude of their clients. 

Jablow says: “It’s where a lot of our focus has been.” 

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