Have family office allocations changed in 2000 years?

“It is advisable for one that he should divide his money in three parts, one of which he shall invest in real estate, one of which in business, and the third part to remain always in his hands.”

– The Talmud

This passage appears in a record of debates between rabbis known as the Talmud, the primary source of Jewish law.  Written as early as 1200 BC, researchers see it as the oldest recorded piece of investment advice. 

As advice, it has stood up pretty well.  Its reasoning continues to influence asset allocation decisions taken by family offices across the world.

Investment writer Meb Faber has estimated that this portfolio (using Real-Estate Investment Trusts, US equities and T-bills as proxies) has returned an annualised 9.8% over the 40 years to 2013, only marginally behind the return on equities, on two-thirds the volatility.

Looking at the average allocations shown in the annual UBS global study of family office allocations, you might be forgiven for thinking the average allocation has hardly changed in two thousand years.

Splitting investments into broad asset classes UBS show that on average family offices have 40% in public-market equities and private equity funds, 23% in fixed income and cash equivalents and the balance (c37%) in what could broadly be described as Real Assets including 19% in real estate  investments.

There is solid logic at the heart of this simple long-term allocation. Stocks are a core growth asset, expected to grow significantly over the longer term. Cash on hand gives the investor flexibility and resilience to stick with the long-term strategy and optionality for investment opportunities that may come along. Real Estate provides a hedge against periods of high inflation which would be damaging for the other parts of the portfolio – particularly cash. 

In recent history this resilience has been demonstrated during the 1970’s where the “Talmud portfolio” outperformed an equity-only portfolio by 2% p.a. and a bond portfolio by 1% a year, according to Faber. Perhaps the best decade for this portfolio was the 2000’s, where a backdrop of falling interest rates and two equity market crashes saw a real return of -3% a year for equity, compared to +4% for Talmud, helped by bond and real estate holdings.

How well is this ancient advice going to stand up today? 

Far be it from me to critique wisdom that has worked well for centuries, but I daresay the Talmudic scholars didn’t have to contend with negative interest rates, quantitative easing or the impact of digital retail disruption on the value of bricks and mortar. The Talmud has relatively little to say on the subject of CAPE valuations and the correct multiple of earnings to pay for a giant technology company  – still less a disruptive electric car manufacturer with a highly unconventional CEO. Although I guess recessions were probably pretty bad in 1000 BC.

While recognising how much has changed, however, we ought to note how much stays the same. Assets held in the stock of companies and in real estate have been wise long-term investments for centuries, and it would be a brave – or perhaps foolish – investor who gave up on this principle. Some things should never change.

Dan Mikulskis is a partner at LCP and lead investment advisor to large institutions


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