Investment

How do family offices deal with the bonds and cash dilemma?

It is hard to conjure up animal spirits from a wounded animal, but Federal Reserve chairman Jerome Powell is doing his best. 

Since Covid-19, he has put trillions into the stock market, and cut interest rates to zero. He has backed fiscal expansion. Now he wants to reverse policies which traditionally jacked up rates at the first whiff of inflation.

Investors also need to change the way they evaluate stocks.  Rather than bothering with growth and value factors, investors need to find companies which can survive the duration

As far as savers are concerned, the Fed’s policies do not encourage thrift. Family offices tell Family Capital they are deeply uneasy with bonds and cash, while happy enough at the way stimulus has pushed up the stock market.

They point out neither bonds, nor cash, generate enough income to pay for their lifestyles. In parts of Europe, bond yields are less than zero. Structured products have disappeared. 

US investors are watching the dollar go into decline, pushing the price of gold over $2,000 an ounce. It is not in their nature to hedge against the dollar, but a degree of diversification into overseas assets by family offices is certainly taking place.

Over the last three months, the dollar has fallen 8% against the euro and 4% against sterling. In June, former Morgan Stanley chief economist Stephen Roach, now at Yale, said the dollar was poised for a 35% slump against its rivals, due to the rise of China and a US decoupling from its trade partners. 

According to one family office: “The pressure on the dollar is one of the biggest I have seen. We have to diversify. We have no choice.” 

Another favours gold and stock picking: “I like emerging markets where active managers have the best chance of finding opportunities.”

Consultant Stephen Martiros of Martiros Strategies, says: “Once you deduct fees and inflation, most cash equivalents produce a negative return and many high grade fixed income securities have a near-zero net yield. 

“So in the short run, cash and high grade fixed income provide stability for a portfolio, but longer-term, starting from these levels, there may be little to no real return of years. Investors are going to be seeking other stable sources of current income and wealth preservation.”

Ray Dalio, founder of US asset manager Bridgewater Associates, is deeply worried by debt burdens, macro-economic issues and global conflict. Now that rates have hit zero, he believes the government will use extreme monetary and fiscal policy to keep the economy moving, as was the case during the Second World War.

This means monetisation of debt is on the cards, leading to a squeeze on fiat currency. Anyone who followed Dalio’s advice to buy gold at $1,450 a year ago would now be sporting a gain of nearly 40%.

In a recent interview, Bridgewater co-chief investment officer Bob Prince said gold was still worth buying. He still saw sense in backing US index-linked bonds, even though their yield stands at a new low of minus 1%. 

Investors also need to change the way they evaluate stocks. 

Rather than bothering with growth and value factors, investors need to find companies which can survive the duration. 

They need a cash flow which can last longer than Covid-19, plus the strength to deal with recurring stagflation, reflation, technological changes and climate change.

When governments inject liquidity, resilient companies need to be well placed to capture the flow. According to Prince, they need to be storehouses of wealth for their investors.

He said you can find them in the food sector, which now includes interesting companies making healthy alternatives. Water companies offer a steady cash flow, plus ways to deal with water shortages caused by climate change

Healthcare could favour pharmaceutical stocks like Roche and AstraZeneca, alert to current needs, including Covid-19 and cancer treatments. Oil companies may never recover but the buoyant clean energy sector can offer a bright future.

The internet has produced storehouses of wealth, which have grown at the expense of traditional suppliers. One family office said: “We invest in internet giants like Amazon because they offer defensive, as well as offensive capabilities.” 

But he stressed free cash flow is as important in the technology sector as any other. 

The latest tech-driven company to hit problems is Monzo, a challenger bank which has suffered hefty losses after a drop in transactions during Covid-19.  There will be more.

In a recent note, Robert Almeida and Erik Weisman of US manager MFS say investors now face the choice between “haves” and the “have nots”. 

And investors need to work hard to see the difference: “Security selection will probably matter more than ever – or at least more than at any time during our careers.”

Subscribe

You will need a Premium Plus Subscription to access this database.

Exclusive news, analysis and research on global family enterprise and private investment offices.

Access to the most comprehensive fully interactive database on global family offices, principal investment offices, and family enterprises.

Check Deal Data, Senior Staff, and New Analysis on more than 500 family/principal investment and holding groups

Already have an account? Login

Subscribe

You need at least a Premium Subscription to read this article.

The most comprehensive information service on the global family enterprise world, featuring exclusive news, analysis, research and data on global family enterprises, family offices, and private investment offices.

Premium

£299

per year

  • Exclusive reports, analysis and commentary
  • Exclusive access to family/private investment office deal information
  • Exclusive interviews with principals and senior management of family/investment offices
SUBSCRIBE NOW

Premium+

£399

per year

  • Access to All of Premium
  • Access to all of FamilyCapital Analytics, our interactive database with more than 500 detailed profiles of family investment groups

More Info

SUBSCRIBE NOW

Already have an account? Login

You've reached the end.

Continue reading free articles by registering as a Member.
Or choose a Premium Plan.

Membership

Free

  • Exclusive reports, analysis and commentary
REGISTER NOW

Premium

£299

per year

  • Exclusive reports, analysis and commentary
  • Exclusive access to family/private investment office deal information
  • Exclusive interviews with principals and senior management of family/investment offices
SUBSCRIBE NOW

Premium+

£399

per year

  • Access to All of Premium
  • Access to all of FamilyCapital Analytics, our interactive database with more than 500 detailed profiles of family investment groups

More Info

SUBSCRIBE NOW

Already have an account? Login

Leave a Reply