I can't tell you how many times a month I'm asked "What do family offices invest in?" I used to wonder what family offices invested years ago when I was only working with a handful of family offices so I went out and met with hundreds of family offices, did informational interviews, conducted a family office benchmarking survey and had conversations with family office investment executives like the one I'm going to share with you today. The following is a short conversation transcript between myself and Lukas Dörig, head portfolio manager at Marcuard Family Office in Switzerland, I hope this gives you a better idea of how family offices structure and manage their portfolios.
Richard Wilson: How does your family office typically split up the investment portfolio between individual securities, mutual funds, ETFs, real estate, and hard assets versus alternative managers like private equity and hedge funds?
Lukas Doerig: First of all, as a standing policy, we do not buy any single securities with the exception of single bonds, so we really subscribe to the idea of collective vehicles and collective management. However, in equities we are also kind of pragmatic; about half of the equity allocation goes into index products where the focus is cost and flexibility, and the other half goes into very active equity managers.
Richard C. Wilson: Are you also light on the private equity side of the portfolio then?
Lukas Doerig: No, no that was just speaking of the equity, but if you now ask about the overall allocations, a typical portfolio, sort of a balanced portfolio would be about 10% in cash for flexibility, about 45% in various bond areas and fixed income areas, because we think there is value in bonds and certainly a lot of flexibility. We also like the idea of buying single names of very high quality, but corporates, so no government issues. We also like some very active fixed income strategies in emerging markets, in high yields, short-term high yield, etc. There is a big playing field there for active managers. The risk assets, as we like to call them, are split up in two halves. Of 45%, 22.5% are in equities; we allocate and we have always allocated one-third to US, including its emerging markets like Latin America; one-third to Europe including its emerging markets; and one-third to Asia.
By definition, we have always been overweight Asia, about neutral in Europe and underweight to US. Then the remainder of the risk assets, the other 22.5%, is split up about one third in hedge funds, about one third in private equity, and then one third in precious metals and commodities. We just recently cut the allocation to precious metals; that used to be even more, about 10%.
Richard C. Wilson: How important is the use of managed accounts within your investment portfolio?
Lukas Doerig: We are not too much into managed accounts. When we allocate to managers, we like to use the public vehicles; obviously the institutional share class is very cost efficient and access is paramount. We do not like to set up managed accounts because it's rather complicated, and you also have a certain tendency not to terminate the manager. It was cumbersome to set it up, so you might feel biased to just continue with the same manager.
We also have exposure to the managed accounts, but that is via fund of hedge funds because within the equity buckets, we also allocate to equity long and short funds, but any other hedge fund strategy we do not allocate directly to, but go via fund of hedge funds. We do not think it makes sense for us to build up an expertise into every exotic single hedge fund strategy, but really work with specialists who have much more resources to focus on the various strategies and do the allocation decisions within the hedge fund area.
Richard C. Wilson: Right, that makes sense. Many times when I speak with family offices, it's kind of an industry joke now: if you go to hedge fund alternative investment conferences, everybody says the fund to fund model is dead and it gets kicked around as an old business model. It doesn't work anymore. But does it work for you guys because of some very minimal extra fee that those fund of funds are layering on top of those fund managers fees or does it work for you guys simply because you don't want to be experts on 20 different hedge fund strategies so it's worth paying that extra fee?
Lukas Doerig: It's basically both; first of all we have very cost efficient access to fund of hedge funds, so you certainly pay less than the standard fees. Obviously there is kind of a washout in the fund of hedge fund area and many of these providers have a big problem. They might even cease to exist and that makes perfect sense. There is still value a good fund of hedge fund manager can add by not just buying sort of the obvious names and allocating to Paulson in his heydays, but can maybe look for the next good talent. As you mentioned, you develop some deep expertise and then add value in the allocation and maybe do a carve out of large multi-strategy managers and really sort of work with the portfolio and not just buy the fifteen most well-known large single hedge funds that everyone reads about in the paper.
I hope you enjoyed learning about this particular family office's portfolio. We have a number of great resources including family office reports, data, and other interviews with family office executives available at http://FamilyOffices.com and we're always available to answer any questions you have about family offices at (305) 503-9077. We also have a number of Swiss family offices speaking at next week's Family Office Deal Flow Summit in London.
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