The family office continues its series of articles, looking at the issues that confront investors.

The following commentary from Blu Family Office, a wealth management house that is headquartered in Richmond, southwest London, is part of a series of commentaries the organisation will be sharing with readers. (See a previous example here.) The editors are pleased to share these views and invite readers to respond. They can contact the editor at tom.burroughes@wealthbriefing.com

The first thing you notice when you are on the buy side, is that you have an almost endless array of options to spend and invest your money. That means you have to specialise and focus on an area where one has an advantage. What possible advantage could a family office have over the countless thousands of investment banks, hedge funds, asset managers and their highly trained professionals? Well, focus for one thing. After all, it is our money and only we know what we really want to do with it, what we need it for, and what it means to us.

But there has to be more to it: there has to be some value that you add, otherwise why else set up a family office to begin with? And this is where some real soul searching has to take place, a purpose has to be articulated and a value has to be defined. Primarily, that is what we do. We try to find our niche, our process, our raison d’etre upon which we create a philosophy and build a machine to implement our investment strategy.

So, here is our take on the world as we start our journey at the very core of what everyone needs to understand: Can we predict the future? It’s an interesting question really, and almost absurd if uttered to a financial layman. Can we apply some fundamental or macroeconomic analysis and form a view on how things are going to turn out? The evidence collected from many decades of empirical data would seem to suggest not. Even data mining, algorithmic trading and artificial intelligence may have found better ways to extract inefficiencies out of the markets, but as far as predicting the future is concerned? There seems scant evidence that we are close to judgement day, aka a scenario where machines take over the world as illustrated in the ground-breaking science fiction movie: “Terminator” (1984).

Having eliminated any attempt to predict the unpredictable, we have saved enormous amounts of fees, time and energy. We invest in exchange traded funds which give us cost efficient exposure to a global basket of equities and we buy bonds of varying duration, credit quality and currencies with an average cost (TER) of around 0.15 per cent on the portfolio level. That’s half the job done and frees us from having to consider any value equity funds, smart beta, or high growth emerging market funds. We simply don’t need to care, because the markets have been going up for more than 100 years. We are long and it costs us next to nothing. Happy days. 

Next, we need to deal with the smart stuff. The things you can do outside of the $300 trillion universe of equities and bonds, and here is where one needs to be very careful. And the real question again beckons: how are we going to add value here? The world of alternatives includes real assets, like houses, or gold, or factories or land. As well, there are the illiquid strategies, like private equity or venture capital, or other forms of project finance. There are also hedge funds, which use dizzyingly complex strategies and algorithms to extract so-called alpha out of the markets. Then there is the really weird stuff, like cryptocurrencies, sports betting or weather derivatives. Is this where we are going to add value when it comes to managing money?

Turns out we can, and people laugh when we tell them our secret to success is, we try not to do anything stupid. The biggest risk to our financial investment strategy is emotions, opinions, egos, or theories. Yes, all fine and good and there is a place for this type of thing in our asset allocation. But the real value comes from taking things the way they are, asking questions, comparing things you heard somewhere else before, and using the experience from many years of trials and errors. By doing this, one can eliminate almost 99 per cent of investment strategies within a matter of simple logical deduction: there has to be a reason why we make money. There has to be some structural reason, some regulation, some inefficiency or sound rationale as to why we should expect to extract an excess return. And any investment thesis that starts with “we think this is going to happen” should be discarded immediately.

Moreover, one has to define where one wants to sit. There is no point spending months on a direct investment deal and crunching numbers on spreadsheets unless one truly enjoys these endeavours. Other families we have met focus on industries or skills sets that ran in the family, others focused on technology to gain an edge. Truth is, it is hard to continuously add value. Doing the little things right and keeping things simple are golden pieces of advice, but ultimately one also has to operate within the confines of that which one has built.