The Richmond, UK-based multi-family office talks about a number of investment themes and controversies.
Christian Armbruester, founding principle of Blu Family Office, the European firm, regularly comments on investment and wealth management issues for this publication. Here, we talk to him about a number of themes.
WealthBriefing: There has been quite a surge in the gold price, and this is a classic safe haven play. Despite the mockery about "gold bugs", the metal hasn't lost its appeal for some. What approach should a family office take to the metal, and what is the Blu FO perspective?
Armbruester: Gold is a funny one and I can understand the argument that, ultimately, this shiny metal is the best store of value, if we lose trust in the financial system. But as ever, one needs to be careful how to incorporate this view into an effective investment strategy. The Armageddon scenario means that you have to buy physical gold bullion and put it in safes across multiple locations around the world. I would also recommend growing your own vegetables, building a bunker and hiring a self defence unit to protect against zombies after the apocalypse has wiped out most of mankind.
Beyond that though, should we buy gold traded on market exchanges to protect our portfolio and what about capital appreciation? Clearly there is a value there and one has to look no further than recent market events. With global equity and commodity markets coming under duress, we have seen gold rally by more than 20 per cent. What’s not to like? It costs money to store gold and there are also no dividends or coupons, which makes a large allocation quite expensive.
The other thing one has to bear in mind is, that once the crisis is over, gold also reverts back to lower prices. Lest we forget that, bar the last three months, gold has been a terrible investment over the last 5 years.
And then something very strange happened, and the world started paying people to lend them money and almost a quarter of global government debt now has negative interest yields. In a world like that, gold is one of the few real alternatives to treasuries, as the ultimate store of value and we could see astronomical increases in the price of gold, if the structural crisis in the markets accelerates.
How much value is there left in private equity, given the big lumps of money that have gone in during recent years? Do investors have to be much savvier about mixing up small-, medium- and big-size funds, multiple vintages, etc, to spread risk? Is the asset class highly cyclical and can it really give that much added diversification? Some, such as Pictet, have been sceptics of that recently.
If a company makes widgets and is owned by a handful of people or many millions, does it have any bearing on the ability of the company to make widgets? Apart from the whole shareholder value theory, which has come under serious scrutiny in recent decades, it really makes no difference who is putting up the capital.
What matters is how a company is managed, how products are being built and how well they are being distributed. So, besides a big illiquidity premium, there really is no difference between private and public equity.
But there is also shareholder activism and if a private equity fund can acquire a meaningful stake in a company and influence strategic decision making, there is the opportunity to create value. Evidence seems to suggest that there have been some very clever people who not only picked the right companies but also engineered profitable exits. You do need to find these people though, and you also have to get in, with minimum investments as high as $5 million or more.
Then there are the 2 per cent management and 20 per cent performance fees, which you have to pay for a very long time with investment periods of 10 years or more. All of which makes private equity a very tricky investment choice in the best of times. How to spread risk within your allocations is probably the least of your concerns, given the large risks and costs of everything else. Maybe we could just pick up some small or mid-cap stocks and save ourselves the fees?
We have to talk about Brexit. As Halloween comes into view, what sort of scenarios should a canny investor have in mind in terms of impact on sterling, rates, etc, etc?
Brexit is the dumbest thing ever and you really have to wonder, who are the incompetent buffoons now leading the charge for a so-called “hard-Brexit”? Let’s be very clear, if the UK left the EU without a deal, it is lights out.
Remember Greece and when the EU turned off the money tap? A gentle reality check and when the people realised that pigs don’t fly, the crisis was over. That was between friends, the UK leaving without a deal would most certainly be acrimonious. A border will go up in Ireland, business will essentially stop and there could be real food and medicine shortages. Heck, they may even shut the tunnel, that is if the long queues of trucks who will now need to have their papers and contents inspected don’t bring trade to a standstill in the first instance.
And before you say the EU will also get hurt and never let this happen, remember that they have 27 countries to keep together and literally have bigger things to worry about. Then there is the contagion effect. If we thought the Lehman collapse was bad, then extracting the sixth largest economy out of the very system that it has been part of for more than 40 years, could be even worse.
There is also the chance of civil unrest. If the current government tries to force a hard Brexit through a reluctant parliament and with about half of the country dead against it, then we might just see some other people get ticked off as well. We may see anarchy, running street battles and utter destruction on the scale of the ultimate apocalypse, dragging the whole world into ruin and we shall all have to live in a dark chasm of evil spirits until the end of time. Which is why it won’t happen. Buy yourself some out-of-the-money Sterling calls against the US dollar and euro and watch with glee as this ludicrous drama take its ultimate turn. Mind the volatility of course.
We have been to a few presentations recently where people are banging the drum about German property, with the notion that there is a shortage issue and money to be made in certain ways. Is this something you can talk about?
What do you get when you have record low interest rates and you can borrow money for free? Easy, a property boom. The one asset class where even the most conservative of investors will accept leverage like they just don’t care. Take out a mortgage and lock in 1 per cent interest for 25 years in euros?
Yes, please and oh, may I have another. Property values in Munich, Frankfurt and most other large urban centres in Germany have exploded. We may be used to that in London, but Germany was never built for this. There are more than 20 German cities with populations of more than 500,000. It is a highly fragmented country. This isn’t Arab, Chinese or Russian money buying up Knightsbridge and forcing the middle classes to places like Wandsworth or Clapham and fuelling a secondary property boom.
This is a whole country with property now well priced out of the range of anyone not making hundreds of thousands of Euros per year. It’s not sustainable, it will turn, and it will end in tears, but we don’t know when. For the moment, it doesn’t look like interest rates are going up any time soon. Long live the German property boom.