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How the world’s wealthiest keep it in the family

The world’s richest families, disillusioned with traditional wealth management, are taking matters into their own hands. Lucy Loewenberg reports on the rise of the family office.

In medieval times, royals appointed a steward who was responsible for managing their wealth, domestic staff and household affairs. This idea filtered down to the aristocracy, giving rise to the concept of “stewardship”.

The modern notion of a family office, charged with the stewardship of a specific family’s wealth for current and future generations, emerged in the 19th century, when the family of financier and art collector JP Morgan founded the House of Morgan in 1838 to manage the Morgan family’s wealth. Today, those with family offices include Bill Gates, Oprah Winfrey, and the Duke of Westminster.

Industry experts reckon that to start a family office you need to have at least $100m, but more typically over $200m. Yet since the 2008 financial crash, the number of single-family offices in the UK has more than doubled to around 1,000, according to The Guardian, and they manage more than $1,000bn (£717bn) between them.

This surge in family-office creation happened because super-wealthy families were “very cheesed off with their private banks” because of the poor returns on their investments, Keith Johnston, chief executive of the Family Office Council, tells The Guardian. “They decided to take more control and create a structure that they felt was… entirely doing their bidding.”

Making it is one thing – keeping it is another

Family-office activities range from investing to advising on tax and intergenerational wealth transfers. Many offices are now also in charge of philanthropy – the average family office gave $5.7m to philanthropic causes last year, according to the 2017 Global Family Office report from Campden Wealth. Family offices may also take care of yachts, works of art, or even provide high-end concierge butler services.

There are estimated to be around 5,000 family offices in the US, and globally around 49,000 families fall into the required wealth bracket. Big investment banks such as Citi and UBS have entire departments that specialise in providing financial services for these offices. But nobody knows exactly how many there are in total because they tend to be secretive, and don’t typically have to register with regulators such as the Financial Conduct Authority.

However, in research material about family offices, two aphorisms crop up again and again. The first is: “from clogs to clogs in three generations” – the cautionary observation that often one generation founds a business, the second builds it up, and the third squanders the resulting wealth. Indeed, according to a survey by the Family Office Exchange (FOX), the most pressing concern for family offices is “growing or sustaining their wealth”, while the “generational transition” comes a close second.
The second commonly encountered phrase is: “when you’ve met one family office… you’ve met one family office”. In other words, all family offices are wildly different from one another.

Philanthropy and giving back

“The wealth of the family was generated by the CEO of a public oil and gas company – that was the genesis. We work for the second generation,” says Vince Knowles, investments and strategy manager at Ceniarth, a single-family office. What’s particularly interesting about this office is the approach to wealth management. “While the first generation deployed capital through the private wealth teams of large banks and conventional philanthropy, for example the arts,” says Knowles, “the second generation focuses on social impact investing.”

Impact investments focus on companies, organisations and funds that aim to make a positive social and environmental impact as well as a financial return. Ceniarth’s mission is to fund “market-based solutions to benefit underserved communities”. Knowles emphasises that, when investing, “we’re not giving grants, there’s a return on capital”.

Rural African or south Asian farmers are among the most economically marginalised communities, in Ceniarth’s view, but the office also looks for “solutions for underserved communities in developed markets”. In the US, for example, they’ve invested with a specialist fund manager that focuses on affordable housing. In emerging markets the focus is on agriculture, energy and small-business finance.

For example, Ceniarth helped to incubate Lendable, which financed a motorcycle-leasing platform in Kampala. “We’re outliers in the family-office world, and innovators in the social-impact investment world,” says Knowles. But interest is growing. Nowadays, “social impact investing and crypto currencies are the biggest growth areas you see at family-office conferences”.

Miguel López de Silanes Gómez, FOX Market Leader for Europe and Latin America, agrees: “Impact investing is on everyone’s radar… There are so many problems in the world, and we’re in this ship together, so if people aren’t rowing, they’ll get thrown off.” The 2016 Investing for Global Impact report found that family offices’ main areas of interest are health, education, clean energy and agriculture.

Managing more than one fortune

Multi-family offices are often set up by single family offices, which have done well then broadened out. Stonehage Fleming dates from 1873, when Robert Fleming established one of the first investment trusts and helped finance the US industrial revolution.

It now spans 250 families, with £35bn under administration, 11 offices worldwide and 500 staff. “The business is independently owned with over 80% held by those working in it, and offers comprehensive support to families across the full spectrum of their assets and wealth planning and structuring requirements,” says Guy Hudson, head of investment management, business development and group marketing.

Wren Investment Office, meanwhile, which launched in September 2016, looks after the wealth of a dozen families and an Oxbridge college. Each family has a tailored long-term strategy for its wealth – Wren does not use model portfolios. It also boasts a large investment committee, tasked with asset allocation and manager research – not just in the UK but globally.

The family office’s current “house view” is that “the environment of positive economic growth and muted inflation continue to favour an allocation towards risk assets”. Only a recession can trigger a change in this current “rational exuberance” – but that said, Wren believes that “recession is inevitable before the end of 2020 as there is no slack in the economy, demand is growing faster than potential supply and central-bank policies remain expansionary”.

As a result, the group is considering how “best to position portfolios in the face of more challenging markets, most likely resulting in a reduction of risk across client portfolios”.

One specific trend Wren has currently observed in the family-office sector in general is “more and more capital being allocated to private equity, with a greater focus on direct deals and co-investments. We are strong believers that private equity is a key component of a long-term investment strategy, but one has to be particularly selective in the current environment, where valuations and leverage are being pushed to levels last seen prior to the global financial crisis.”

Indeed, last year The Wall Street Journal argued that family offices are even competing with investment banks and private-equity groups either to do deals or to provide financing to promising start-ups.

Should you set up your own?

Overall, it’s impossible to measure the economic, social or philanthropic impact of family offices. Amy Deen Westbrook, Kurt M. Sager Memorial distinguished professor of international and commercial law at Washburn University School of Law, argues that, while family offices have a substantial amount of assets under management, “they are likely dwarfed by the market power of the BlackRocks and Vanguards in our economy”.

However, if you are rich enough to establish one, it may well be worthwhile, she notes: “Arguably, the lack of regulation (and thus decreased costs of operation) produces a leveraging effect: family offices make it easier for individuals with more money to make more money.” Not all of us have a spare $200m to keep safe for the grandchildren – but the good news is that it’s possible for those of us with smaller portfolios to invest alongside those who do. Several investment trusts have been set up to run family fortunes – we look at some of the most interesting below.

How to invest in family offices without setting up your own

Probably the best-known investment-trust vehicle for family wealth is RIT Capital Partners (LSE: RCP), which was set up to manage some of the Rothschild family’s wealth. The family still owns about a fifth of the shares and the trust is chaired by Lord Rothschild. It trades on a premium to its net asset value (NAV) of around 2% (in other words, the shares cost a little bit more than the value of the underlying portfolio). The dividend yield is 1.7%. Over the past five years, the trust has returned 71% (with dividends reinvested) compared with 42% for the FTSE All-Share index.

Another option is the Caledonia Investment Trust (LSE: CLDN), which has made a similar total return over the past five years. Nearly half of the outstanding shares are owned by the Cayzer family, who made their money in shipping in the 19th century. The trust trades on a discount to NAV of about 17%, and yields 2.1%. Both RIT and Caledonia invest in a wide range of assets, with unquoted companies making up a substantial portion of both portfolios.

A third interesting option is Majedie Investments (LSE: MAJE). The Barlow family – who made their money in Malaysian rubber plantations – own around 40% of the shares. The trust has returned more than 100% over the past five years and yields 3.4%. It currently trades on a discount of around 10.5%. Just under a third of the fund is invested in Majedie Asset Management (which manages the trust) and it also invests heavily in the Majedie family of funds.

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The above is reproduced with kind permission from MoneyWeek    It appeared in issue 891, 13th April 2018