A Family Is Not A Portfolio: A Discussion With Charles Grace

Family Office Exchange, a membership organization with offices in Chicago, New York, and London, seeks to provide high-net-worth families and the managers of their family offices with the resources they need to advance family wealth and well-being.

Charles B. Grace III is a senior director at FOX, hired in March 2010. We spoke to him recently about how ultra-high-net-worth families and family offices might best deal with volatile markets, and the role of alternative investments in that picture. Nothing that Grace said to us, or that we transcribe below, is to be regarded as investment advice.

AAA: One of the platitudes that applies to all investors, including family offices, is that they must be diversified. Is your understanding of what that means changing? For example, has asset class diversification on the one hand or geographical diversification on the other hand, become a bigger or smaller part of the over-all picture?

FOX: A lot of UHNW and family offices are re-thinking traditional ideas about asset allocation and portfolio theory. One of the ideas that are gaining traction is goal-based investing. This means that instead of thinking of the portfolio only as an entity in itself and in relation to markets you, as the manager of a family office, think about the family and its needs to a greater extent: its safety, growth and aspiration buckets and the like to meet specific family goals.

Certainly in this approach, too, diversification plays a role. A typical family office will hold cash and cash equivalents, debt, and equity. The equity may be both public and private. There also may be real estate, especially if the family has a particular degree of familiarity with real estate. Other strategies will often be included.

In the years before the world financial crisis, an endowment oriented model was gaining some ground, following on the example of Yale University and its long-time CIO, David Swenson. But, frankly, there has been some questioning of that as of late.

With the questioning, we’re seeing some re-allocation of the funds that might once have been dedicated to alternative investments, but that (because for example of liquidity concerns) might not fit as well into certain goal-oriented approaches.

AAA: Are you seeing among FOs a flight to the presumed safety of the US, in the face of troubling news especially from Europe, but also concerns about a slowdown in China, etc.? Are investors ‘coming home’? If so, does this complicate the need to diversify?

FOX: There has not been as much of this as you might expect among our U.S. members. We are a membership organization, with roughly 500 members, half family offices and half advisers. Not all are U.S. Among those who are and aren’t, there is an understanding that there are great opportunities for growth outside the U.S., especially among the emerging market nations. There was a time when the EMs would have been bunched with the rest of the world under the “international” category. But they are now coming into their own to a greater degree for investors.

In the case of China, the problem for investors, including of course FOs, is to figure out what vehicle to use to gain your Chinese exposure. It is one thing to invest directly in a Chinese company, another to invest in a fund with Chinese expertise, and a third thing to use a Hong Kong approach.

AAA: What about your non-U.S. members. Do they tend to regard the U.S. as a safe haven?

FOX: They have a somewhat different perspective on the U.S. from what they might have had a few years ago. Certainly the question of which havens are safe is a relative one depending on which country we are talking about. The U.S. has opportunities for those seeking safety, but it is not necessarily a more safe haven than, say, Switzerland.

AAA: What is your take on commodity vehicles, notably CTAs, as part of the over-all picture for a family office?

FOX: Commodities are usually not a large part of the portfolio value of a family office. They may be between 3 and 5 percent at most usually, and this may be treated as part of the hedge fund bucket rather than as a bucket of its own. What is intriguing about commodities, for some FOs, though, is that they are very liquid markets, compared to the greater illiquidity you have to concern yourself with in the hedge fund world, broadly defined.

AAA: What is your view of the prospect of changes in the regulations concerning hedge fund solicitation? Do you think there is a danger that FOs will be lured by newly aggressive hedge fund advertising into unwise investments, or do you see them as sophisticated investors who can look after their own interests when confronted with such solicitations?

FOX: Our members are fairly sophisticated. Your readers are surely aware that ‘rich’ does not necessarily mean ‘sophisticated’ in fact (though that presumption is made in law): still, the families who establish FOs often have individually and collectively a good deal of experience in the business and financial world, and the office itself serves as a process, with advisers and gatekeepers. I’m not sure that the relaxed solicitation rules will be all that important to this world.