Last week I had lunch with Richard, a business colleague and friend who I have known for several decades. His career has been stellar, leading some of the capitals best known private banking departments and multifamily offices. He and I have spent many happy hours enjoying country pursuits and working together, so I asked him first, whether, he was having much sport this year.
I wished I had not asked. He is off on Friday to stay for a few days with a German Count friend in his Bavarian chalet to hunt chamois. He showed me a picture of the chalet they would be staying in. Although in theory a bit like deer stalking in Scotland the hunter has to be much fitter given that the terrain is considerably steeper. He wondered whether he was fit enough for the challenge. Knowing Richard lacking fitness would make no difference, he would be determined to have a good time.
The conversation moved onto his work. He expressed his desire not to return to private wealth management. ‘The yields are so low, private wealth managers can no longer justify their fees. In my opinion, every investor should put 80% with an investment management, 10% in riskier projects with a good potential yield and 10% in investments of passion, which could include charitable work, impact investment or collectibles such as art or cars’.
In my book ‘When you are Super Rich Who can you Trust?’, I point out that ‘Investment management, whether passive or active is not a science. It does not follow rules that can be used to predict the future. It is an art, because it is dependent upon people and as we know, people are fickle and unpredictable’. Most investors do not really understand this in practice; if they did they would take a totally different approach to their investing.
Edward, a client of mine, did not understand this to begin with, but now does. He sold his business in 2007 and gave his money to a multifamily office to manage. Eager to learn, he followed the performance of the funds into which his account manager had invested his money. At that time, Edward assumed that some fund managers were better than others and that his account manager knew who they were. At the end of each year, he expected his account manager to ditch the funds which were not performing well and put them into the funds which had performed well – but this is to assume that investment management is a skill and not statistics.
As a statistic, if a fund manager has had a good year, Edward should take the profits and invest it in the worst performing fund. Next year that fund could have a good year and he will benefit from the rise in the value of the fund, especially if having had a good year, other buyers, looking at the past year’s performance, want to invest in that fund and he will make a profit.
What a fund manager is doing is trying to spot undervalued assets or a trend in investments and what the account manager is doing is trying to spot next year’s stellar account manager, regardless of what he or she did last year.
When Edward realised that investment management was statistics not skill, what did he do? He engaged a wealth manager to go through with him his lifestyle needs and future trigger points; buying houses for his kids, the marriage of his daughter, succession, his personal passion for renewables and kids in Africa. It soon became clear from this analysis that his portfolio would best be passively managed using trackers, but that the portfolio set aside in trust for his children should invest in equities, with some bonds for the expected capital requirements. With regard to his interest in renewables, his wealth manager introduced him to a former investment manager who has a deep knowledge of renewables and to a charity with a charity to help him raise money for kids in Africa. ‘Now that my portfolio is managed according to the needs and interests of myself and my family, I feel in control of my investments and feel I am getting value for the fees I pay.’
And what about Richard? Like the manager Edward was introduced to who works with him on his renewables interests, Richard is looking to work with a firm which specialises in medical technology. He will then seek out families, who have an interest in medical technology with whom he can work. ‘I want to use my skill and expertise in one sector so that I can pick projects on which there is real growth potential, if the family is prepared to take a risk’.
Looking for projects as compared to investment management is the difference between hunting and farming. Richard could take a lot of time and effort in Bavaria tracking down an animal, only to miss on shooting. Managing the 80% of ‘safe’ money produces a steady, but not spectacular return, hunting projects could however make the client a super profit – or none at all.
If you have experiences like Edward or Richard or have any comments, please let us know. If you would like to buy Caroline’s book or make an appointment to see her or one of her team, please contact firstname.lastname@example.org or phone her on 020 3740 7423.
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