Many families have been dissuaded from investing in funds believing them to be poor investment value for money, an extra layer of fees and typically managed by firms that do not put the needs of their clients first. This may be true in some instances, but in others, funds are an important investment tool for families seeking to preserve capital.
CapGen, which evolved from the Said family office in Geneva, advises and manages money for families. An important part of its business is to scour markets to find the best fund manager solutions for our clients’ portfolios. -Ian Barnard answers some questions family offices may face for investing in funds.
Why do we believe in funds?
If you want to preserve capital over years and over generations, you need to diversify your risks. Owning different things in different places protects you against owning just one thing to which something bad happens. The challenge, of course, is how you go into new markets, new companies and new assets without bearing the risk of being the dumb person in the room. Pooling your capital with our investors and appointing an expert manager to do it for you at reasonable cost, that is, creating a fund, is the answer. Funds are the answer to how you simultaneously get expertise and diversification.
We actually think there is an additional benefit in using funds in some of your portfolio. It reduces your exposure to your own skill. Some are untrammelled by the responsibility of managing the family’s wealth. Others, however, have told us that putting part of the portfolio in well-chosen funds liberates them to take risks and spend time on the few things that they really care about and are good at.
But, to repeat, we are the first to say that the majority of fund products, equity or credit, public or private, developed market or emerging market, whatever or whatever, don’t pass muster. Sometimes, it is simply a question of funds meant for one sort of investor being shown to another sort of investor for whom they are inappropriate. The needs of the retail investor are utterly different to those of wealthy and sophisticated families.
How do you find the hidden gems?
There is straightforward lack of skill in the fund management industry. The majority of investment managers, regardless of fees, just don’t make money. The trouble, however, is the lack of skill is very easy to see after a manager disappoints but a good deal harder to spot in advance. We all know that if you launch eight funds at year zero, then, at the end of year three, one of those would have got the market right for each of those three years. If you have ever wondered why, towards the back of the financial sections of newspapers, there seem to be so many funds? It is because the more you have the more likely that, by pure chance, there is one that will do well.
What to do? A couple of things stand out. We presume guilt rather than innocence. That is, we assume a manager has been lucky and then try to find skill. We do this in two ways; qualitative and quantitative. The qualitative part is about extensive research and, in particular, doing very extensive reference checking. The quantitative phase is about unpicking all the past data to check that the manager has not just been lucky. And we like owner managed investment businesses where all interests are aligned rather than the products from the banks or the big asset managers.
A smart investment manager with real skill and a great strategy becomes a bad product if the charges are too high. Investors face managers who charge them more money than they are making for them. Negotiations on this subject are pretty zero-sum so our strategy is to catch them early in the life-cycle when they are vulnerable and keen to strike a deal.
We’ve been at this a long time now and still discover new tricks devised by the asset management industry to part clients from their money. The pool of investment products worth buying is a small fraction of those on the market. But the good ones can be very, very good and not only keep you rich but make you richer.