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Five executives at family offices: Where they’re putting money now

Domestic and global uncertainty has left them maneuvering carefully, managing risks and finding bright spots here and there

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The slowing Canadian economy is leaving wealth managers treading carefully. “Strategic navigation” continues to be necessary, says Anik Lanthier, partner and portfolio manager at Richter in Montreal.

Amid higher interest rates, inflation and geopolitical turbulence, the Canadian economy has suffered. But it also has shown surprising resilience.

Economists and market participants were expecting mild recessions in the U.S. and Canada, but that has not come to fruition, says Edmonton-based Marvin Schmidt, founder and principal of The Schmidt Investment Group at CIBC Private Wealth. In addition, inflation is declining, especially in Canada, he says.

Risk management has also become a focal point. “Our primary focus is on risk management and downside protection, something that is paramount for our clients,” says Schmidt.

Canadian Family Offices spoke to five family office executives and portfolio managers to determine how the domestic and global uncertainty is affecting their investing decisions.

Tom McCullough, chairman and CEO, Northwood Family Office, Toronto

“While the allocation to each asset class is driven by the client’s unique circumstance, we employ diversification as a cornerstone to risk management. We invest in asset classes across the risk and return spectrum for our clients, which is central to capital preservation.

Our client portfolios are diversified across a mix of cash, short maturity fixed income, public equities, private equity, private real estate, private infrastructure, venture capital and other uncorrelated strategies. We continue to build out our clients’ private markets exposures, looking at both closed-end and evergreen structures.

In times of increased economic and geopolitical uncertainties, rather than try to predict the short-term direction of markets and make knee-jerk tactical changes to a client’s asset mix, we remain focused on achieving the client’s goals, which are primarily grounded in a long-term view.

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Our investment beliefs in managing risk through diversification across public and private markets, limiting downside capture (i.e., the amount an investment drops relative to the overall market decline), and managing liquidity results in portfolios that are resilient through changing economic, geopolitical and market conditions.

Broadly, we believe inflation will gradually continue to trend lower, allowing central banks to become less restrictive in their setting of monetary policy. This outlook is largely supportive of both equity and fixed income markets on a medium-term horizon. Given the concentrated nature of public equity performance in recent time periods, our preference is toward active management, which we believe will produce superior risk-adjusted returns in the years ahead, as the equity market broadens.

One example of a recent tactical move has been a shift in our bond allocation. The aggressive rate hiking cycle in 2022 and 2023 created an opportunity to invest in liquid, shorter-dated investment grade corporate bonds that were trading at a discount to their par value. This was quite a different environment from the low interest rate period that prevailed previously when most bonds traded at a premium. The discount provides a more tax efficient return for taxable investors, and as such we adjusted a portion of our fixed income exposure in late 2023 to take advantage of this opportunity.”

Marvin Schmidt, founder and principal of The Schmidt Investment Group at CIBC Private Wealth, Edmonton

“Investors should have a well-diversified portfolio invested in multiple asset classes including public equities, bonds, private equity, absolute strategies and real estate. The current climate of high interest rates, high inflation rates and general economic uncertainty hasn’t changed this, and we believe this investment philosophy serves clients best.

We aim to deliver market returns while minimizing downside risk, providing our clients with a smoother investment experience. This approach allows our clients to focus on their endeavors without the constant worry about their portfolio’s performance.

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We believe private equity will continue to generate above market returns, and this is an important component of most client portfolios. We have been overweight in this asset class.

On the public equity component, we are sitting at target weight but would be comfortable making additional investments to the Canadian side rather than the U.S., especially given the weaker Canadian dollar.

When investing outside Canada, currency can impact returns very significantly, especially over a short-medium time frame, so to manage this risk and potential negative impact on client returns we will either add or remove currency hedges or adjust our direct investment exposures up or down inside or outside of Canada. In the short term we would not be surprised to see a somewhat weaker Canadian dollar, but over the next several years we would expect the Canadian dollar to strengthen versus the U.S. dollar, and we are positioning client portfolios with that in mind.

For fixed income we believe that short term rates have peaked, and the next cycle for the remainder of 2024 and 2025 will be declining rates.

Private equity has historically delivered strong risk-adjusted returns with low correlation to the public markets. For public markets, Canada is considerably cheaper than the U.S. on both an absolute and historical basis. While there is always some uncertainty, whether it’s economic or geopolitical, I wouldn’t say that current times differ substantially at a macro level than most other time periods.

We expect stock markets to continue to have a strong year in 2024. We also do expect market volatility to increase in the second half of the year, and therefore having uncorrelated or low correlated assets to the public equity markets should result in a smoother investment experience as we move through the end of 2024.

Interest rate relief is in sight for consumers, so businesses should continue to be strong and should be able to move forward more confidently knowing that rates will likely no longer be going up, but rather down.”

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Anik Lanthier, partner, chief investment officer, portfolio manager, Richter Family Office, Montreal

“Globally, central banks are transitioning from tight monetary policies to rate cuts, with some, including the Bank of Canada and the European Central Bank, already having started. These actions highlight the cautious approach that central banks are taking to ensure inflation remains under control while fostering economic growth.

Geopolitical tensions, particularly in Europe and the Middle East, continue to impact market stability. The upcoming U.S. presidential election adds another layer of uncertainty, influencing investor sentiment and market dynamics.

As allocators, we are fortunate to be in a position where we can be highly selective in deploying capital. This advantage arises from the current dearth of liquidity, which is partly due to the slower return of capital from general partners (GPs). Additionally, in recent years, many allocators, including ourselves, have directed a larger portion of deployed capital toward private markets. Coupled with the struggles of many GPs to raise new capital, we now face an environment where capital is scarce.

We find several themes attractive. We are exploring opportunities in artificial intelligence, and more specifically in generative AI. Industries supporting AI, such as data centres and the energy sector needed to power them, are also of interest. Investments related to decarbonization, healthcare and biotechnology also have long term growth potential due to ongoing innovation and policy support.

Finally, with high interest rates and a cautious banking sector, there is a scarcity of capital, especially for mid-market firms. Lending strategies targeting inefficient markets or those backed by assets are appealing, potentially offering mid-teen returns with risk similar to senior secured loans.”

Declan Ramsaran, managing director, PANGEA Private Family Offices, Toronto

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“Our top three areas of capital allocation in 2024 are private credit, private real estate investment trusts (REITs) and private equity in software as a service (SaaS) technology.

Our posture remains opportunistic. To us, private credit in this part of the cycle provides comparatively attractive yields with acceptable volatility. We find both asset-backed and asset-based private credit opportunities highly appealing at this time.

The International Monetary Fund estimates the private credit market to be more than $2 trillion and expects growth to ‘outpace other asset classes.’

The characteristics of private REITs align with our patient capital allocation philosophy while providing us with a meaningful degree of oversight and direction for impact. For example, with one of our private REIT allocations, we are helping to alleviate some of the housing concerns in Canadian communities by creating accessible supply while preserving the local architectural heritage.

Our private equity allocations in SaaS technology are one of the crystal balls that give us a glimpse of how technologies will change business and life for us in the future. One of our SaaS technology allocations is positioned to win significant North American market share in a sector annually valued at US$265 billion. This technology will positively impact diversity, equity and inclusion metrics for Fortune 500 companies.

We see positive areas in global equity markets, but escalating geopolitical risk is very much top of mind for us. Closer to home in Canada, we see some areas of the financial services sector performing well within the coming quarters. Dividends of some blue chip, Canadian household names are quite appealing at this time in the equity market cycle.

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It is a special year for elections around the world. According to the World Economic Forum, a record 50 elections are happening. We are closely focused on the U.S. election.

Even though recent Canadian tax changes have created discomfort for some of our clients, we are all aware that things could become considerably more uncomfortable depending on the outcome of the U.S. election. With this in mind, sometimes the safest place for capital preservation is close to home.”

Chris Foster, chief executive officer, Foster Family Office, Toronto

“In light of high interest rates, high inflation and general uncertainty, we have been investing in SPDR Gold Trust (GLD); iShares Bitcoin Trust (IBIT); iShares Silver Trust (SLV); Franklin FTSE Mexico (FLMX); Franklin FTSE India (FLIN); and Franklin FTSE Japan (FLJP).

Our key investing mandate is to never allow our wealthy clients to become ‘un-wealthy,’ so playing defense is central to all our mandates.

There are two types of threats that we strive to protect clients from. The first is the garden-variety bear market that comes around every few years. We try to position our portfolios to make sure clients will never participate more than 50 per cent in any market meltdown. The second threat we attempt to protect our clients from is a true global cataclysm, something like the loss of the U.S. dollar’s status as a reserve currency, or nuclear conflict.

Let’s take the second threat first. We have a 5 per cent allocation to a group of what we call ‘non-confiscatable’ assets: gold, silver and Bitcoin. While these assets have been doing well recently, and we anticipate they will continue to do well if interest rates start coming down again, their true value is to shoot the lights out when something really bad happens.

As for the more normal threats, such as bear markets, recessions, etc., we are positioning the equity portion of our portfolios for stormier weather. We diversified away from more-expensive North American markets early this year, adding Mexico, Japan and India into our Global ETF portfolio. Our favorite ETF manufacturer in these markets has been Franklin Templeton. While Franklin’s individual ETFs may not be quite as liquid as other ETFs, the lower fees more than make up for the lower liquidity.

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While the ‘higher for longer’ consensus is well-embraced at the moment, we think central bankers will be hitting the panic button very soon. We are anticipating that the jobs market will soften materially in coming quarters, leading to a quick series of rate reductions on both sides of the border. The investment implications of this, we believe, will be to favour more defensive and interest-rate-sensitive parts of the market, such as insurance, financials and REITS.”

Responses have been lightly edited for clarity and length.

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