Five family-office execs and what they’re investing in now
They are positioning clients for the long term but can’t ignore market volatility, threat of downturns
There’s been considerable debate about Canada’s economy lately. Although C.D. Howe declared a recession in May 2020 – and announced it had ended last month – Canada’s GDP fell in April and May of this year, signaling that we may not be out of the woods yet.
More optimistically, the Conference Board of Canada says Canadians built up savings over the past 18 months and there is pent-up demand for goods and services. As well, the take-up of vaccines – and the removal of more stringent public health restrictions – may help boost the economy. Yet inflation is on the rise. It’s all a bit unclear as to what direction things will go.
Amid all this, the Bank of Canada is projecting growth of about 6 per cent in 2021, 4.5 per cent in 2022 and 3.25 per cent in 2023.
Family offices are well-versed in guiding clients on how best to weather the economy’s ebbs and flows. Many are following well-honed practices of building portfolios that preserve and grow wealth – and insulating their ultra-high-net-worth clients from potential shocks.
Canadian Family Offices spoke with five family-office executives about the course of action they will be taking this fall.
“We do think there is a lot of investor uncertainty due to the ongoing battle against COVID-19. Despite all this, we believe in the resilience of humans, and remain cautiously optimistic on the reopening and strengthening of the economy.
“While the topic of a market downturn does come up in client conversations, none are expecting a repeat of the 2008/9 crisis. However, we continuously emphasize that timing the market is difficult; we are investing with a long time horizon given that our families have multi-generational wealth; and we create a truly diversified portfolio that can meet the family’s objectives irrespective of a market boom or recession.
“We have not stopped allocating new capital to equities but continue to favour managers that capture less of the downside. We have built a barbell portfolio for our clients, allowing for the portfolio to show strength during economic growth, and resilience when there is a weakening economic backdrop. We also help diversify client portfolios across alternatives, including real estate and other inflation-protected investments.
“We ask ourselves: What are the emerging industries and trends? We then allocate to top-tier managers in those spaces, hoping to benefit from the tailwinds that these industries enjoy as wider adoption ensues. This disruption theme is quite prevalent in our client portfolios and includes, among others, investments in cybersecurity, food technology and decarbonization-themed funds. By picking specialist managers (as opposed to generalists), we believe that we are increasing the probability that these managers will be able to pick idiosyncratic return opportunities that are less impacted by market gyrations.”
“I would not say we expect a downturn in the markets in the coming months. Our firm is a passive indexer. We don’t time the markets.
“The S&P 500 has not had a 5-per-cent correction in 200 days. Prices are volatile, and correction could come any time. I read a great line before: ‘People have lost more money from fear of a market crash than an actual market crash.’
“The reason I feel comfortable right now is that I know there is still plenty of liquidity in the system. The Fed is nowhere near removing liquidity. The stock market is a market and prices are determined by supply and demand. As long as there is easy liquidity around, dips will be bought.
“Our firm has been a passive indexer for 20-plus years. We continue to hold very diversified portfolios of ETFs and rebalance to targets during volatility. During the March 2020 crisis, we were able to rebalance portfolios near or at the stock market lows for clients. One thing we did do earlier this year (spring 2021) was to increase diversification even more by adding small allocations of alternative investments to client portfolios. We found a product that trades on the TSX as an ETF that is liquid, transparent, inexpensive and diversified.
“At the same time, in early 2021, we increased very modestly Canadian equities for the commodities exposure, reduced bonds very modestly, and reduced unhedged FX exposure.
“There are always risks in the economy. The only thing that’s certain is uncertainty. A correction could come any time, then we will rebalance client portfolios to target as we have always done.”
“We are not expecting an economic downturn in the coming months. But with there being so much uncertainty in the economy, it would be irresponsible if we didn’t consider it as a possibility. There are many things to take into consideration, such as the increase in COVID-19 cases, geopolitical issues and concerns about rising inflation pressures.
“We continue to be capital allocators but are moving away from technology and growth stocks and more into value stocks where we feel the value is not properly reflected in the stock price. As a result of the continued uncertainty, where clients require access to capital in the next two years, we are raising cash now instead of keeping the capital invested and raising it at a later date. We are also increasing our allocation to market-neutral and long/short strategies that act as a ballast within client portfolios.
“For anyone with capital to invest today, we are taking a more conservative approach and allocating to more strategies where downside protection is paramount. We are bracing clients for a lot more stock market volatility and a likely meaningful downturn within the next 6 to 12 months.
“I expect significantly more volatility. As governments eliminate economic support, growth in many sectors slows down and companies experience difficulty in meeting earnings estimates, we feel a stock market pullback is likely.”
“Few clients are expecting an economic downturn. In fact, many are witnessing much the opposite given tight labour conditions and upward pressure on prices.
“Our forward indicators clearly point to decelerating growth. We are doing our best to educate our clients, but it is a slow-moving process. However, we do not believe it will impact investing patterns for three reasons.
“First, our clients have long-term time horizons of 3 to 5 years or more. Second, approximately half of our clients’ investments are in private assets, which have lengthier holding periods. And third, beyond short term wiggles, slowing growth has not been negative for risk assets historically. Since we think an outright recession is unlikely, volatility is likely to increase, but a bear market is not in the cards.
“Our approach has remained constant for much of the past decade: to focus on the long term as well as private assets that are generating substantial alpha and excess returns.
“Risk assets should resume their outperformance as the year progresses. Growth will slow, but an outright recession is unlikely because the Fed and BoC policy settings will remain stimulative. Positive growth combined with ample liquidity is consistent with a continuing bull market, rather than a major drawdown in risk assets.”
“My greatest fear is not knowing that which we do not know. I believe the stock market is currently priced for perfection, at all-time highs, and therefore I am fearful. Given the many other asset classes that our clients can invest in, we are very cautious on equities but still own them, just not as much as we hope to in the future.
“For ultra-high-net-worth clients, it’s more important to play defence, not offence. We recommend an all-weather portfolio that will meet or exceed our clients’ expectations given any economic environment, which is always uncertain. In the ultra-high-net-worth space, they tend to favour the philosophy of ‘stay rich, not get rich.’ Our main concern is the relationship between risk and return. We are focused on asset allocation and absolute returns, finding strategies that go up, whether the stock market goes up or not. Those strategies will have a low correlation or no correlation to the stock market.
“I hope that this current pandemic ends and we find ourselves next year experiencing new normal times. From an investment perspective, I believe there are many other asset classes that will give you a better return for much lower risk than the stock market.”