Four family-office executives and what they’re investing in today

It hasn’t been the best year for Canada on the economic front. And with GDP projected at just under 1 per cent for 2024, the year that’s shaping up doesn’t look to be much better.

According to the Bank of Canada’s Monetary Policy Report from October 2023, consumer price index inflation has decreased since June 2022, but “progress toward the 2 per cent target is proving to be slow.” It’s predicted it will stay at around 3.5 per cent until mid-next year.

But what’s worrying investors is the possibility of a rapid slowdown in the Canadian economy, driven by high levels of household debt and lower spending. Long-term bond yields have increased dramatically since July, and higher levels are expected to last – a development that could negatively impact equity and other asset prices.

What’s reassuring is that Canadian family offices are preparing for this eventuality. Many have invested in alternative investments, and in many cases, their strategies are paying off.

We spoke to four family-office executives to determine what they see happening in the coming year – and what advice they’re giving clients.

Neil Nisker, co-founder, CIO and executive chairman, Our Family Office Inc., Toronto

“As a Shared Family Office serving ultra-high-net-worth clients, we prefer playing defence over offence. We focus on risk and it has served our families very well. You don’t have to take much risk to double your money in 10 years, which is a 7-per-cent net return.

“Some three years ago, when interest rates were near zero, we made a tactical decision, knowing that they can only move in one direction, that any income strategy that we were using must be both floating rate and very short duration. These included mortgages, bonds, senior credit and secured lending.

“Each of the last three years these strategies have performed better than in the previous year, as interest rates increased. This worked very well, especially in 2022, when our families were up when stocks and bonds were down dramatically. Obviously, there is a relationship between risk and return. The more risk you take the more money you can make or lose.

“At the present time we are sitting on a lot of cash, which is not only giving us more than 5 to 5.5 per cent with daily liquidity, but the optionality of moving quickly into other asset classes when we feel the time is right. Most of our clients’ portfolios are in anything but stocks and bonds. We are underweight equities.

“We don’t believe that the stock market is cheap, and there are many reasons why we believe we will have an opportunity in the next 12 to 18 months to invest in the market at lower levels. We will also extend duration in our bond portfolios, once interest rates begin to go down sustainably, and we believe that will begin sometime mid-2024. History has shown that every time interest rates go down the stock market goes down, and we are waiting patiently for that to happen.”

Sloan Levett, partner and practice lead, family office, Fuller Landau LLP, Toronto

“For the first time in over a decade, investing in GICs is now part – or at a minimum, a discussion – of our overall asset allocation discussion with clients. As well, any investment we look at, we evaluate its risk/return characteristics against the return a GIC can generate. That comparative didn’t exist for the better part of the last decade.

“We’re more focused on fixed income and the credit market. With many fixed-income strategies generating yields nearing 10 per cent, that asset class now warrants meaningful attention. On the equity side, we’re being very selective.

“We have recommended clients remain patient both in terms of slowing down the pace at which they deploy capital and have become even more discerning into the asset classes we’re deploying into. Given geopolitical uncertainties and the macroeconomic-challenged landscape – high interest rates, inflation, etc. – we are patiently sitting on a meaningful percentage of cash generating a 5-per-cent-plus return these days.

“We likely won’t see interest rates start to fall until maybe Q3 of 2024. I feel real estate, specifically commercial and residential, will continue to soften as mortgages mature, and people are faced with a potential tripling of interest rates.”

Yan Li, chief investment officer and portfolio manager, Unbiased Portfolio Management Inc., Calgary

“Eighteen months ago, some people were calling for a recession to hit in six months. Eventually a recession will happen. We are not in the business of making short-term predictions. Our portfolios are broadly diversified and rebalanced to targets during market volatility.

“Having said that, our research has identified some longer-term themes that are more likely than not to play out in the coming years. These include higher average inflation this decade (2020s), commodities CAPEX under-investment, global supply chain rerouting due to geopolitical considerations and inflationary domestic policies. As well, stocks and bonds are more correlated amid the higher inflation regime.
“Our bond portfolios are either short-duration or inflation-protected through TIPS and Real Return bonds. We have liquid alternative investments that further diversify away from stocks and bonds. We also have a 3-per-cent Bitcoin allocation in our model portfolio as a flat debasement hedge.”

Sudharshan Sathiyamoorthy, vice-president, head of manager research, Richter, Toronto

“Evidence is pointing to inflation not being as transitory as many had hoped, and interest rates staying higher for longer. A downturn in markets is a very real possibility.

“Ultimately, diversification and investing with a longer-term view on the markets is how we create portfolios for clients that are resilient to the vagaries of the market. This means that capital required for their lifestyle needs are typically kept in low-volatility and liquid investments, and the rest of their portfolio is well diversified across different markets, asset classes and strategies.

“Clients need to stay ahead of inflation, taxes and fees just to maintain purchasing power, before even considering growing it over time. With banks retrenching and a dearth of capital providers making capital more expensive, fixed income and credit strategies have become interesting, especially strategies that lend against contractual cash flows and real assets.

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• How much cash to hold right now

“We are still focused on creating diversified portfolios for our clients’ multi-generational wealth. But we look for strategies that have uncorrelated drivers, such as those that invest in innovations in food, education and decarbonization, strategies that involve buying and developing data centres, industrial real estate and multi-family rentals, and even more niche strategies such as those that invest in sports-related revenue streams.

“With rates and inflation where they are, and with upcoming mortgage renewals, the Canadian consumer is going to feel the pinch. Small- and medium-sized businesses that are not well-capitalized will feel the pressure as capital has become much more expensive than 1.5 to 2 years ago. As a result, fixed income and credit are becoming more compelling than they have been in the past.”

Responses have been lightly edited for clarity and length.

 

 

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