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Family offices: seeing the big picture

Philip Watson

By Philip Watson

Head of Global Investment Lab and Chief Innovation Officer for the Private Bank in EMEA and Global Investments

April 8, 2016Posted InFamily Office and Wealth Advisory

Having a holistic portfolio view is vital to running a family office.

Without one, inferior returns and too much risk-taking can easily follow. For many family offices, however, there’s a clear danger of losing sight of the forest for the trees. That’s especially true when multiple banking relationships are involved, each with their own advisors and custody arrangements. Such family offices are faced not only with many trees but also with several forests.   

At first glance, this mightn’t sound undesirable. After all, having numerous advisors and custodians may help add diversification. In practice, though, the costs of managing, say, multiple banking relationships can quickly outweigh the benefits. The many hundreds or even thousands of investment positions held across these relationships can actually lead to over-diversification. Because each ‘tree’ makes up so little of the ‘forest’, even the best performers have little impact on overall returns.

That’s not the only potential drawback of family offices having several banking relationships, though. Dealing with a jungle of statements from various providers, different vehicles and perhaps also conflicting advice can be confusing, expensive and time-consuming. Seeing the forest for the trees can become even more difficult, therefore.

While the logistics can be tough, carrying out regular diagnostics of holdings across all relationships is essential for family offices. Our approach to this stresses finding out what is really driving a portfolio’s returns by identifying the factors it is exposed to. There are literally hundreds of potential factors, such as individual market returns, US 10-year corporate spreads, valuations, earnings momentum and so on.

The results of factor analysis can surprise family offices. They often learn they have exposure to return drivers they didn’t know they had, as well as discovering hidden duplicated exposures. Take the recent case of the Northern European family office that managed more than US$500m. On the face of it, their holdings seemed well diversified. But our analysis found that more than 50% of their overall risk was concentrated in Western European market returns.

Sometimes, family offices have a particular concern that makes them request a holistic analysis of their factor exposures. One Southeast Asia-based family office was worried about the risks that exposure to rising interest rates and currency moves could pose to their holdings. Our subsequent analysis confirmed their suspicions and we then came up with some strategies to hedge their precise risks.

Multiple banking relationships are already a reality of life for many family offices today. And they could become more common still as family offices’ assets continue to grow and as their needs become more complex. With the forest spreading and the variety of trees proliferating, the importance of keeping the big picture in focus is increasing. Having a manager who is capable of performing regular, holistic analysis of portfolio exposure factors across all your relationships offers a way of helping to achieve this.