Family offices go back to basics as financial assets fail to deliver

With many financial instruments providing flat or negative returns, some family offices are turning to what some have termed “basic businesses” or “alternative alternatives”. That is, niche real assets that existed before the introduction of financial instruments such as equities and bonds.

Family offices speaking at AsianInvestor's Family Office Forum in Singapore last month said they had invested in farmland in Australia, sand mines in Brazil and water-related plays. This is in addition to allocations increasingly being made to real estate operating companies and platforms rather than the underlying assets.

One private office that has been doing this for a while is Singapore-based Vulpes Investment Management.

“We grow food and sell it to people. As an investment class farming basically has disappeared from people’s radar,” said Steve Diggle, family principal at Vulpes. "We got into farming in 2009 because of the risk-return profile. It has good inflation-hedge characteristics. We are the largest producer of avocados in New Zealand."

Diggle noted that this movement was not a coincidence. “Traditional investments like listed stocks, bonds, mutual funds and ETFs are all very recent financial constructs, which did phenomenally well from 1982 to 2007, so no one bothered to do anything else,” he said.

Diggle knows this better than most, having run a volatility-focused hedge fund, Artradis, that made big profits during the crisis period in 2007 and 2008 and peaked at $4.5 billion in AUM before closing in 2011.

“Post 2007 the system failed," he said "The chances that those traditional asset classes will produce acceptable risk-adjusted returns to investors over the next 30 years are minimal. So when all fails, you have to go back to first principles.

“We are now in perpetual QE [quantitative easing] and therefore perpetual financial repression, and zero- or negative-yield bonds," added Diggle. "There are $10 trillion worth of bonds that are giving negative yield."

Regulations also play a role in providing investment opportunities, meaning certain opportunities are only available in certain places. Sean O’Shea, managing principal at New York-based private equity firm Sienna Capital Partners, has been involved in a “pure water play” in Australia, where the rules allow for such deals. This involves selling water-access entitlements and is designed to promote more efficient water allocation. 

Investors want to be involved in the active management of assets, said O'Shea, also speaking on the panel. “If something goes bad, you are held at the whim of how that asset performs,” he added. “We have physical assets that you can feel and touch, and there is something you can do to increase its value. You can help to support that value if you’re actively involved.”

Yet some family offices would rather be more ‘hands-off’. Panelist Jack Hon, founder of Wide Growth, a relatively new Malaysian single-family office, prefers not to be actively involved in managing physical assets, especially in areas it knows well.

Hon’s family business has a bias towards real estate investments and seeks to diversify its portfolio into regions where it doe not have business, such as Europe, the US or Australia. For example, Wide Growth does mining deals in Australia, taking a “hands-off” approach.

“We try not to be too active simply because it’s a grey area,” he said. “If we are looking to direct investments that we are familiar with, it adds to the risk in the operation."