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Family Office Investments - Stepping into the Funding Void


This article came out during the week on the new methods coal companies are using to raise capital now that institutions and banks are pulling back on ESG grounds.


The most interesting is this quote: “These investors, particularly out of the US, they understand coal, they live and breathe the coal sector. They have made profits out of it, they would be family offices or investors that are not beholden to the [environment, social and governance] ESG limitations that the banks have at the moment through their investors.”


Family offices, in my experience often have a wide range of influence on how they manage assets. One thing they all nearly all share however, is the freedom to invest as they see fit and are not beholden to outside check lists.


I completed a research report for a global asset manager and one of the requests was to carve out and Socially Responsible/ESG section. I interviewed six single family office investment teams covering eight separate portfolios, all with varying assets, complexity, and generations. Five portfolios are managed by non-family members, three are run by a family member with additional advice provided by a consultant or inhouse investment staff.


Here's what I found:


Investment Policy - There is no explicit ESG/Impact overlay or component in any of the Investment Policy Statements. This was across the board, even those that had recently established or re-written their policy. Despite this, the general feedback was that this lack of explicit direction was not expected to last. With generational pressure obvious and a general acceptance that there is a want from the family members to invest with an eye to sustainability.


Even though there was nothing in writing, the portfolios with direct investments (public and private market) have agreed exclusions. Most include weapons and, with one exception, tobacco. Some have a “I’ll pretend I didn’t see that stock” approach to indexing investments and see it more and as an implementation issue.


Box ticking – there is a definite anti-box ticking feedback from all offices. The idea that ESG/Impact should override investment criteria is refuted and there was little appetite in receiving data outputs showing ESG-Pillar scoring.


Environmental – there is no appetite for an Environmental overlay or any CO2 reduction at the aggregate portfolio level. Most families are interested in environmental technology or invest with a manager that has an explicit high tracking error strategy that factors in future growth in ESG/SRI.


Social – there are some managers gaining traction with social impact, many families interviewed saw this as more aligned to their philanthropic investment.


Governance – this was deemed as a requirement for all managers to engage with in terms of company selection. Examples cited were on global manager’s team that assisted portfolios companies with governance structure as well as Private Equity firms that provide guidance. This hands-on preference to governance is reflected in their bias to concentrated, fundamental strategies, particularly in the small cap space.


Ethical – all families have an ethical bias that informs portfolio construction. This is rarely data driven, but more of a values alignment with managers or co investors. Some families excluded specific sectors, others take a very pragmatic stance, especially in public market equities.


Private markets and co-investment – this allocation is more aligned to impact and SRI as families see the potential returns for those sectors and industries developing technology and receiving funding. Some specific industries mentioned were those that are recycling waste, developing decarbonisation technology and those that have a positive social impact.


Some specific managers were mentioned - not specifically as they had any ESG overlay, more that they had specialist knowledge in the area and can provide a governance structure as part of due diligence.


Industry – some see the potential returns in those industries that are under pressure from funding and cost of capital. The increased moat/barrier to entry for industries such as coal and oil and gas represent to some an investment theme like that of tobacco.


Direct Indexing for ESG implementation – for most, active management is the preferred implementation for public markets. As a firm, Hall Road sees a lot of portfolios, most have a bias to concentrated, active stock selection with the exception of US large Cap. The idea of direct indexing was broached as a possible alternative/hybrid between indexing and smart beta.


The concept of family specific indices for low dispersion markets that could incorporate exclusions may be attractive.


Sustainable Development Goals – this area is often seen as too hard to score, despite the increase in data provided by the likes of Sustainalytics etc. The view is this is a retail product, positioned for advisers ticking a compliance box.


Conclusion

The institutional or wealth management challenge of “stranded assets” or other negative investment outcomes of supporting coal or other ESG screens doesn’t hold for some family offices. In fact, sometimes the opposite is true:


“As an example, coal and natural gas are not seen as going anywhere soon and to remove them from the portfolio would be an issue. Specifically, the respondent mentioned: “how long to become stranded? What is the timeline, and would it be better to pick well run companies now that are taking advantage of potential pricing increases to funnel some excess cash into separate tech focused businesses whilst maintaining exposure to the commodity cycle?”.


It is not to say that ESG and other measurements are not important for this client base but should be seen as a work in progress with a new generation of family members pushing the portfolio towards sustainability and impact.


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Cheers


Shaun.


“Hall Road Investments Pty Ltd is a Corporate Authorised Representative (CAR No. 001279456) of Non Correlated Capital Pty Ltd (AFSL No. 499882). Shaun Parkin is an Authorised Representative (AR No 001279458) of Hall Road Investments Pty Ltd (CAR No. 001279456) and is authorised to provide general advice to wholesale investors”

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