Mountains in Clouds

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Hall Road Investments #54 (Family Office Sherpa, Index & ESG)


The Sherpa Update


Family Office Costs – as we see a lot of suppliers and family offices that use them, we have built a database of costs that serves as a kind of benchmark for clients. Often, the concern for families is that they are paying overs for solutions. Recently, we have made it a point to attempt a Total Cost Ratio for the running of the office – this includes staffing and suppliers as well as hours spent in total. It’s amazing how much it costs to deliver several workarounds using Excel that can eliminated by the use of a good investment platform, or the time it saves when a SaaS integrates well.


One thing that keeps coming up in terms of asset tracking and data analytics software is how much of our problem does it solve. Segmenting the client by actual issues and the best way to solve it within their price point is really the biggest challenge and one that can only be solved by experience.


Staffing – keeping in the theme of Family Office costs, this whitepaper from global recruitment consultant, Agreus has some data around the benchmarks for US and UK family office staff bonuses across investments, finance, operations and the executive. Some of the data points are really interesting and could provide some context for local staff and employers as remuneration is often a hard thing to get right.


Addepar – Seek co-founder Matthew Rockman launched a new Multi Family Office that will provide customised, niche investments. That’s great, but what I’m more interested in is the fact they chose Addepar for their platform. For those that don’t know, Addepar has nearly US$3trillion in assets under admin and serves mainly UHNW and Family Office clients in the US. They recently opened a European office but have so far put less effort into APAC. We have clients that use the platform through our US affiliate Mirador LLC but very few directly, mostly due to the complexity of running the SaaS inhouse.


As more Australian clients move to Addepar, the feeds are improving, and our clients can have the choice.


Private Market Debt – I had a meeting with Challenger’s CIPAM on their new fund. As with anything non-public markets, I was interested in the differences between what the small ticket size investor was missing out on by staying in public markets. As with private equity, the key is scale that attracts deal flow and being first call. One point was interesting – it’s not just access to the deals, the need for thoughtful portfolio construction should be paramount. The ability to pass on the rather lucrative structuring and arranging fees to unit holders was also a new piece of information.


Praemium – has lost its CEO, again.


Open APIs A good article from Forbes on the current take up over open APIs within wealth management. As discussed ad nauseum in the past, we see a lot of crappy reporting and lack of integration with counterparties. From global managers that insist on sending Excel or PDF files to local wealth platforms that can’t provide data to a competitor for “IP Reasons”. I call BS on most of that and with investors moving away from the classic white glove, all-encompassing private bank relationship – if you can’t provide aggregation services, you must provide easy access to data for platforms that can.


Early-Stage VC – keeping with the recent theme of education in the early-stage VC landscape, I met with Adelaide based Innovyz to discuss their 10th pooled investment vehicle. They are a commercialisation company that focusses on university and research institutes. As with all early-stage investing, being first call is important – in this case it’s the advance materials and manufacturing staff that have research with a high potential for commercialisation. The lack of commercialisation in Australian Universities compared to the rest of the world is quite staggering, Innovyz looks to assist those that have the idea build it into a business.


One aspect that we focus on is governance, the firms that specialises in niche VC areas with a repeatable process and the connections to be first call give me more confidence than those just seeking a transaction.


McKinsey - has released their vision for wealth management's future. As with BCG and EY, they note that the wealth management firm of the future will have to differentiate itself from the mass market provider. This includes providing an integrated ecosystem for clients across myriad counterparties, a digital experience that reduces complexity and what they call the "Netflix" advice model - data-driven, hyper-personalized, continuous. Advisers can start this journey now or try and play catch up when they see staff and client attrition rates increase. They also note that the advice of the future will be bite sized and goal specific which increases the need for asset tracking and risk analytics and raises the question of when or if the big tech firms join the advice business.


Meetings & Presentations – CIPAM (Private Lending), Innovyz (Early Stage VC), Qualis (Curated Alternatives), illio (Platform Demo), Evans & Partners (Family Office Advice), Vanguard (EM), Jarr (Admin),


ETFs & Indexing


Bitcoin ETFs Continued – Some feedback on the market making challenges for any Bitcoin ETF. Some capital market experts are less concerned with the hedging issues as there are a number of futures contracts available which market makers can use to cover market volume. For them, the bigger problem is getting crypto through compliance in a large bank and the fact that MM will need to stump up 100% cash for any borrow, then hedge out.


Also pricing the fund is a concern as it tends to be quite messy and there is uncertainty on the mechanics - is it done at the close (4pm Sydney) or London close or NY close? A mix? All this adds to risk for the liquidity providers and market makers to price into the spread. There is certainly a lot to think about before you advise clients to invest – know your product.


Tilting at AlphaThe trick is getting the factor right. Those that reduced growth and went overweight value recently would be sitting pretty but knowing when to shift back is the real skill. The big quant shops will be forever turning out new “factors” to exploit for excess returns and as they become repeatable, the indexing products will follow. I reckon if an active manager can find alpha in a new risk factor, then they deserve assets. It’s when that method becomes easily repeatable that I can buy it in an index for single digit basis points I will shift to beta.


Momentum – speaking of factors, it’s rebalancing time for some of the biggest ETFs in the US, most notably the iShares Momentum ETF that will turnover a frighteningly large number of positions as it moves from growth to value stocks. This article in BB covers the reasoning, it’s mostly to maintain an overweight to winners over the past year and that requires a move out of tech and into financials – some analysts expect that this position change will go from less than 2% to around 30%. Now, if momentum moves back to growth from value in the next year, expect another big rotation. There is a Quality ETF on the ASX that has done extremely in well in terms of flow – according to the analyst quoted in the article, the US listed version could move it into lower vol stocks.


Smart Beta does not equal passive and active managers need to outperform these ETFs that have just taken the quant recipe and matched it.


ESG & Philanthropy


Sand - Following on from the recent Copper/Green Metals piece from Goldman Sachs, this snippet from Perpetual Resources provides a nice update on the driving forces behind the recent spike in the process for sand which is another ingredients in the production of solar panels.


Tracking Errorthis survey result from i3 shows that tracking error comfort is high amongst insto investors when it comes to ESG integration. 15% are willing to take 100bps if it means true to label outcomes. Funny that when those building ESG integrated solutions have a bias to reduce tracking error, almost for the sake of it. I would want high tracking error against main benchmarks or I’m not actually moving the dial.


As always, if you want daily updates on what I’m looking at, start following the Hall Road LinkedIn page

here.


Cheers,


Shaun

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