Mountains in Clouds

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Hall Road Investments #58 (Family Office Sherpa, Index & ESG)


The Sherpa Update


Addepar – following the article on 1010 Capital and some feedback from firms like Hall Road, Addepar finally produced a webinar for Australian based prospects and clients. If you’re interested, a recording can be found here – feedback was positive from our clients and contacts. It’s short and punchy, let me know if you’d like to be put in contact with them or have any questions.


BlackRock – has released a cracker of a Family Office survey along with Juniper Place. The direct quotes are interesting, particularly on the need for better tracking of cash flow and funding requirements for private market deals. We see this trend continuing and the current infrastructure for offices is not going to handle this asset class.


JB Were – are spending $20M on digital infrastructure apparently which means they are renting rather than buying. I know they use Praemium already so maybe it bolts on and saves them a BT Panorama style investment requirement. In the article they mention the need for digital experience and ESG as a primary focus so maybe one of the global players has been utilised? They must have read this BCG report.


Real Estatethis article in i3 provides a very interesting overview on the “antifragility” of real estate assets. Or “why real estate assets survive black swan events”. Now, this is in aggregate and obviously sectors of real estate are affected differently during events such as COVID but it’s a worthy addition to your asset allocation library.


Catalyst Funds Managementlatest $2bn hedge fund to open its doors in Oz. Deepan Pavendranatha from Goldman Sachs/Regal has set up in Sydney. This is good news for the local industry which has seen most major new players head directly to HK or Singapore. Doesn’t hurt that he’s already raised enough funds due to some recent results, so the tyranny of distance isn’t as much of an issue.


BCG - has released their Global Asset Management Report 2021. Like their counterparts in Wealth Management, BCG calls on asset managers to seek growth opportunities in private markets and data and analytics, which it said will be crucial to everything from client engagement and distribution to customized investment products. The need for a private market/alts strategy is pretty obvious from the data - fee compression has hit across the board as low cost indexing takes over, alts and private markets is the only segment growing in fees and size.


Wealth Management M&A – action in the UHNW/MFO space continues to gather pace. With the large players staking out the mass affluent client base with scale and products, the opportunity to differentiate is in the UHNW/Family Office space. In the US, Bain is taking a stake in Carlson, in Europe Tiedemann Advisors Advisory acquires UK MFO HOLBEIN PARTNERS LLP Partners and in Asia McFaddens & Co has teamed up with CIIC as they expand their Multi Family Office services to Hong Kong. This line from the article below is indicative of why we are seeing these cross border/jurisdiction ties ups and acquisitions: "US Based Tiedman is pushing into Europe’s family office space to give high net worth clients more cross-border capabilities and European investment expertise. It has marked out territory in the growing impact investment space which, in turn, has been attracting more co-investing among ultra-HNW individuals and family offices."


Factors – for those interested in any review on the five-factor model for global equities, this research piece provides some arguments for claims that factor premia are primarily driven by small companies representing, at times, as few as several percentiles of the total market capitalization and if it doesn’t actually work for large caps, maybe they should just be for your small cap portfolio.


Cathie Wood – an interesting take here from ARK’s Cathie Wood on the risk of innovation deflation (rather than inflation) and the impact on the incumbent stocks within the large benchmarks. It’s a great read for those interested in the predictions of an innovation super bull but as she points out: “If we are wrong … then we will be perhaps uniquely wrong,”.


EMT/Arrive Wealth – I keep seeing examples of wealth managers taking on the idea of niche, interesting investments and providing them to clients that require more than the cookie cutter approach. One recent example is that PWC borne Arrive Wealth Management has announced a tie up with EMT Partners, a specialist in Entertainment, Media, Sport and technology law and advice.


Private vs Public Equity – JP Morgan has released their very readable report on private equity vs public equity performance. It’s a great for those that appreciate two sides of the story rather than one as it takes a “food fight” approach that does not seem to be pushing/eviscerating one side over the other.


IPO vs Private Sale – Forbes ran an article on some of the benefits and challenges family offices see in having a public market s liquidity event.


UBS – has launched a "marketplace" for clients looking to buy and sell alternatives such as real estate, hedge funds and private equity. We definitely see the merits of increasing the ability to transact in illiquid assets that may be difficult to match buyers and sellers. This marketplace model has had limited success in the past and the fact UBS has partnered with Envestnet, Inc and iCapital Network shows that success or failure is usually determined by the digital experience and efficacy of implementation. This looks more like a match making process and if you're a client of UBS makes sense to at least keep an eye on. As with a lot of developments in this space, fund managers are using technology improvements and best of breed affiliations to further lower the ticket size required to access the alternatives market. As mentioned in the previous BCG report on Global Asset Management - indexing has commoditised a large proportion of investments and pushed fees close to zero, the growth is in private markets and alternatives - you just need to find an attractive entry point.


LGT – will launch the LGT Multi-Alternatives Australia Fund as its first public fund in the country following the appointment of Equity Trustees as the RE. We see LGT funds in client portfolios, but this is the first Aussie domiciled.

Astute Wealth/Lumiant – Astute launched legal proceedings against Lumiant for pinching its questionnaire. They seemed to have resolved their beef. I remember when robo-advice businesses were sprouting up everywhere in 2014/15 – it was very hard to see the difference between the questions that were used for risk profiling.


Syfe – Singapore based digital wealth manager has raised US$70M from Peter Thiel and others as it continues to grow. It’s in sharp contrast to the difficulty that independent US and European business such as this are having – FUM is growing extremely quickly, and it seems that client acquisition costs are no where near as high.


M1 – like Syfe, this US firm seems to be avoiding the fate of other digital advice firms and is now worth $1.4bn after an injection from Softbank. It’s a fascinating study of those that are gathering assets and funding and others, with seemingly similar business models are shuttering.


Mirae Asset Management – Ex Betashares major shareholder seems keen to tackle the Australian funds management market under its own brand with the hiring of Kris Waselby (ex ETF Securities) as head of country. It’s a crowded market to enter but they will be coming off the IP transfer from Betashares’ success.


Meetings & Presentations – KPMG (Family Office Update).


ETFs & Indexing


Direct Indexing – I was interviewed by Emma Rapaport from Morningstar on how Direct Indexing was developing here and in the US. One aspect that I hadn’t thought about was the use case for direct investors, a major client for ETFs through their self-directed pensions. True democratisation needs easy implementation – it seems to be getting solved in the US, the barriers here are higher but not for much longer.

ETF Closures – fund size as part of your due diligence is less around the liquidity of the fund itself (which is dictated by the underlying constituents) and more around the chances of the issuer shutting it down. Case in point, eInvest/Perennial/Daintree cash booster ETFs (ECAS) has been wound up due to a lack of inflow. I don’t generally have an issue with sub advised funds – why not use a manage that specialises? But when there are multiple parties, all with their own commercials to think about, their tends to be a greater chance of one pulling out rather than stick it out.


It also doesn’t help that the cash/cash enhanced space is losing assets as interest rates are not high enough to cover the MER plus required return.


Total ETF Market – Chi-X now puts out a total ETP market report which includes ASX and Chi-X listed funds. Keep this link for quick referencing as you do your due diligence. I like this report in that it gives a total market overview but its missing two things – what type of fund it is (ETF, MF) and classifications that drill down more than broad terminology like “Australia Equities”.


Vanguard – has made their first acquisition in 46 years, acquiring California based JustInvest – a direct indexing business. This is a big one for the sector as it takes an indexing/ETF pioneer and moves them into the realm of customised indexing at scale.


This quote from the article sums up the race we are seeing: “ETF issuers or sponsors that ignore direct indexing will be “overtaken left, right and centre”, said Timo Pfeiffer, chief markets officer of Solactive, a German index provider. “I have no doubt [it will reach the mass market].”


ESG & Philanthropy


Family Office – From the BlackRock FO report, 80% of family offices are engaged in some form of sustainable investment. From the survey results, it seems that the next generation is driving this trend and the need to compromise on performance is no longer perceived to be reality or a constraint. Generational issues are also at the forefront of this trend, a quote that resonates: “Generational change is a concern. We want to get closer to the next generation and sustainable or impact investing may represent an opportunity to engage more meaningfully.”


Of those Family Offices investing in sustainable strategies, 34% rely on exclusion policies, 56% use specific sustainable strategies and 38% have adopted sustainability as a key component of their investment risk assessment.


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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