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Hall Road Investments Newsletter #55

The Sherpa Update

UBS Global Family Office ReportHere’s UBS 2021 report which I’m potentially a little too excited about. For me, the detail on family office running costs is very relevant as they note an increase in terms of staffing and IT (a focus for Hall Road’s diagnostic process). Private equity is preferred source of opportunity with a sharp decrease in Fund of Funds use and a move to funds or direct as families and their advisers become more confident in due diligence. This is great to see as fees seem to come down, however it’s worth noting that these more esoteric investments require infrastructure to support it.


In terms of asset allocation, there is a big move into equities from fixed income with a bias to developed or developing markets. The section also has some insights into how global family offices view Crypto Currency:


“…upwards momentum makes them hard to ignore. Thirteen percent of respondents have invested, and 15% are considering doing so, although not as part of their SAA. “For us, it started really as just a pure trade,” notes the Swiss CIO. “We saw the institutional adoption and that was why we took on a small allocation in bitcoin, maybe almost a year ago. We figured that institutional adoption is only going to increase. It began as a pure momentum trade.” In Asia, a quarter report having invested, although it’s most likely at the margin of portfolios.


I’m a massive fan of this yearly report and recommend taking the time to read it.


Hold Back – When investing in US hedge funds, one aspect of the IM that can pop up is the hold back clause. One current live example is Credit Suisse client’s investment in the Renaissance Technologies managed “CS Renaissance Alternative Access Fund” which has seen losses of 32% in CY2020 and a wave of redemptions. Redemption demands can sometimes trigger a hold back clause, which means clients will receive 95% of their funds after two months, with the remaining 5% expected to be paid out in January, after the fund’s year-end audit. Know your supplier, know your full liquidity profile.


Magellan – has released its retirement fund. Apparently, it solves the issue of sequencing risk – running out of money before you die. They are doing this by loading it up with stocks in the hope that capital growth will sustain the nest egg. This goes against some strategies that prefer defensive assets concerned with drawdowns that can cause irreparable damage to the long-term viability of the client’s investments. Think target date funds or annuities.


How are they doing this? By building a separate support fund into the structure that will suck in distributions during periods of high stock performance and then distribute during down periods to prop up income. It looks like you get capped on the upside and the benefit is only on the downside. The support fund can borrow money off Magellan too and will invest in Magellan’s infrastructure and other equity funds.


It seems they have built a “solution” through a fund of funds product that looks to cap upside despite a high exposure to equities without any of the customisation or tax benefits of a non-mutual structure. Add a market timing element that is not disclosed, some opacity on the performance fees, the fact they self-invest, and it further alludes to the question – are you a good fund manager or a good funds management company? When you look at the all-in fees, I think the answer is obvious.


Pershing – Magellan backed Finclear has purchased BONY Mellon’s Australian business (Pershing). If you are with the mid-tier broker, you probably use Pershing for clearing so keep an eye on your statements. Pershing has been winding down operations in Oz for a while now so this should be no surprise.


Evergreen VCThis article on evergreen VC funds was of interest. The issue we see with the VC fund structure for some clients is that they have a long lock up period. Often, this is not a bad thing as it forces investors to take a long-term view. Sometimes though, the need to exit efficiently means they don’t invest in the asset class at all and miss all the potential benefits. Using technology that has been set up for digital assets may be a way or circumventing some of the liquidity issue. Seems that evergreen funds have been around for a while, it’s just that the mechanism of redemption mean that it wasn’t attractive to the issuer.


Totus – Sam Granger has launched his own shop, Equanimity Partners, and purchased the rights to the Totus High Conviction Fund which he has run for the last four years. He has also picked up Chris Cuffe for his board and managed to keep his current seat in the Totus offices. Cuffe is now advising this one, Lennox Capital Partners and EGP. Busy.


SPARC SPACs have run out of targets to take out, so Ackman at Pershing Square has structured a new beast - the SPARC. This version allows for blank cheque companies to deploy assets that take right pre-IPO rights rather than takeover the company and list. The first target is AMG which is listing in Amsterdam. Investors receive a 10% allocation to that company.


Addepar/Knowledger - I was on an Addepar/Mirador/Knowledger webinar this week entitled “Solutions for the Modern Family Office”. As more clients use US based technology, the more we need to know. For Addepar, attribution analysis is not really on the horizon and the real value proposition of the platform is managing complexity in ownership structures and serviced asset reporting. They also launched a new tool called Navigator. For Knowledger, the integration with Xero or Oracle NetSuite is not an option and so not really in the frame for most Aussie clients.


Leveris – published a very thorough guide to wealth management in 2021. This report is different to the recent reports in that it focusses on the fintech sector and how they are position themselves for “generation alpha”.


Fisher Investments – is launching a HNW offering in Oz. This explains why I kept seeing adverts for salespeople.


Meetings & Presentations –Onda Group (Intermediated Platforms), Entrust (Not for Profits), Addepar/Knowledger Webinar (US WealthTech), Sentinel Real Estate (Build To Rent).



ETFs & Indexing


Best and Worst ETFs– I’m curious as to the point of such a list for index funds. Reading this AFR article, it was best in terms of performance only. For me, best implies fit for purpose but I guess that’s not nearly as interesting and hard to quantify. The list the article draws from (StockSpot) is a little weird – it doesn’t include inverse ETFs in the official rankings as they “include leverage”. For me, the question is – did the fund do its job and do I understand the structure. Performance over a 1-year period seems a pointless metric and will favour a specific asset class, claiming “best” because of it seems more marketing driven than helpful for investors looking to make an informed choice.


There is some research that says to buy the worst performers so maybe this report serves as a good reminder to rebalance.


Niche ETFs – one thing the AMC/Gamestop episode should teach investors is that you can think that you’re diversified when you’re actually massively exposed to idiosyncratic risk. Take niche funds that look to exploit investor interest in a particular segment – space, gaming etc. When you were sold/ you bought into the fund you were looking at a sector bet but as one stock rises exponentially, it will take a higher weighting in assets. The same happens with large cap weighted benchmarks such as ASX 200 or S&P500 but usually takes more time and the index providers look to manage some of that issue through limits. When a stock like AMC rallies 2000%, it becomes an outsized position in some funds by the hour.


ASX Report – Click here for the Monthly ASX ETP report, it’s a great source of data for anyone looking to invest or advise on ETFs etc. I use the Excel download as you can slice and dice the information that is most relevant for you.


ESG & Philanthropy


UBS Report – as mentioned, UBS has some cool data points – in particular how families are positioning their portfolios for Sustainable Investing.


73% of respondents mention Green Tech as an investment priority, 42% state that they’ve prepared the investment team to make Sustainable Investments. Asked why they are looking/are investing in SI? Most popular answer is a sense of responsibility – it’s for the positive impact on society, according to almost two thirds (62%). Similarly, more than half (55%) say it’s the right thing to do for society. 49% also see it as being the main way to invest in future. In the field of impact investing, there’s still unease about how to measure impact. APAC families are only slightly lower (68%) than Western European (72%) in having at least one sustainable investment.


There is a move in some jurisdictions for families to merge impact investing and philanthropy. However, there is still a significant portion that will continue to keep the two very separate.


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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