Crunch time for investors?

The credit crunch is at the fore of most investors' minds at present, but how are they and their portfolios coping? Families in Business chaired a roundtable discussion at the Family Investment Workshop in London to find out

Roundtable panel

Michael Moqutte had a lengthy banking career in North America, Europe and Asia and reinvigorated a family office that his grandfather founded in Switzerland 75 years ago. "I took over the day-to-day management 12 years ago. Our focus is on a group of asset classes with a core focus on real estate – and private equity particularly investments that are sometimes off the beaten track where we recognise there to be more opportunity."

Rafiq Jumabhoy started his career as a chartered accountant before returning to a family business in Singapore which he turned around and built into a major international hospitality and real estate business. "When the business was sold I got into advisory services in real estate. Today, my company, Orkney Investments, provides strategic real estate advisory services, branding and turnaround expertise to pension funds and corporate investors."
 
Basil Demeroutis is a partner and MD, Europe, of Capricorn Investment Group. Capricorn started life as the family office of one of the founders of eBay. In 2002 it was set up to manage the wealth that he accumulated through the IPO. "Our investing style is really along the US endowment model – multi-asset class, heavy allocation towards alternatives, private equity, real estate and other traditional alternative asset classes like hedge funds."

Toby Birch works for Blackfish Capital in Guernsey, the investment arm of the Rowland family office. He wrote a book called The Final Crash which came out in May 2007. "The conclusions of the book were closely aligned with the family's emphasis on the resources sector. They gave me seed capital to manage a hedge fund based on the idea that further depreciation of the dollar would lead to a significant appreciation of real assets."

It's said that during a downturn the ultra high net worth community doesn't suffer as badly as everybody else. Given the current economic climate would you agree with this statement?

Moquette: It is generally true. The ultra high net worth community is well managed, well invested and should have a core of assets that provide an annuity off which it should be living.

However, it is common to be asset rich but cash poor and one of the greatest worries of the very wealthy is the thought of getting a cash call and being unable to write the cheque.

You might be worth hundreds of millions but if it's not sitting in the bank you will have to dispose of something. And this is not the right moment to dispose of something. So to answer your question, yes but it doesn't mean it's easier or less stressful.

Jumabhoy: I think you've got to segregate between what I call the more sophisticated ultra high net worth people and the ultra high net worth that you have many of in my part of the world – a number of whom are first generation. Consequently the systems and risk management are very different.  Many don't even have systems – often there is one principal who makes all the decisions.  

Demeroutis: From my experience principals are concerned about what's going on currently but they are not paranoid.

I think the advisors, the people that are acting as fiduciaries, tend to be the paranoid people. We feel we've done a good job positioning capital defensively over the last couple of years. Time will tell.

I think this has been a great last five to seven years to invest, it's made a lot of people look like heroes and in the next couple of years we'll see what's going to separate the men from the boys.

Birch: I think initially they will be able to protect their assets but I am concerned that we are about to witness a witch hunt or what I call "the blame game". Anyone who is seen to have escaped the downturn or made money in the good times will be "the evil ones".

The public, banks and government won't blame themselves for what they've done, or how they've contributed to inflation. I think there's going to be a bit of a shock from a PR point of view as entrepreneurs become targets, in spite of their contribution to the tax base and the well-documented wealth multiplier effect.
 
Have there been any significant changes to your
portfolios since the downturn?

Moquette: No, I would not say there have been significant changes. We have taken our hits, thankfully modest, here and there. If anything we've battened down the hatches.

There are great opportunities to lock in interest rates at the moment, and to renegotiate terms with lenders. We have been doing that and getting better terms and better covenants.

Demeroutis: We liken it to managing a ship. We know the direction that the ship is pointing hasn't really changed, although we've made some course corrections over the last couple of years.

I think there are lots of new opportunities that are starting to emerge. We're at the beginning rather than the end so we're cautiously adjusting the course of the ship without really trying to adjust the direction it's heading.

Jumabhoy: It's interesting listening to everyone here because  a major family I am involved with has actually focused back into its core operations.

Very successful families usually have good instincts and this particular family pulled out in 2007 from real estate in the UK. They've focused on operations and building their business from inside out as opposed to doing the speculative thing until they see markets settle.

I think the financial crisis has happened but the impact on the real economy is still to come. I suspect that in the next six to nine months we will start to see where the value can be created. It's going to be a very interesting time.

Do you all have plans in place for a doomsday scenario, eg, a serious recession or downturn? Are they built into your investments and how do they fundamentally work day to day?

Moquette: Fundamentally we review our activities monthly in some detail and quarterly in much greater detail. We have a number of outside advisors who do overviews as well. So yes we do have plans because we shall take steps if we feel the doomsday is upon us.

That doomsday can take all kinds of forms from family issues, disputes, frustrations and stresses, which we have provisions for, through to investment issues and portfolio allocations that go faulty. Being focused on long-term returns we take the market adjustments (even corrections) as part of daily business, yet try to exploit opportunities that these markets present.

Demeroutis: In terms of us looking at the portfolio we sit down about once a year both internally and with our outside advisors, and put together an entire scenario plan.

We look at the world and say what the probability of stagflation, trend growth, outsize growth and recession is.

We also talk about "black swan" events like economic
collapse and anarchy. We then assign probabilities to each of these things. Currently we assign a 1% chance of collapse of the financial system, but we know how to position the portfolio and what would be the ideal portfolio to have in that sort of scenario.

Then we constructively go back and test the portfolio against those assumptions and look at what would have derived the best return.

Finally, we construct the overall asset allocation model, taking into consideration the relative probability. There are some things we do that are really defensive against such events and we hold a lot of hard tradable assets physically in order to make sure that, if the unthinkable happens, we're positioned for it.

Birch: It is the extreme events that you really want to discuss in detail before you do the nice stuff like investing. Events such as food crises are classic unexpected phenomena. The UK is completely unprepared for anything like this, as farming and rural issues have been treated with contempt for decades.

Britain spends billions on defence overseas yet cannot guarantee basic domestic access to food and energy supplies. So things that cross my mind are, for example, getting hold of land in places like New Zealand or areas that are isolated for arable farming.

There are of course other risks closer to home with disputes over inheritance and stewardship for the next
generation.

There is an old saying "clogs to clogs" in three generations with the best example being the spectacular rise and fall in family fortunes for the Wall Street legend Jesse Livermore.

This is where, particularly in the Channel Islands and in Switzerland, trust companies are so useful, because you've got a third party person who will go through things like letters of wishes or how to structure the estate in an unbiased manner.

Obviously we're in a downturn but there are surely some bright spots. What are the areas you feel will provide exciting opportunities from an investment point of view?

Moquette: Well if I could change the word bright spot to resilient spot – we see education and health as two sectors that are resilient, ie, people do not compromise on either.

You would not shop for a cheaper surgeon and most people would not, if they could possibly afford it, take their children out of a good school. They'll leave them in the school, pay the necessary fees and they'll sacrifice elsewhere.

We have made a strategic decision to dedicate a good deal of time, effort and capital to developing investments in those two sectors and have had some success of which we're proud. It's very rewarding in all aspects, both for the family and feeling that it's doing some good, and it's also financially extremely rewarding if well-managed and located, is top quality and generally has longevity.

Birch: Temporarily you could get very excited about gold but I tend to look at these things more as an insurance policy. If you claim on the policy it means everything else has gone wrong and it's not ideally what you want to do.

What I'm actually really interested in at the moment is Islamic finance. Of all the things that have gone wrong, a lot is to do with debt and interest and the misuse of gearing, which is fine except when it's overdone.

I'm actually very positive because I can see a time when we no longer have mortgages, which effectively just create money out of thin air, inflate the economy and actually make it worse for the next generation.

The more you inflate the worse it is for your kids and that just doesn't make sense. So I can see Islamic finance being used, even if it takes on a Western spin.

Demeroutis: Rather more mundanely, I think that there's been a big re-pricing of a lot of different assets and asset classes. Real estate, for one, is pretty interesting to us. I think we're still on the entry of a downside swing of a somewhat protracted global re-pricing of real estate assets.

However, we're aggressively looking at new opportunities in the real estate sector that have started to appear and I think will continue to appear over the next 12 to 24 months.

More altruistically, we're looking at and have invested in a number of "ag" funds and I think that that's quite an interesting area, buying agricultural land around the world.

Another big theme that we're thinking about, although it may be too early, is Africa. We've done one investment in Africa already and it's an area that we continue to monitor – where in Africa is best to invest and what sort of style of investing is best.

Jumabhoy: Well the question that I'm actually waiting to answer relates to sovereign wealth funds and the liquidity floating around the system. I think my question is re-pricing of assets but does that mean re-pricing across the board or re-pricing in certain markets?

The concern I have is that markets in our part of the world are shallow – just a small amount of money can move  prices by 50%. I can see that the Korean, Middle Eastern and Japanese funds will all come to places they're most familiar with and that's South East Asia, so we could actually have another asset bubble being created.

There are two strategies, one is just ride it and hopefully get out in time. The other is the one I favour which is to go back to the fundamentals and understand the specific proposition and then say "does this make sense long term" because if I have to work my way through it for five years instead of three years, will I be killed because the fundamentals were not there to start with?

I think in that regard there are value buys in any market – you just have to find them and then you've got to be able to work them out.