Asset Allocation of the 0.1%

[hdas]

The Economist has an article on Family Offices. In it, it presents the average (survey) Asset Allocation of Family Offices*** in 2018:



Quick takeaways:

>> Generational wealth preservation diversifies a lot more than just (bond/stocks)
>> Private Equity has displaced Hedge Funds in the last 5-10 years.
>> Commodities have a place, the vehicle makes the difference.
>> Direct Investment Opportunities are interesting but you do need the staff/expertise to weed out the bad ones.
>> Overall seems a balanced distribution

***Single Family Office makes sense when >= 100 million. Multi Family Office >~ 20-25 million

Cheers

[AlphaLess]

Good chart / article.

From asset allocation point of view, most of what hedge funds offer are pretty much stocks and bonds.
They might have exposure to factors that vanilla stocks and bonds don't provide, but the concept is the same.

I can see why there is a move away from hedge funds: hedge funds are perennial underperformers, and that is due to the incentive. If one has a hedge fund that is so good that is producing 'excess returns' (whatever that means), then there is a two-fold incentive: (a) keep adding assets until the capacity is exhausted , or (b) take the hedge fund private, i.e., only allow insider / employee / family money.

(a) is obvious because of 2-and-20.
(b) becomes even more obvious when you have a strategy that's so good, that it does not make sense to do 2-and-20, and instead you pocket 100% of the returns.

So family offices catch up to that scam, and certainly, they vote with their feet.

One other important thing: some hedge funds ARE family offices, essentially.

I don't fully understand where the value-add for private equity is. But direct investment is essentially private equity. So I can see value there: you are essentially a private shark, looking for undervalued assets.

[fire4fun]

A lot of the "private equity" opportunities I've seen are invested in various forms of property and equivalents. This means that as much as 40% or more of the ultra-wealthy's Family Estate is in real estate.

This should come as no surprise when we look at history. Since the ancient times people would defend their property and we would go to war over it, with land often being the primary reason for conflict. Something to think about.

[hdas]

I don't fully understand where the value-add for private equity is. But direct investment is essentially private equity. So I can see value there: you are essentially a private shark, looking for undervalued assets.

Some observations:
>> Here is a reference to Price Equity .
>> I wonder what % of PE is Venture Capital.
>> This Family office model also resembles the endowment portfolio
>> There’s a cadre or Wealth Management Firms that cater to the 2-20 mill client and one of their angles is to use the pool of assets to access PE funds and select hedge funds.

Cheers

[livesoft]

It looks like the 0.1% can lose money just as well as the rest of us ... maybe even more so.

[Jack FFR1846]

I'd be curious if any of these family office strategies beat a simple 60% VTSAX, 40% VBMFX portfolio. I've seen some of the college endowments fail miserably against these many years.

[milo minderbinder]

I'd be curious if any of these family office strategies beat a simple 60% VTSAX, 40% VBMFX portfolio. I've seen some of the college endowments fail miserably against these many years.

I very much doubt it. They would have a hard time justifying their fees with such an allocation.

[heyyou]

>> Commodities have a place, the vehicle makes the difference.

With commodities at 3.4%, that may be the remains of previous 10% allocations, kept as reminders of what not to do.

[Whakamole]

A lot of the "private equity" opportunities I've seen are invested in various forms of property and equivalents. This means that as much as 40% or more of the ultra-wealthy's Family Estate is in real estate.

I don't know where you are getting this from. Private equity can include a lot of things. Do you have a cite on that 40% number?

It just seems that since you joined the forum last month, you've really been pushing real estate.

[megabad]

>> Commodities have a place, the vehicle makes the difference.

For some investors "commodities" are sometimes simply a byproduct of other investments. Oil/NG is the primary example that comes to mind. If you are a mid sized oil producer, you always have some unsold crude and your inventory fluctuates based on your contracts. It just so happens that in my area there a quite a number of "family offices" that have significant oil holdings.

>> Overall seems a balanced distribution

In some ways yes, in some ways no. Many would not consider a portfolio with 16.2% bonds to be "balanced".

A lot of the "private equity" opportunities I've seen are invested in various forms of property and equivalents. This means that as much as 40% or more of the ultra-wealthy's Family Estate is in real estate.

This should come as no surprise when we look at history. Since the ancient times people would defend their property and we would go to war over it, with land often being the primary reason for conflict. Something to think about.

I do not find that high NW individuals generally refer to real estate as "private equity" despite the fact there is indeed private equity real estate that they invest in. The two have vastly different tax considerations (which is important for family offices) which would seem to justify separate asset classes (as the chart in the first post indicates).

[fire4fun]

A lot of the "private equity" opportunities I've seen are invested in various forms of property and equivalents. This means that as much as 40% or more of the ultra-wealthy's Family Estate is in real estate.

I don't know where you are getting this from. Private equity can include a lot of things. Do you have a cite on that 40% number?

It just seems that since you joined the forum last month, you've really been pushing real estate.

The "cite" is in the OP. Did you look at it? 22% private equity and 18% property = 40%.

[fire4fun]

>> Commodities have a place, the vehicle makes the difference.

For some investors "commodities" are sometimes simply a byproduct of other investments. Oil/NG is the primary example that comes to mind. If you are a mid sized oil producer, you always have some unsold crude and your inventory fluctuates based on your contracts. It just so happens that in my area there a quite a number of "family offices" that have significant oil holdings.

>> Overall seems a balanced distribution

In some ways yes, in some ways no. Many would not consider a portfolio with 16.2% bonds to be "balanced".

A lot of the "private equity" opportunities I've seen are invested in various forms of property and equivalents. This means that as much as 40% or more of the ultra-wealthy's Family Estate is in real estate.

This should come as no surprise when we look at history. Since the ancient times people would defend their property and we would go to war over it, with land often being the primary reason for conflict. Something to think about.

I do not find that high NW individuals generally refer to real estate as "private equity" despite the fact there is indeed private equity real estate that they invest in. The two have vastly different tax considerations (which is important for family offices) which would seem to justify separate asset classes (as the chart in the first post indicates).

Lately, I have been investing quite a lot in private placements invested in various forms of real estate. The tax treatment has been amazing. A paper loss (written off against ordinary income), despite quarterly checks in my bank account. They do cost seg. analysis so first 2-3 years are sweet.

[stimulacra]

Didn't know what a Family Office was until stumbling across this thread and reading this Wikipedia article:
https://en.wikipedia.org/wiki/Family_office

Seems very opaque and esoteric to me. I would imagine Buffets 90/10 allocation to trustees would be just as optimal for the 0.1% as the disclosed allocation listed.

I would imagine almost any reasonable or unreasonable asset allocation would work, at least for a generation or two.

How would wealthy families cross-shop or evaluate “Family Offices” though? How would a boglehead train their heirs and/or board members of a family foundation to properly assess and vet these outfits? Seems very Godfather Part III to me when looking at the wikipedia graphic below.

[megabad]

How would wealthy families cross-shop or evaluate “Family Offices” though? How would a boglehead train their heirs and/or board members of a family foundation to properly assess and vet these outfits? Seems very Godfather Part III to me when looking at the wikipedia graphic below.

They would evaluate them in the same way anyone evaluates anything: based on the value they provide. Most bogleheads make these evaluations with respect to investment advice and management on a regular basis. And the existence of a family office certainly doesn't preclude educating heirs and planning for the future.

A "family office" is merely a means of centralizing resources. Instead of me having my trust guy in New York, my lawyer in Albany, my tax guy in Boston etc and my brothers, sisters, parents and children all duplicate these; my family could hire everybody under one roof and they work together. If you have a big very wealthy family (say..Rockefellers) than there really is no other way to do it without having a mess. In smaller less wealthy families, these tasks can be centralized under one family member instead of hired out.

If one office doesn't handle everything, it is difficult to impossible to optimize things. Once you have a dozen heirs, multiple controlled companies and tons of real estate in different states and countries, most families need "people" hence the family office. I am not Rockefeller rich by any means but I handle investments and do several sets of state and federal tax returns and deal with three different countries in my small family alone. I would need help if it expanded much beyond this. It just takes too much time to analyze different tax codes and file different forms and decide what goes where especially upon the death of a family members.

[dave_k]

How would wealthy families cross-shop or evaluate “Family Offices” though? How would a boglehead train their heirs and/or board members of a family foundation to properly assess and vet these outfits? Seems very Godfather Part III to me when looking at the wikipedia graphic below.

megabad explained it nicely, but I'll add the following which I was writing meanwhile and got distracted before I could post:

For a single family office, which both the Economist article and the Wikipedia page focus primarily on (though not exclusively), there's no cross-shopping of family offices, rather hiring the lead staff for your family office. The office payroll and overhead replaces an AUM fee (and potentially fund management fees even for indexing if direct indexing is used), so it only makes sense for very wealthy families. The family has more control over investment and incentives, plus all the other factors indicated in the chart. If I had 9+ figures, even if I primarily wanted to do indexing, I'd have a family office instead of a simple self-managed 2-4 fund allocation because all those services can be integrated and optimized together. Families in that situation need a lot more CPA and estate planning type services anyway, and possibly other legal services, so they may as well have them on staff and working together.

[willthrill81]

I'd be curious if any of these family office strategies beat a simple 60% VTSAX, 40% VBMFX portfolio. I've seen some of the college endowments fail miserably against these many years.

I very much doubt it. They would have a hard time justifying their fees with such an allocation.

I doubt it as well. There's no way such an AA could have an ER under 10 basis points.

Further, the AA of the top .1% is frankly irrelevant to virtually everyone here. Just because that's their AA in no way, shape, or form should mean that you should have even a remotely similar AA.

[hdas]

I'd be curious if any of these family office strategies beat a simple 60% VTSAX, 40% VBMFX portfolio. I've seen some of the college endowments fail miserably against these many years.

Here's Yale Endowment Asset Allocation:



Cheers

[stimulacra]

How would wealthy families cross-shop or evaluate “Family Offices” though? How would a boglehead train their heirs and/or board members of a family foundation to properly assess and vet these outfits? Seems very Godfather Part III to me when looking at the wikipedia graphic below.

megabad explained it nicely, but I'll add the following which I was writing meanwhile and got distracted before I could post:

For a single family office, which both the Economist article and the Wikipedia page focus primarily on (though not exclusively), there's no cross-shopping of family offices, rather hiring the lead staff for your family office. The office payroll and overhead replaces an AUM fee (and potentially fund management fees even for indexing if direct indexing is used), so it only makes sense for very wealthy families. The family has more control over investment and incentives, plus all the other factors indicated in the chart. If I had 9+ figures, even if I primarily wanted to do indexing, I'd have a family office instead of a simple self-managed 2-4 fund allocation because all those services can be integrated and optimized together. Families in that situation need a lot more CPA and estate planning type services anyway, and possibly other legal services, so they may as well have them on staff and working together.

Thanks Dave_K and Megabad. Makes a lot of sense. Learned a couple of new things today

[AlphaLess]

It looks like the 0.1% can lose money just as well as the rest of us ... maybe even more so.

Markets are both equal opportunity as well as affirmative action

[fire4fun]

Didn't know what a Family Office was until stumbling across this thread and reading this Wikipedia article:
https://en.wikipedia.org/wiki/Family_office

Seems very opaque and esoteric to me. I would imagine Buffets 90/10 allocation to trustees would be just as optimal for the 0.1% as the disclosed allocation listed.

I would imagine almost any reasonable or unreasonable asset allocation would work, at least for a generation or two.

How would wealthy families cross-shop or evaluate “Family Offices” though? How would a boglehead train their heirs and/or board members of a family foundation to properly assess and vet these outfits? Seems very Godfather Part III to me when looking at the wikipedia graphic below.

Mo' money, mo' problems.

[willthrill81]

Didn't know what a Family Office was until stumbling across this thread and reading this Wikipedia article:
https://en.wikipedia.org/wiki/Family_office

Seems very opaque and esoteric to me. I would imagine Buffets 90/10 allocation to trustees would be just as optimal for the 0.1% as the disclosed allocation listed.

I would imagine almost any reasonable or unreasonable asset allocation would work, at least for a generation or two.

How would wealthy families cross-shop or evaluate “Family Offices” though? How would a boglehead train their heirs and/or board members of a family foundation to properly assess and vet these outfits? Seems very Godfather Part III to me when looking at the wikipedia graphic below.

Mo' money, mo' problems.

When I see a graphic like that, it makes me very thankful to have enough tax-advantaged space to never need taxable accounts. It makes so much stuff so much simpler.

[ETadvisor]

The Economist has an article on Family Offices. In it, it presents the average (survey) Asset Allocation of Family Offices*** in 2018:



Quick takeaways:

>> Generational wealth preservation diversifies a lot more than just (bond/stocks)
>> Private Equity has displaced Hedge Funds in the last 5-10 years.
>> Commodities have a place, the vehicle makes the difference.
>> Direct Investment Opportunities are interesting but you do need the staff/expertise to weed out the bad ones.
>> Overall seems a balanced distribution

***Single Family Office makes sense when >= 100 million. Multi Family Office >~ 20-25 million

Cheers

You essentially have four asset classes to select from:
fixed income (bonds & cash/cash equivalent)
equity (stocks)
real assets (public/private real estate & commodities)
alternative investments (hedge funds & private equity)

For investing, I just stick with the top 2.

[NYCguy]

Private equity is very different from real estate. PE is the private ownership of operating companies around the world.

Four years ago I decided to expand my asset allocation to include up to 10% of alternative investments. For me this will include private equity, some VC and perhaps some commercial real estate. I am staying away from hedge funds and commodities.

So far, I have capital commitments to private equity funds equal to approximately 5% of my portfolio and another 2 1/2% of capital commitments to a VC fund. On a funded basis, these alternative investments currently represent less than 2% of my asset allocation.

Honestly, as a buy and hold index fund investor, branching out into alternative investments is a bit of an experiment. It’s going to take me about 10 years to figure out whether this was a good move or not.

[Valuethinker]

Private equity is very different from real estate. PE is the private ownership of operating companies around the world.

Four years ago I decided to expand my asset allocation to include up to 10% of alternative investments. For me this will include private equity, some VC and perhaps some commercial real estate. I am staying away from hedge funds and commodities.

So far, I have capital commitments to private equity funds equal to approximately 5% of my portfolio and another 2 1/2% of capital commitments to a VC fund. On a funded basis, these alternative investments currently represent less than 2% of my asset allocation.

Honestly, as a buy and hold index fund investor, branching out into alternative investments is a bit of an experiment. It’s going to take me about 10 years to figure out whether this was a good move or not.

What's the minimum for an American as a Limited Partner in a PE fund?

Something like $1m? The funds I am familiar with deal with LPs in a minimum size of $10m, typically.

These are investments you have made as an Accredited Investor, in SEC terms? What are the minimum requirements for that?

In the UK we have Closed End Funds that invest in PE that any retail investor can buy (London SE listed). However PFIC rules would make those impossible for a US investor, I think.

Ones I have used include Pantheon, Graphite (now ICG Ventures), hg Capital, Standard Life Private Equity. Got absolutely caned in 2008-09 but they have recovered, mostly.

VC valuations right now give me the willies. The "Unicorns" (private cos, last round valuation overs $1 billion).

[Valuethinker]

I'd be curious if any of these family office strategies beat a simple 60% VTSAX, 40% VBMFX portfolio. I've seen some of the college endowments fail miserably against these many years.

Here's Yale Endowment Asset Allocation:



Cheers

The percentage in VC funds is absolutely terrifying - that really feels like a top-of-the-cycle number.

Granted, Yale has access to the handful of funds which reap more than 100% of the outperformance of VC funds v. Nasdaq. It really is an industry where if you are not in the top 5% of funds by IRR, you were better not to have played. Swensen's book takes you through that.

What Yale does is not easily duplicable. Many university endowments have come a cropper trying to be Yale Endowment.

[Valuethinker]

I'd be curious if any of these family office strategies beat a simple 60% VTSAX, 40% VBMFX portfolio. I've seen some of the college endowments fail miserably against these many years.

I very much doubt it. They would have a hard time justifying their fees with such an allocation.

I doubt it as well. There's no way such an AA could have an ER under 10 basis points.

Further, the AA of the top .1% is frankly irrelevant to virtually everyone here. Just because that's their AA in no way, shape, or form should mean that you should have even a remotely similar AA.

This is a good point.

When you are at that point it's about wealth preservation. Holding assets which in the long term allow minimization of taxes, generate returns higher than inflation, and can be managed by third parties in a not ordinately expensive way.

That has always meant holding commercial property. And investments in companies not in diversified stock markets. Usually the family source of wealth.

Take a look at Rothschild Investment Trust -- Lord Jacob Rothschild's family vehicle (LSE listed) for an example (which does make some quoted investments) (This is a separate part of the family from NM Rothschild the merchant bank).

https://www.ritcap.com/about-us

https://www.ritcap.com/sites/default/fi ... tsheet.pdf

Quoted Equity - Long 37%
Quoted Equity - Hedge 15%
Absolute Return & Credit 23%
Private Investments - Funds 15%
Private Investments - Direct 10%
Real Assets 3%
Other Investments 1%
Net Liquidity / Borrowings / Other Assets -4%

Key Details as at 30 November 2018
Net assets £2,887m
NAV per share (Diluted) 1,856p
Share price 2,010p
Premium 8.3%
Average net equity exposure (YTD) 47%
Ongoing Charges Figure2 0.66%
Gearing 13.2%
Shares in issue 155,351,431
Financial year end 31 December 2018
First interim dividend paid (30 April 2018) 16.5p per share
Second interim dividend paid (31 October 2018) 16.5p per share
Total dividend for the year 33p per share
ISIN GB0007366395

[azanon]

I'd be curious if any of these family office strategies beat a simple 60% VTSAX, 40% VBMFX portfolio. I've seen some of the college endowments fail miserably against these many years.

I very much doubt it. They would have a hard time justifying their fees with such an allocation.

I doubt it as well. There's no way such an AA could have an ER under 10 basis points.

Further, the AA of the top .1% is frankly irrelevant to virtually everyone here. Just because that's their AA in no way, shape, or form should mean that you should have even a remotely similar AA.

This is a good point.

When you are at that point it's about wealth preservation. Holding assets which in the long term allow minimization of taxes, generate returns higher than inflation, and can be managed by third parties in a not ordinately expensive way.

That has always meant holding commercial property. And investments in companies not in diversified stock markets. Usually the family source of wealth.

I think it's at least worth consideration that if you have the "income" of the top 0.1%, or even as wide as the top 10%, to not necessarily invest with equity-dominated portfolios, because you have the income to power a far more conservative portfolio along regardless. Specifically, if you take a "top 10% or better" income, and save 20-25% or more of that gross income specifically for retirement, you quite frankly don't need a 60/40 to retire on-time, and in comfort. And if you don't "need" to take the risk, why take it.

[JackoC]

The Economist has an article on Family Offices. In it, it presents the average (survey) Asset Allocation of Family Offices*** in 2018:

Those differences, v (public) stock/bond only, might fall into two categories.
1. Things you can more efficiently invest in, or invest in at all, only if you have a large amount to invest
2. Forms of (attempted) diversification which might or not might have value.

It seems to be direct private equity and property would tend to be in the former category. I do not accept the opinion sometimes given or at least suggested on this forum that public stock is a strictly superior investment to private equity or real estate (and everything else ). It's just that the latter two present some serious obstacles to smaller scale investors. But if 20% real estate is $10's-$100's mils or more then you're not fielding calls on the proverbial clogged toilet in the middle of the night, nor do you have to concentrate in a few properties. Likewise there are potential advantages to private companies over public ones in particular situations, especially if you are not paying high fees over and above the management of the companies themselves (obviously with a stock index fund you are still paying the cost of managing *the companies* part of the expense which results in net income, just not much additional fee to manage *the fund*).

Hedge funds and private equity *funds* would be justified more on point 2. The very rich are still paying fees. So it's still subject to the argument that it's just the insiders in the best such funds who can create real value, not necessarily investors on the outside paying fees, and the most persistently successful funds may tend to kick outsider investors out eventually. OTOH most anti-HF argument here is by people who wouldn't be eligible to invest in them anyway, and often via simplistic arguments like 'they didn't beat the S&P'. It's not actually a solid fact that HF, VC, PE funds add no value, again especially if hiring your own good analysts to evaluate them cost a negligible % of your assets per year.

Which is the basic reason why it might make sense for 'offices' of very wealthy families to invest differently than X/Y public stock/public bond: the cost of the 'office' could be quite small in bps per year, if the fortune is big enough. And no reason to suppose such economy of scale doesn't open *any* worthwhile investment opportunities that wouldn't be open on a portfolio of a few $100k or a few $mil. Although as already mentioned, this is a big reason why the allocation isn't directly relevant if you are running a much smaller portfolio.

[Taylor Larimore]

I'd be curious if any of these family office strategies beat a simple 60% VTSAX, 40% VBMFX portfolio. I've seen some of the college endowments fail miserably against these many years.

Here's Yale Endowment Asset Allocation:



Cheers

Bogleheads:

It is informative to learn that the Yale Endowment Portfolio, led by David Swensen, has a 10-year annualized return of 9.84% compared with The Second Grader's Starter Portfolio (The Three-Fund Portfolio) return of 11.20%.

https://www.marketwatch.com/lazyportfolio

Best wishes.
Taylor

[azanon]

I'd be curious if any of these family office strategies beat a simple 60% VTSAX, 40% VBMFX portfolio. I've seen some of the college endowments fail miserably against these many years.

Here's Yale Endowment Asset Allocation:



Cheers

Bogleheads:

It is informative to learn that the Yale Endowment Portfolio, led by David Swensen, has a 10-year annualized return of 9.84% compared with The Second Grader's Starter Portfolio (The Three-Fund Portfolio) return of 11.20%.

https://www.marketwatch.com/lazyportfolio

Best wishes.
Taylor

That's not a link to Yale's Endowment Portfolio, nor their performance. David himself would tell you (us) that it's not possible (or feasible) for individual investors to replicate the Endowment Portfolio. hdas' link is the correct portfolio.

[fennewaldaj]

I'd be curious if any of these family office strategies beat a simple 60% VTSAX, 40% VBMFX portfolio. I've seen some of the college endowments fail miserably against these many years.

Here's Yale Endowment Asset Allocation:



Cheers

The percentage in VC funds is absolutely terrifying - that really feels like a top-of-the-cycle number.

Granted, Yale has access to the handful of funds which reap more than 100% of the outperformance of VC funds v. Nasdaq. It really is an industry where if you are not in the top 5% of funds by IRR, you were better not to have played. Swensen's book takes you through that.

What Yale does is not easily duplicable. Many university endowments have come a cropper trying to be Yale Endowment.

Interestingly Ben Carlson (From the wealth of common sense blog) has pointed than 99% of pensions and endowment funds and the like are really fairly small (<$100M). I would think they should be investing closer to individual investors then to Yale. I suspect Swenson would agree but that is probably not the lesson a lot of these funds took from his book.

[NYCguy]

Private equity is very different from real estate. PE is the private ownership of operating companies around the world.

Four years ago I decided to expand my asset allocation to include up to 10% of alternative investments. For me this will include private equity, some VC and perhaps some commercial real estate. I am staying away from hedge funds and commodities.

So far, I have capital commitments to private equity funds equal to approximately 5% of my portfolio and another 2 1/2% of capital commitments to a VC fund. On a funded basis, these alternative investments currently represent less than 2% of my asset allocation.

Honestly, as a buy and hold index fund investor, branching out into alternative investments is a bit of an experiment. It’s going to take me about 10 years to figure out whether this was a good move or not.

What's the minimum for an American as a Limited Partner in a PE fund?

Something like $1m? The funds I am familiar with deal with LPs in a minimum size of $10m, typically.

These are investments you have made as an Accredited Investor, in SEC terms? What are the minimum requirements for that?

In the UK we have Closed End Funds that invest in PE that any retail investor can buy (London SE listed). However PFIC rules would make those impossible for a US investor, I think.

Ones I have used include Pantheon, Graphite (now ICG Ventures), hg Capital, Standard Life Private Equity. Got absolutely caned in 2008-09 but they have recovered, mostly.

VC valuations right now give me the willies. The "Unicorns" (private cos, last round valuation overs $1 billion).

I work in financial services and we have "friends and family" opportunities from PE sponsors a few times a year. We invest through an aggregation vehicle that I think is $10 million minimum. Individuals can invest with $250k minimum typically.

Additionally one of the private banks pitches me opportunities but their fee structure is too rich.

Everyone needs to be an accredited investor and a qualified purchaser which I think is $5 million of investment assets.