CapGen offers alternative to portfolios loaded with equity

Many private clients are holding portfolios over-burdened with equities, despite believing they are investing in a diversified fashion, says Charlotte Thorne, founder of investment office CapGen Partners, which oversees $2bn (€1.5bn) in assets held by mainly European families.

CapGen evaluates portfolios using just three basic asset classes as markers: equity, debt and cash. “Many are often surprised at just how much equity they have in their portfolio when we split it out,” says Ms Thorne.

While private equity and real estate are among those asset classes currently very much in vogue, they are not enough of a diversifier to customise client portfolios, which also containing equities and bonds, to the current tough economic climate.

“Our problem with such a ‘balanced’ portfolio is that in reality, equity, private equity and real estate all behave the same way,” says Ms Thorne. “The last thing you want to do is add in some long-short equity hedge funds.”

CapGen are big believers in alternatives, so much so that they are happy to channel as much as 70 per cent of clients’ portfolios into hedge style assets, provided they are uncorrelated from the other major classes.

The final result is a very skewed-looking portfolio, with low nominal allocations to equities and bonds, but the behaviour of such a combination in reality can be very advantageous.

“The portfolio doesn’t appear so balanced. You are more likely to end up with something that looks like a lot of alternatives to the novice eye,” says Ms Thorne. “But it is more a case of lots of types of funds with different underlying assets.” This approach is significantly at odds with that of private banks, most of whom allocate around 20 per cent of their portfolios to alternatives investments, with the lion’s share in bonds and equities.

While most wealthy European families are maintaining tight relationships with the traditional private banks, wedded to the old-fashioned approach, a significant minority are dipping their toes in the water searching for alternative sources of advice, she says.

There is an increasing realisation creeping into the thinking of many private clients that banks cannot provide as diversified an asset pool as is necessary for current conditions, says Ms Thorne. “Most families we deal with are introspective and thoughtful. They recognise that you need good banking relationships, but that you also need other people in the mix for wealth management advisory work.”

When it comes to constructing bespoke ETFs or structured solutions for a family, CapGen would typically do this through investment banks, which increasingly see these types of investment offices as new distribution channels for their products.

While most of the portfolios taken over by CapGen do not appear to have any outrageous investments imbedded in their midst, many tend to be costly, over-advised and over complicated, suggests Ms Thorne. “Once you unpick the cost structure for clients and show them what they have been paying – which they are not often aware of – it can be a bit unsettling for them. They tend to be over-advised, with overcomplicated, anachronistic legal structures.”

Although the private equity asset class has been very much lauded by private banks of late, the approach can often be flawed, with a lack of diversification, as clients pursue control and direct access to investments, she believes.

While CapGen is a big supporter of private equity investments, there is some doubt emerging about fashionable direct investments, currently being popularised by private banks rather than collective funds. “We see many families being seduced into small deals, where they have no knowledge or control. This type of arrangement takes up all their management time without any benefit,” says Ms Thorne.

“This is a circular dialogue. Families like the idea of co-investing and more control, but they don’t really know why,” she adds. “Many people are suggesting these types of deals to clients. There is a whole industry out there putting families together with other families for direct deals. They think it’s nimble and cuts out the middle man, but often it does not make any sense.”

Whereas the trend among private banks has moved away from raising private equity funds towards these direct deals, most clients simply do not have the sourcing capacity or sector knowledge to benefit from the opportunities, and it is high-time for them to move back to collective schemes, believes Ms Thorne. “This is why private equity funds have a purpose. They take positions in up to 10 companies and have knowledge of the market. This is much better than trying to do ‘club’ deals.”