Stonehage aims to build structures that will last

The investment strategy implemented at multi-family office Stonehage is aimed at preserving clients’ wealth, rather than shooting out the lights, insists Ronnie Armist, head of the firm’s investment advisory business.

“Our main mantra is capital protection,” he emphasises, explaining this is achieved over a cycle of three to five years by not hitting the market’s peaks or troughs. If virtually all private banks and wealth managers claim this to be their objective, there is a speech and there is a delivery, says Mr Armist.

The firm recently acquired from large private banks clients who had their portfolios decimated during the market crash in 2008-2009. Some of them were “totally pregnant” with private equity and venture capital holdings, he explains. “Nobody can establish an asset protection type of philosophy and put such a large part of the portfolio into private equity,” he says, indicating that a reasonable exposure to this asset class is around 10 per cent.

While Stonehage is “niche and really high touch oriented,” at large banks clients are not necessarily going to command the attention they should get, he states.

Clients scarred by the financial crisis are still very cautious and want to protect their capital. “They may have the objective of growing their assets in excess of inflation, in excess of fees, but they are not looking to create extra wealth in the very short-term,” says Mr Armist. “They really want to build their portfolios for the long-term.”

Most assets at Stonehage Investment Partners (SIP), the firm’s investment division, are managed on an advisory basis on which a flat, transparent fee is applied. “Quite often clients bring ideas to us. It is a very collaborative approach and portfolios are entirely bespoke and tailored to each family.”

When designing portfolios, it is a matter of understanding clients’ investment objectives and needs, their risk parameters, their drawdown tolerance, currencies and liquidity requirements as well as their tax issues. “People’s emotions change. They say they can live with a drawdown of 20 per cent but then if you ask whether they would mind to lose say $20m (€15m) out of their $100m, they are very uncomfortable. Hard numbers make the drawdown harder to digest.”

Most importantly, it is crucial to understand clients’ overall balance sheet, ie the quantum and nature of their business assets and the overall set of investment and lifestyle assets. If the client’s business is in a cyclical industry, for example, it is not advisable to include too many illiquid investments in his financial portfolio.

In that respect, SIP has a competitive advantage over many wealth managers, he states, as thanks to the firm’s dominant fiduciary business, investment advisers can gain informational access to many of their clients’ whole wealth, including business assets.

Big blue chips stocks, in which SIP started investing in 2009, have been “the anchor” in client’s portfolios. They provide good dividend yields, tend to have quite a large emerging market exposure and generated satisfactory returns last year, whereas the market was down 7.5 per cent, states Mr Armist.

In the alternative space, single managed hedge funds, in particular global macro, have acted as a good balance in clients’ portfolios and generated “decent returns” last year.

Diversification of the currency base is also very important and depends on the client’s needs and requirements. “We don’t currency speculate, but we like to be, where possible, giving ourselves the best chance of having the right currencies in the portfolios,” he says.

“We like Asian currencies, as there is lot of growth in Asia. Those currencies are to some degree dollar linked, but normally outperform the dollar in good times, especially when their fundamentals are positive. In some instances, we have allocated more than 5 per cent of the portfolio’s assets into Asian currencies.”

Managing client expectations is important from day one, stresses Mr Armist, explaining how a very wealthy individual knocked on his door recently, asking for 20 per cent portfolio returns, but he turned him away. That sort of return is not achievable within the firm’s investment culture.

Some other clients, though, just seek help to screen investment proposals and implement some of the deals or to map out all their assets and manage risk. Others ask the firm to provide aggregated reporting of their assets.

Stonehage does not sell any in-house products, thus avoiding conflicts of interest. “Today clients are more than ever looking at business models and that the interests of the firm are aligned to theirs as much as possible,” says Mr Armist.

A unique story

Unlike a growing number of multi-family offices, which originate from single-family businesses that transform themselves into broader organisations servicing a wider range of interests, Stonehage has a different history.

This multi-family office business was founded in the late 1970s to provide fiduciary services to a group of South African wealthy families of entrepreneurs and there was never a principal clan. It has since grown to become a multi-disciplinary, multi-jurisdictional firm and servicing around 1,000 wealthy families from 13 offices around the world – including one in London, three in South Africa and three in Switzerland. Totally independent, it is owned by its management and 400 staff. Its investment division SIP, set up in 2006, manages more than $2bn (€1.5bn) in total assets.

“It was a classic example of an emerging market wealth story,” says Andrew Rodger, head of Stonehage’s family office advisory business. “These rich families found themselves wrestling with challenges outside their direct immediate business experience and dealing with international issues relating to wealth preservation.”

They were seeking trustees and directors of underlying companies with whom they could really identify, being entrepreneurs themselves with experience of their approach to life, he explains.

Realising that a trust company needs to command a deep understanding in many areas – including succession planning, investments, tax and law, property, philanthropy, art and private equity – the trustees rolled out these fields of expertise into separate business divisions. Families can mix and match the various services.

“We are happy to fill the gaps and that makes us pretty unique,” says Mr Rodger, adding that many firms masquerade themselves as multi-family offices but, in practice, are just private investment offices, as their business model is based exclusively on asset management. The family office division consists of a team of lawyers and accountants who report on the whole wealth of the client and marshal the specialist expertise as required. Services to wealthy families can be provided in-house, completely outsourced or, most commonly, a mixed approach is taken.

The trust or fiduciary business is still at the core of Stonehage’s activities. In today’s world, the role of trustee is becoming increasingly difficult, explains Mr Rodger. International wealthy families face very challenging market and economic conditions as well as difficult regulatory and tax environments. Governments need more money and banking institutions are also seeking to replenish their balance sheets and reduce their own risk. In the private client context, this means charging more for less, he says. “We need to be right there in the front renegotiating relationships with banks for our clients.”

Moreover, when yields are very low, the costs and risks of dealing with banks are thrown into sharp relief, as counterparty risk is perceived very real.

All this pressure generates new political tension within families, exacerbated by the fact that each jurisdiction is developing complicated and sometimes conflicting rules about how to exercise their demands on rich families, says Mr Rodger.

“This means that some actions at a trust level may be favourable to beneficiaries living in a jurisdiction but unfavourable to others living in a different jurisdiction, making navigating those sorts of challenges very difficult,” he explains.

“In order to face any potential attack, it is extremely important to maintain effectively run structures on a day to day basis. These are succession planning, intergenerational wealth transfer strategies and it is about running them really well.”

Ronnie Armist and Andrew Rodger, Stonehage