As the country tentatively re-opens this week, the investment community is scrambling to find its bearings. The most profound health crisis in generations has ravaged the global markets, and the buy-side is bleeding profusely from every asset class. Fears of a second peak are mounting and even optimistic forecasts do not see the UK’s economy fully recover until 2023.
While institutional investors are grappling with rapidly falling fund values and low annuity rates, family offices face a different array of challenges – from the management of lean and concentrated teams to pandemic-induced legacy planning. In the City and Mayfair alike however, the hunt for yield is drawing investors out of fixed income and long-only equities into the alternatives. For family offices, being supple and opportunistic are the keys to survival, regardless of the underlying investment thesis.
Reshaping the Model
The majority of sophisticated family offices have diversified portfolios with investments spread across directs and funds, through a range of private and public strategies. This model works during periods of stability, particularly for conservative FOs prioritising wealth preservation. However, amid the turmoil of this year, even in our private network we have seen hundreds of millions lost through stubborn implementation of traditional strategies. The chaos of the pandemic is ushering in a new age, and – at our family office – we believe fortune favours the brave. Those who identify openings brought on by Covid – and deploy quickly into these sectors – will flourish, while the dinosaurs of the old order will collapse as we enter global recession.
While the private wealth space is notoriously opaque from the outside, as many of us in the community co-invest together and share deals, family offices are often willing to share war-stories between each other. So where have some been going wrong?
The mid April oil price plunge was devastating – one family in our network that held large private oil-related assets in their portfolio has been forced to cease operations. The pain is also felt on the listed side – TechnipFMC, for instance, is down 68 percent in 2020. Families with assets in the tourism and travel sectors have also been suffering. Norwegian Cruise Line, United Airlines, Carnival and Royal Caribbean Cruises are some of the worst performing stocks of the year, and many privately owned assets in hospitality have – for obvious reasons – been yielding almost nothing.
For the creative and the courageous however, these strange times could prove fruitful. Private wealth can be deployed quickly, and volatility presents as many opportunities as challenges.
Biotech is an obvious place to start; while the race for a vaccine has consumed the headlines, there are also interesting deals emerging in the development of secondary therapies and diagnostics. In the public markets, biotech has seen some of the best performing stocks this year – notably Dexcom and Regeneron Pharmaceuticals.
Our family office has long seen the investment potential in healthcare innovation – we have, over the last five years, incubated a number of companies focusing on longevity. For the first time in human history, diseases linked to aging – cancer, heart disease, dementia, stroke – outweigh infectious diseases as the largest killers. As Covid is most deadly among the elderly, tackling aging itself could prove instrumental in controlling damage from future similar infections. While roughly a quarter of our private family office network currently has some exposure to healthcare, we anticipate a surge of popularity in this space in the coming five years, as the importance of resilient healthcare has never been more evident.
The supply-and-demand shock has unlocked some compelling opportunities in the manufacturing and delivery space. Unsurprisingly, e-commerce – particularly online grocery and food – has performed well during this pandemic. Amazon.com, for instance, showed an increase in traffic of 17.1% from the start of March to the end of April according to SimilarWeb Inc., and panic-buying has helped boost conversion rates. Innovation here is inevitable; I have spoken to investors looking into bespoke shopping companies, drone tech for delivery and 3D printing – which is already playing a role in producing PPE for healthcare workers. There have however been some losers in the retail sector – department store Kohl and beauty company Coty both saw potentially catastrophic losses this year. Unpredictable demand fluctuations and supply-chain disruptions curse the sector somewhat, and careful stock-picking will be key to success here.
Renewable energy has also emerged as a winner this year. Repeated supply-driven shocks in oil are driving progressive investors towards more resilient, greener energy sources. While many families implement ESG strategies – historically trading high returns for ethical and reputational gains – the pandemic may prove a game changer here. The principal of an Irish family office recently told me, “We’ve been investing in solar and wind power for decades, but now the shift in demand brought on by Covid is finally proving the legitimacy of deploying capital into cleantech as a money-making strategy.” Renewable energy consumption in both the developed and emerging markets has risen dramatically in 2020, with a flatter peak time curve brought on by the new work-from-home norms diminishing the need for non-renewables in storage.
Agility is a strategy
In uncharted waters, strict investment theses should be replaced with cautious but opportunistic mandates.
Compared to our institutional cousins, family offices are famously heterogenous – we will see a range of other strategies being employed in the second half of this year, with a mix of results. Many in the community are holding onto cash as credit spreads get tighter – particularly those with real estate, yachts, art and other illiquid investments. Others are shifting focus towards information technology, as working from home will remain the norm for the foreseeable future. Related fields like AI, cybersecurity and ed-tech are also seeing traction. Real estate – a staple of most family offices’ portfolios – is also showing promise in certain areas, with low human density assets (warehouses, industrial facilities etc.) outperforming shopping centres, lodging and healthcare centres for obvious reasons. Understandably, others are turning to ‘safe-haven’ asset classes – though these include everything from gold to Bitcoin depending on the macro-outlook.
More than anything, agility will be the defining character trait of the next-gen winners.
As traumatic as Covid has been for the world, the crisis will eventually pass. So too will the opportunity to invest at current valuations; the key for savvy investors is to remain nimble and alert. As the world starts to recover, a handful of innovative and dynamic family offices will be instrumental in building the technology and infrastructure of the new order.
Now read: The changing face of Fund Domiciliation
To hear up to the minute news, industry events and exclusive access to incredible perks join AYU here.
Want to feature on Hedgebrunch? Click here.