Family Offices & Covid
“Fear, frustration, and anxiety all come from the same place – not knowing. The more knowledge you have, the better the decisions you can make.”
– Brian Patrick Cork
So much has changed in the last two years. When we account for all of the different facets of daily life, that may even be an understatement. The way we work, interact with others, interpret the Constitution, and so much more have shifted drastically from the accepted norms. Some of the changes have been pandemic related while others have slipped through the door Covid left open.
With all of these changes and talks of those yet to come, one must wonder what is in store for the financial markets. We have witnessed a surge in alternative investment vehicles such as cryptocurrency and revolutionary investing strategies like what has taken place within the Reddit community. But what does any of this mean for the average investor?
On February 14, 2020, the Dow Jones was trading at 29,398. In twenty-one months, amid a global pandemic, it soared over 17% to 35,677. During that same period, the S&P has increased by over 25% from 3,380 to 4,544.
While these two indexes have done remarkably well as businesses across the globe closed their doors temporarily or permanently, the Federal Funds rate plummeted a staggering 95% from 1.58% to .08%. The last time we experienced a drop as precipitous as this was after the financial collapse of 2007.
Considering the opportunities to jump in and enjoy some of the market appreciation, or leverage virtually non-existent interest rates to borrow and capitalize on an also booming real estate market, one has to wonder where the risk and reward lie in such uncertain times. At the current levels, the stock market seems to be riding a bubble. But the real estate market has also increased drastically in many parts of the country and come with a record number of tenant defaults, both commercial and residential, leaving some landlords with negative cash flow.
To get a higher-level overview of what may be on the horizon, I spoke with four gentlemen who run, or are associated with, family office investment platforms. Family offices control some of the largest stashes of private money in the world. The thought of how they managed it has always intrigued me. I will be forever grateful for their willingness to spend some of their valuable time contributing to this piece.
One of the first things to blow my mind was when Brian Patrick Cork, Single-Family Office Intermediary, said many family offices work on one-hundred-year plans. Most folks, even disciplined financial professionals, are often chasing five, ten, or twenty-year strategies. With an outlook this long, there is no need to be concerned with the short-term anomalies in the market – like a pandemic! “Events in history don’t have to define a strategy. They can impact it, but not change it.”
The offices Brian has worked with understand how Covid has changed economies of scale, but it has not caused them to deviate from their plan. Construction, robotics, and transportation are key investment areas. The temporary blips of increased prices on raw material and fuel are not a concern. When there is more cash on hand than good deals available to capitalize on, they are not afraid to sit on the sidelines and wait it out.
With a proper plan and vision, even the worst of situations can be turned into a benefit. Real estate in one form or another is a component of most family office portfolios, but they do not view rental defaults in the same way a smaller landlord might. Missed payments become tax deductions and can play a part in an overall tax strategy. Even if the defaults continue long enough in one sector of the real estate market, there is foresight in planning to sell, repurpose, or evolve those buildings in some way.
Another incredible thing that stood out from my conversation with Brian is how family offices do not read the newspaper or watch mainstream media. The media is constantly pushing their own agenda and fanning the flames of panic. There is a mindset of stoicism amongst family offices that precludes them from making decisions based on emotion. Facts and statistics are the only things that matter. Everything else is just noise.
Inder Sodhi, CEO at Goradia Family Office, broke the family office mindset down into two groups. First, there is the multi-generation structure where money is often professionally managed following mandated investment strategies without much room for deviation. Then there is the single-family office, which is often an entrepreneur, or small group, with new money. They are conscious of where the money was made in the first place and control everything independently.
Both structures are currently experiencing an increased shift toward technology awareness. The particular sectors chosen are more specific to each office, but the potential cannot be denied. In his family office, they generally stick to the core principles of their strategy, but shifts are being made toward promising venture capital opportunities in software and biotech.
His beliefs about the ebbs and flows in the market coincided with Brian’s. Too much emphasis is put on short-term movements. This takes the focus off of the fundamentals and long-term plan. There are also plenty of opportunities outside of the stock market and real estate. In his opinion, traditional businesses, so long as they are operationally sound and well managed, can offer a strong return on investment.
According to Stuart Browne, Chief Investment Officer of SB Family Office, the size and scope of the family office plays a significant role in determining investment strategy and outlook. Having a background in cyber security, one of the biggest challenges, or opportunities in their case, was the quick pivot to remote working environments. Whereas they were already positioned to adapt, many of their larger contemporaries were struggling with a lack of infrastructure on both the hardware and software fronts.
We also talked specifically about the rise of Reddit as a market maker and the distinction between a user-driven platform where strategy is communal but investment dollars are still very much individual, and a private hedge fund. While retail dollars are playing a larger part in the market than ever before, the more established money managers understand a short squeeze and are more concerned with long-term capital gains than a short-term profit.
When discussing the seemingly inflated values of the major indexes, Stuart pointed out that there are far more indicators to pay attention to than just the ones the mainstream media and financial channels focus on. These markets are indicative of the discounted cash flow models analysts use, but a historical look at the charts tells us this is not sustainable. A closer look at the Russell small-cap index, which has barely moved in relation to the others, tells us that America isn’t going back to normal any time soon.
And on the conversation of rising interest rates compared to near-zero levels we are at now, Stuart made a great point as to why they may be here to stay longer than we think. One of, if not the largest, debt holders in the United States is our government. At a time when we are printing money at an all-time high and struggling with a budget crisis, any upward movement in interest rates could increase scheduled debt payments by hundreds of millions of dollars.
Kiah Jordan, Professional Fiduciary at Impact Family Office, confirmed that most of his clients made very few shifts in their strategy throughout the pandemic. When the initial market shock hit in March and April of 2020, there were calls to review liquidity positions and question whether to make changes. Ultimately, the complexity of shifting portfolios convinced most to stay the course.
Family offices with real estate positions conducted tenant assessments to identify where their risks were greatest. The findings pointed mainly to retail locations or office space that was not easily converted to co-working or other decentralized uses. This analysis also identified opportunities in the industrial, manufacturing, and warehousing segments. And while many of Kiah’s clients had the opportunity to sell properties at a substantial gain, the lack of attractive alternatives to reinvest in prompted them to hold tight there as well.
After digesting all of this valuable insight from four highly respected family office professionals, a few things seem to stand out. There is no magic recipe for success. There is no right or wrong place to invest money during the good times or the bad. All of these investors are focusing on different sectors and industries based on their long-term strategy. And that is the second golden nugget. Each individual has a plan for the funds they manage. Unforeseen events don’t ruffle this doctrine and they can stay the course while many others panic. Wealth is not created overnight. But when chasing it based on emotion, it can most certainly be lost that quickly.