Total portfolio approach for family offices 

Having worked with a wide range of families with differing objectives, constraints and governance models, we firmly believe that a total portfolio approach to investment management is far more effective than a siloed investment approach. A siloed approach can neglect the portfolio’s overall expected returns and risks profile, leading to a lack of coordination among investments.  This can result in suboptimal diversification and missed opportunities for holistic risk management. Whereas, when each investment decision is made as part of a cohesive strategy, we have seen an increased likelihood of achieving long-term investment goals. We employ a comprehensive ‘four-stage’ total portfolio approach to design and build robust investment portfolios. 

The first stage involves defining the investment objectives, allowing families to determine the most suitable overall investment strategy based on their unique investment philosophy, multi-generational time horizon, and generation-specific risk and return requirements.

The second stage focuses on identifying the strategic asset allocation (SAA) that aligns with the family's investment objectives and constraints. Any asset class should only be held in the portfolio because of the contribution it makes to the whole; each needs to justify the capital allocation made. The risk and return of each asset class should be considered in the total portfolio context, not in isolation. Asset allocation weights are determined to create a portfolio that achieves the desired factor exposures, diversification, and a balanced relationship between beta (market risk) and alpha (active management) risk and return.  

Within this framework, we believe it is important to retain the ability to capitalise on idiosyncratic investments, even where these transcend traditional asset categories.  SAA weights and categorisations should be sufficiently flexible to allow for this.  The SAA weights are the output of the asset allocation process that support risk management and performance assessment; they are not constraints that are imposed outside of the decision-making process.

Targets, tolerances and rebalancing should be established to maintain the desired risk and return profile over time; but a disciplined rebalancing process is also expected to add value by crystallising gains and topping up allocations to undervalued assets.

The third stage is to incorporate dynamic asset allocation (DAA), adding shorter-term views to enhance the strategic framework. By separating SAA and DAA activities we ensure that each part of the process is managed by experts in their respective fields. This increases the likelihood of  clear accountability and that the rationale for each decision that's taken is clearly understood and its impact can be measured over the relevant timeframe. Regular monitoring is required to identify any exposure concentrations that may arise from SAA decisions, underlying manager positions and DAA tilts.

And the fourth stage focuses on manager selection at the asset class level. Within private markets this can prove particularly important as the performance gap between top-tier and bottom-tier managers can surpass that of traditional public listed assets. To increase the chances of selecting top tier managers, we believe it is key to build lasting relationships, use local research teams and employ a disciplined fund selection approach, focusing on business management, alignment, strategy, and track record.

Every investment strategy, including a total portfolio approach, presents its own challenges, but we believe this method can be particularly well-suited for family offices. It can offer clarity and accountability, enabling effective governance and risk management, resulting in a more cohesive and optimised investment portfolio that aligns with a family’s unique objectives and values.

Here’s an example of a portfolio designed for a family office using a total portfolio approach that effectively translates specific investment objectives into a customised portfolio. This portfolio places a strong emphasis on potentially    achieving high real returns by prioritising growth-oriented assets designed to outpace inflation, thereby helping families preserve the real value of their wealth across generations. Considering the typical family's relatively low liquidity needs (as a proportion of the total asset pool) and long-term investment horizon, a substantial portion is allocated to growth-focused investments, including private markets. This can not only enhance potential returns but can also facilitate diversification across various economic cycles and market conditions. A strategic blend of bonds, hedge funds, and private debt underpins the liquidity of the portfolio, controls volatility, facilitates value-additive rebalancing and DAA position taking and broadens the range of return drivers, potentially enhancing diversification and supporting the family's overall investment goals.