Family and traditional assets bring a variety of tasks, privileges and risks. The London based Family Office meets this challenge with a great sense of responsibility and clearly defined values on consistent, sometimes innovative ways. This is the case with the recent development – a passive equity portfolio that represents the world market. A complex process that, after years of intensive research, teachings and studies, was based on a simple essence: the world is growing. And since its existence, financial markets and stock prices exist with it. To translate this view consistently into a global, passive equity market portfolio was the common challenge.
In order to counter this, there was an intensive research and a relentless questioning of our own views at the beginning of the journey. After an intensive and critical examination of scientific sources and our own experiences, we were finally able to agree on five axioms, which served us as guard rails in the further process. These are:
• We are no geniuses: We do not nourish the illusion to be smarter than thousands of other financial analysts and asset managers, or to have a lead on information or technology.
• There is no free lunch: To achieve considerable returns make it necessary to take certain risks.
• We cannot predict the future: the future is uncertain. Therefore, we do not rely on prognosis. Stock returns remain unpredictable (as do economic or political developments).
• In the long run, the world continues to grow and develop: Humanity has always evolved in science, technology and quality of life. We believe that this will continue in the long term.
• Quality of life matters: We want our children and grandchildren to grow up in a world worth living. Namely in safety, freedom and a healthy environment.
In order to take these axioms into account, all the countries of the world, which have a significant capital market, were evaluated and rated according to various indicators. These indicators consider economic aspects (e.g., debt ratio), investment risks (e.g., corruption), and cultural / social impacts (e.g., education level). Therefore, a country allocation could be achieved that best suits the values of the family.
In the next two steps the economic performance of companies was measured with regard to their size and the sectors covered, in order to be able to allocate regarding these factors as well. At the end of the analysis, it was shown that the resulting allocations significantly differ compared to other global indices (e.g., MSCI World).
Now, in a final step, this theoretical allocation was to be presented as precisely as possible with suitable securities. For this purpose, a formal optimization algorithm was implemented which, in addition to the allocation, also took into account the costs and was applied to a selection of more than 100 suitable and prefiltered ETFs. The resulting portfolio is thus cost-effectively applicable, very broadly diversified, and adapted to the individual needs of a family office of generations.
Since the project was successfully completed in 2015, a complex and cost-efficient investment vehicle for their equity investments is available to all Family Office-assisted families, whose performance has so far fully met the expectations. We are proud and pleased that we were able to participate in this exciting project.
Ziggel, D., Armbruester, C. (2016): Constructing a Passive Global Stock Market Portfolio from a Multigenerational Family Office Perspective, The Journal of Wealth Management, Jg. 19, Nr. 2, S. 89-99.