Life with and beyond fund managers

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Ultra High Net Worth Individuals (UHNIs) will tell you that managing large sums of money is almost as difficult as making them. This article focuses on one specific aspect of managing grand wealth – How UHNIs need to think about fund managers and how a Family Office (FO) can help in this regard.

Successful fund managers can often become stars of the financial markets. Their personalities can become brands that are described using words such as astute, uncanny, flamboyant, intuitive and outlier. These words suggest that a fund manager’s job is magical, even mystical.

The well-informed, however, know that method is better than mystique. They look for fund managers who can be described using other words like consistent, proven, reliable, predictable, and so on. Words shorn of glamour; words that convey stability.

Keeping that as the benchmark, UHNIs will do well to incorporate the following three mantras while scouting for apt market funds:

Risk averse clients mostly rely on large cap portfolios with a steady return over a decade or more. Clients with a higher risk appetite, on the other hand, would bet on exhilarating growth rates offered by small and midcaps. So far, so good.

What makes the alignment of risk appetite to funds (and therefore fund managers) challenging is change. And such a change can take many forms:

» Fund managers can move from one company to another. Today, a chosen fund might be managed by a Fund Manager with a completely different risk orientation. As a result, the “style integrity” of the fund might have been compromised. In other words, a fund that once stayed away from small and midcap companies might now be heavily invested in them.

» As UHNIs enter a new phase of life – due to retirement, increased or decreased quantum of wealth and so on– their risk appetite might change. FOs therefore stay in continuous touch and, as a matter of course, keep watching out for any significant change in risk appetite. Such a change might provoke a completely new approach to investing, leading to a revamp of the portfolio

» Additionally, taxation can erode the gains offered by certain instruments. Therefore, no risk assessment is complete without looking at such extraneous factors.

A family office will never forget that investments should be made rationally, but the consequences of investments are always emotional. Funds and fund managers must be assessed for each client accordingly.

As an added dimension to diversification, UHNIs can also invest in algorithm-based funds that automatically invest money based on pre-determined parameters. Here, the client’s trust is extended from man to machine.

At a high level, the difference between a market fund and a private equity investment is quite simple. In the former, the UHNI indirectly owns a part of a business. In the latter, the distance between the investor and the investment is reduced drastically. In a way, this is direct ownership of a part or the whole of the business.

Mixing market fund investments with private equity purchases is another way of diversifying one’s portfolio. Before taking the private equity route, however, the client and the FO must be willing to conduct a highly rigorous scrutiny of the promoters, the market, the product/service and the firm’s policies. Since the client will be locking in capital for a pre-determined duration, the level of due diligence practised needs to be much higher than while investing in a market fund.

On the plus side, the client will potentially enjoy the thrill of watching a new business flourish in the marketplace. Just like William Kane reveled in the success of Abel Rosnovski in Jeffrey Archer’s famous novel Kane and Abel. This is no small joy for anybody with an entrepreneurial streak.

Of course, in the private equity model, the fund manager is non-existent. And that is not always a bad thing.

The author is the Co-founder and Managing Director of Entrust Family Office Investment Advisors.