The recipe for successful family investing

When you have decided on where you and your family want to direct the wealth you have created for impact and purpose, the next stage is to plan the investment strategy to make this a sustainable reality.

The ‘base layer’ portfolio needs to take care of supporting family members’ needs and wants, the impact of inflation and unforeseen events in respect of both family and financial markets. Currently, and for the near future, we have very low or negative global interest rates. Particularly in this environment, bank deposit returns cannot keep pace with the price increases in many non-discretionary goods and services or provide the necessary capital growth for this base layer to be sustainable and fulfil its purpose.

How do you go about achieving this?

You need to think like a long-term institutional investor. Seek out credentialed investment professionals who can help you.

Generally speaking, you can cut out layers of cost by dealing with an investment actuary for advice and engaging directly with fund managers who actually do the investing themselves.

An investment consultant (usually an actuary) will work with you to develop your thinking about a realistic rate of return for an appropriate level of risk for the base layer portfolio. This involves creating a Statement of Investment Policy and Objectives (SIPO). This is a framework for governance of the portfolio, setting its purpose and objectives, the investment philosophy or beliefs around investing, expected returns and strategic and tactical asset allocation limits.

A full exploration of the family’s attitude to risk will be useful in and of itself. How much capital can we afford to lose and for how long? Clearly setting down your beliefs and risk tolerances will help you hold your course when markets dip or do not perform as expected. You will know you have tested a range of investment scenarios and hopefully, will have developed conviction in your approach. Going through this process with an independent actuary will help avoid the pitfalls that many individual investors make, such as chasing high returns, paying too much for active management and dealing with the inevitable volatility of financial markets.

When it comes to selecting managers for various asset classes, there are some assets that are best suited to a passive or index based approach and others where active management can add real value after fees. Rational, institutional quality managers charge fees that allow them to deliver ‘alpha’ – a premium return over the benchmark after all costs. An investment actuary can help you identify such managers for these parts of the portfolio. Delivery of these returns on a consistent basis is hard, because at times, large pools of investors prefer larger companies to smaller ones, growth styles over value investing or domestic versus global GDP exposures and so large money flows influence performance.

So while past performance is no guide to future returns, I think it is an indicator of manager’s skill if they have delivered consistently superior returns over a long time horizon. By contrast one or two years of ‘shoot the lights out’ returns is not what long term investors seek out. These may have more to do with luck or excessive risk taking than skill.

So what other factors should help you identify a good quality manager?

Sufficient resources to research and implement good investment ideas, skin in the game (an alignment with achieving the investment goals of their funds) and a clearly thought out investment thesis for how they construct portfolios.

As with your choice of actuary, independence is a good thing. There should be no conflicting business imperatives from your investment professionals to select a particular fund or manager or invest in a particular way. So be on the lookout for conflicts of interest or hidden fees and commissions, which are inconsistent with delivering the best outcomes for your family as the client.


Disclaimer: Rebecca Thomas is the CEO of Mint asset Management Limited. The above article is intended to provide information and does not purport to give investment advice. Rebecca is also an Independent Director of Gilligan Sheppard.

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