Source:
https://scmp.com/business/banking-finance/article/2099860/chinese-wealth-and-family-offices-need-professionals-and
Business/ Banking & Finance

Chinese wealth and family offices need professionals and private bankers

The composite global portfolios of family offices returned 0.3 per cent in 2015, from 6.1 in 2014 and 8.5 per cent in 2013, according to a report by Campden and UBS.

The composite global portfolios of family offices returned 0.3 per cent in 2015, from 6.1 in 2014 and 8.5 per cent in 2013, according to a report by Campden and UBS.

One current infestation of Hong Kong’s financial landscape is the rapid proliferation of family offices that are actually ill suited for investment management.

The family office concept for mainland Chinese looks like a sophistical exercise by both the clients and private bankers. The whole concept is completely misunderstood or mismanaged by Chinese clients.

Yet, it has been embraced by venal nouveau riche who want to placate their egos by creating an illusion of sophistication.

And bankers are willing to offer their services around the aspiration. It is a form of financial-cultural appropriation from Europe and North American family office organisations that doesn’t suit the way many Chinese families think of an investment enterprise.

The Global Family Office Report 2016 by Campden and UBS surveyed 242 family offices globally with average size of US$759 million in assets under management.

Family office investment returns have suffered. The data showed an alarming trend: “After returning 8.5 per cent in 2013 and 6.1 per cent in 2014, the composite global portfolio of family offices returned a disappointing 0.3 per cent in 2015.”

In comparison, the report said, “Endowments on average returned a more modest 2.4 per cent in 2015.” While the data ends in 2015, the three-year trend for family office returns has been unimpressive.

“There has been an overall (worldwide) increase in the percentage of family offices that are pursuing a growth strategy from 29 per cent to 36 per cent. However, strategic asset allocations reveal a high degree of regional variation,” the report said.

Zero to low rates have forced family offices to take greater risks.

Experienced family offices in North America and Europe are playing to their strengths by allocating longer term and accepting more illiquidity. Private equity and venture capital investments have become even more central to family offices over the past few years and now represent close to a quarter of the average overall portfolio. This approach is only successful when experienced in-house teams have sufficient ability for conducting due diligence and managing existing private market investments.

Hedge fund managers have suffered as the average family office reduced its holdings from 9 per cent to 8.1 per cent last year due to concerns about performance and fees.

But, there is a big difference between the family offices in Europe and the US versus China. Much of Chinese wealth is in its first or second generation, so the families still aggressively seek greater returns instead of wealth preservation.

The relatively new Chinese family offices pose a greater investment hazard to themselves than they realise. For many, their initial goal was to create a vehicle for millions or billions of dollars being moved to Hong Kong.

Nowadays, the stringent know-your-client and anti-money laundering rules being enforced by all banks are better met if the client sets ups an office in a business district to create a facade of credibility and access banking services when moving a large amount of cash from China.

“Investment is most intelligent when it is most businesslike,” according to the stock market guru Ben Graham.

However, many family offices aren’t adequately staffed with experienced and independent investment professionals.

Family offices are most useful if they are able to fulfil special family needs that cannot be served elsewhere, but most of all, only if you think you can beat the market.

Active investing is a zero sum game that requires a level of institutional discipline that is sometimes hard to replicate in a traditional Chinese family setting.

Usually when I meet them, I encounter a preponderance of family members or loyalists from the family’s main business. The patriarch or matriarch dominates meetings; the employees sit around the boardroom passively and obediently waiting for instructions. It makes for an uncreative investment environment where contrarian ideas and decisive risk management are rarely welcome.

Appointing sons and daughters, especially if they are inexperienced, is a recipe for disaster. Just because they have several years of experience in investment banking or structured finance, does not necessarily qualify them to be superior long term investors - especially in labour intensive practices like private equity or venture capital. Being unwilling to pay for qualified professionals to source and process deals is a short-sighted way to save money.

The result is flawed investment thinking, sloppy analysis, domestic bias and concentration of risk in assets like Hong Kong real estate, mistaking it for diversification from China real estate.

In a highly competitive high net worth, wealth management market, private banks in Hong Kong are more than happy to accommodate families who want to masquerade as a family office.

Most clients are better off remaining private banking clients rather than establishing a dedicated investment manager.

Peter Guy is a financial writer and former international banker.