Learn, explore and unleash your inner chef.

“Keep your eyes on valuations. Be prepared to cut risk and hold cash if the market moves violently against your investment portfolio. Do not ride down the next wave of equities after this euphoria is over. It is time to be very risk-aware. Even if you do not move to cash as yet, put in some risk management parameters that can get you out of your riskiest trades before you lose a bundle,” advises Kevin Burrows, CFA, Chief Investment Officer, Adi Dassler International Family Office.

Mr. Burrows is a speaker at the marcus evans Elite Summit 2017, taking place in Montreux, Switzerland, 7 - 9 June.

What asset allocation model would help family offices deliver sustainable long-term performance?

Investors should diversify their investment portfolio broadly across liquid asset classes; bonds, commodities and alternatives. I recommend managed futures for the alternatives allocation.

Our family office focuses on the liquid end of the investment spectrum, so there is not a lot of private equity or venture capital in our portfolio. My philosophy is about trying to get back to the promises of hedge funds of funds, which promised steady accumulation of returns with limited drawdowns. We target seven percent returns with seven percent volatility. The problem with hedge funds, as we know, is that while they are hitting the volatility target, they certainly are not achieving the return target. I try to take a step back and simplify the process by investing more in beta-driven ideas through tactical asset allocation, and by doing it more cheaply and efficiently through exchange traded funds and a few active managers. Broad, tactical asset allocation is the way investors can achieve steady returns.

How should portfolios be constructed?

It is difficult to predict what returns the market will achieve, but it is possible to construct a portfolio based on historical volatility and be fairly close to your risk target. Returns obviously depend on current valuations, but investors must recognise that investing deals with people’s psychology and relationships so they cannot adopt a completely quantitative approach. Understanding the market psychology while keeping your eyes on valuations is important. We take a trader’s approach to mitigate risk; if the market trades against us, we cut risk quite rapidly and build cash.

What risks should family offices be aware of?

The main risk we are trying to avoid is a large drawdown. Therefore we emphasise diversification and value investing, and do not chase performance with valuations that look already stretched. Nevertheless, we do like momentum and managed futures as a strategy. In a diversified portfolio, they are one of the few areas of alternatives that actually lower risk.

Many family offices invest in private equity, but we prefer private debt. Family offices need to be careful with private equity and venture capital investments – if they lack access to the very best managers they should not allocate large amounts.   

What trends should family offices prepare for? 

We will finally see less dominance in the market by the central banks. As the interest rate environment normalises, we can once again concentrate on market fundamentals. The bond rally is almost over and investors can look forward to four to five percent returns from fixed income. If my target is seven to eight percent, fixed income can get me five percent of that. Family offices need to manage this transition and expose their portfolio to areas of the market that will do well in this inflationary environment. Risky assets will finally pay more in line with their historical returns as opposed to always being outperformed by fixed income.