Private emotions running high

Private investor Marie Fucci told delegates at Opal Financial Group’s recent European Alternative and Institutional Investing Summit 2007: “I have always thought that investing is more about psychology than about numbers. Investing is more an art than a science.” Ms Fucci has spent 20 years in �corporate finance, M&A, privatisation, emerging markets and venture capital in the pharmaceutical industry, and now invests in those areas because she knows them intimately and can impose stringent criteria on her allocations. But she is not averse to using �emotional words to describe what she does. “I do my own investing because I like it,” she says. And when it comes to risk management, “You have to �understand yourself well to understand just how much loss you can bear.” This causes her to shun hedge fund managers, who lack what she calls, “the grey-hair factor”. She does not believe that a manager who has not seen his 40th birthday can know what it is like to experience a day like 19 October 1987 – as she did in a brokerage role. Investment D-I-Y Guy Fermon, who made his money �selling his �software companies in 2001, embarked on some investment self-education after having visited some private banks. “It turned out I enjoyed it, so I kept going myself,” he recalls. He too asks that very emotional �question when it comes to risk �management: How much loss can I bear? “For me, risk has very little to do with volatility. My risk is that I die broke.” That leads him to accentuate the qualitative when managing his 27 per cent exposure to (mostly niche, �aggressive) funds of hedge funds, stressing the need to “understand the return drivers for each strategy because that will help you avoid damage when the storm comes”. “Beware of the numbers,” he says. “You can be really cool with statistics. But – and I understand that this is �emotional – a key thing is how much you feel you can trust a person.” The professional wealth managers on the panel backed up this emphasis on the emotional. “With family offices and wealthy individuals, there is this whole psychological, even emotional, process that imposes itself on asset allocation decisions,” agrees John Bailey, CEO of Spruce Private Investors. Before you get to asset allocation you have to deal with governance structures – how the family co-ordinates its �decisions. Then there is succession-planning. Mr Bailey refers to one client family, now in its 15th generation in the US, that has 200 members. Decision-making can get mighty complicated. And his average clients’ 65-75 per cent exposure to alternatives across all asset classes – with a solid absolute-return focus – owes a lot to that fear of the downside the others expressed. “We embrace alternatives fully,” says Mr Bailey. “When markets are down, we want to be flat. When markets go up, we look for a competitive return on the upside, nothing more. Since we started, we’ve done about 12-18 per cent per annum, at about 4 per cent volatility.” And once Spruce Private Investors gets down to manager �selection, it shifts from the very �quantitative approach it takes to asset allocation. “A lot more fundamental, qualitative work comes in,” says Mr Bailey. “We look for �opportunistic managers, with a broad investment palette, who perform �fundamental research, are risk-minded and operationally sound. The team has to have a verifiable �institutional track record. We typically run 12-20 reference checks on managers.” A family affair Marty Jensen, CEO of multi-family office United Management Group, tells a �similar story, where the firm will often “get involved with a family counsellor” to make sure there is intergenerational and sibling harmony – and in �managing the eventual investments. Describing his asset allocation �metrics, Mr Jensen begins with basic portfolio theory and post-MPT categories. But the third set, covering private equity, has less to do with �statistics. “When we start moving into private equity, none of those MPT, post-MPT or even hedge fund �metrics apply,” he explains. Even with hedge funds quantitatively, a strategy may well exhibit low volatility and low correlations over long periods, but �qualitative analysis could soon identify it as a ‘flood-insurance’ strategy levering-up tail risk. Alternative asset management is often described as a people business, and the presence of idiosyncratic risk is one �reason why. It is also why the �industry should remain �sympathetic to the needs of private/family investors. “Managers must be empathic towards what the �family wants to achieve,” says Ms Fucci.