ESTABLISHING A SUSTAINABLE FAMILY OFFICE INVESTMENT FUND

Today’s ultra-high-net-worth (UHNW) individuals and families look very different to previous generations, and their concerns are different too. Stefan Viljoen, Head of Family Office at Standard Bank Wealth and Investment, believes that Family Offices have a vital role to play in helping ultra-high-net-worth (UHNW) individuals and families navigate change in an increasingly complex and unpredictable financial landscape.

“One of the most valuable aspects of Family Offices is their ability to stay abreast of current trends and leverage their resources to support their clients in an ever-changing world,” he says.

“Globalization has heightened the need for robust macroeconomic analysis and this, in turn, places a demand on Family Offices to fully appreciate everything from geopolitics to central banking trends from around the world,” Viljoen continues. “We are often approached for advice based on the narrative of trends for investing, especially asset class preferences within Family Offices, such as fixed income, public and private equity (direct of funds) and real estate.”

Viljoen notes that investment trends and asset allocation strategies among Family Offices and UHNW clients may also vary significantly across different regions due to factors such as market maturity, economic conditions, and cultural preferences. “As an example, operating in a volatile market would mean there is a strong emphasis on liquidity and diversification across different asset classes and geographies,” he says.

“For this reason, we recommend that a Family Office agrees on an Investment Policy Statement (IPS), which is your roadmap to deal with investment goals, strategies and guidelines for managing the investment fund.”

Discipline and consistency

A detailed IPS ensures that each family’s particular nuanced needs are crystallized and incorporated into all activities. “Just as no two families are alike, no two Family Offices should be alike either,” says Viljoen. “The IPS should account for this by providing for big-picture issues like capital preservation, as well as meeting more immediate needs.”

An IPS helps maintain discipline and consistency in investment decisions, especially during volatile market conditions. It also serves as a reference point for resolving any disputes or misunderstandings between the investor and the portfolio manager. Key components of an IPS would typically include:

• Investment Objectives: These specify the financial goals, such as growth, income, or capital preservation, and the expected return on investment.
• The percentage of income and gains of the investment fund to be allocated to the family’s other structures, such as sub-trusts or trusts created for different family members, philanthropic activities, etc. 
• Risk Tolerance: Outlines the investor’s risk tolerance, including acceptable levels of volatility and potential losses. 
• Asset Allocation: Details the target allocation of different asset classes (e.g. stocks, bonds, real estate) and the rationale behind these choices. 
• Investment Strategies: Describes the strategies to be employed to achieve investment objectives, including any specific investment styles or approaches. 
• Roles and Responsibilities: Defines the roles and responsibilities of all parties involved, including the investor, portfolio manager, and any other advisors.

Viljoen adds that an IPS should also include rebalancing asset allocation guidelines and robust performance monitoring and reporting. “If the support from the core investment fund is not managed in moderation, the commercial endowment may come under pressure and put the entire system at risk. Harsh decisions may then need to be taken to protect the investment fund from undue risk, including exploitation.”

Securing a sustainable future

While staying true to the fundamentals of good governance is key, Viljoen believes that marrying the traditional pillars of a high-performing Family Office with nimble responses to changing market conditions will be a differentiator that stands the test of time.

“In a globalized world, it is more important than ever that a Family Office has the right systems and strategies in place to structure a sustainable investment fund that will ensure the successful transfer of wealth to future generations.”