Ignoring risk is the ultimate risk, family-office professionals told

CHICAGO — Family-office professionals at the Family Office Forum here last week were warned about the dangers of not paying enough attention to the risks related to investments and governance.

CHICAGO — Family-office professionals at the Family Office Forum here last week were warned about the dangers of not paying enough attention to the risks related to investments and governance.
“The ultimate paradox is that not dealing with the topic of risk is the ultimate risk,” Sara Hamilton, founder and chief executive of the Chicago-based Family Office Exchange, said at the forum’s opening session.
In fact, she said, a study on risk and family offices conducted last year by her organization showed that the sustainability of a family’s wealth through generations “is dependent upon the family’s ability to identify and manage risk.”
The most worrisome risks for wealthy families surveyed in the Family Office Exchange study were family legacy, relationships, and family reputation and public image, Ms. Hamilton said.
The challenge for wealthy families is that “no one wants to dwell on risk,” she said.
But Ms. Hamilton urged wealthy families and family-office professionals to “have the courage to begin the conversation” and said that the benefits of analyzing family risk are considerable.
Doing so encourages families to define their shared goals for the future, serves as a catalyst for action and provides a model for times of transition or crisis, she said.
Families need to ask themselves why they want to stay together and what they fear most, as well as what they want to accomplish with the family’s wealth, Ms. Hamilton said.
What’s more, it is critical to identify “which key advisers are responsible for managing family risks,” she added.
Beyond their control
Family members need to understand that some macroeconomic factors simply are beyond their control, such as geopolitical instability, market volatility, and currency and interest rate fluctuations, Ms. Hamilton said.
On the other hand, it is just as important for family members to realize that there are predictable risks within their control, such as the lack of an effective decision-making process, improper ownership structures, inadequate asset diversification and poor communication within the family, she said.
Most wealthy families share goals that center on business ownership and control, wealth preservation and enhancement, financial security and proper governance, Ms. Hamilton said.
Risks associated with those goals need to be identified and addressed, she added.
When investing in what he called a “low-return world,” Mark Yusko, president and chief investment officer of Chapel Hill, N.C.-based Morgan Creek Capital Management LLC, urged family offices to reduce risk by avoiding U.S. equities and by seeking assets they could “leverage up.”
“You should not think about U.S. equities for the next 10 years,” he said during his presentation on understanding global macroeconomic trends.
Mr. Yusko said that the stock market is overvalued and would have to post phenomenal gains over the next decade to justify current prices. He also expressed misgivings about the U.S. economy in coming years, citing a potential crash in the housing market and rising inflation.
“If inflation was measured the way it was 15 years ago, it would be at 7% right now instead of 2%,” Mr. Yusko said.
To reduce risk, he advised, investors should be in “the cheapest assets that offer the highest margin of safety.”
Mr. Yusko was bullish on international and emerging markets, particularly in China and India. He predicted that consumer consumption in those countries will continue to rise for the next decade as young people move toward middle age.
Japan’s recent economic recovery and rising interest rates also drew praise from Mr. Yusko.
“Rising interest rates are a sign of economic strength, not weakness,” he said. “Japanese stocks are the best opportunity out there today.”
Model portfolio
Mr. Yusko also recommended that energy and natural resources commodities such as oil, natural gas and uranium make up at least 10% to 15% of a model portfolio that is diversified broadly to reduce risk.
Depletion of existing oil reserves is a “monster” issue, he said.
“The industry will need to find significant new reserves just to meet existing depletion, let alone increased demand from Brazil, Russia, India and China,” Mr. Yusko added.