The investment portfolio of a family office needs to cater not only for the risk appetite of the family members, but also for the need to diversify away from assets held directly and consider high levels of liquidity. We speak with Mark Albiston of the Todd Family Office about how this works in practice.
When designing an investment portfolio for a family office, there are a number of considerations to keep in mind that are very different from the portfolio of an institutional investor, such as a pension fund or insurance company.
Often, the family you are investing for has made its money in a particular industry, in a particular country and is likely to have significant assets they hold directly, including operating companies and properties. Many of these assets are illiquid.
Therefore, achieving a properly diversified portfolio needs to acknowledge any assets outside of the portfolio, Mark Albiston, Investment Manager for the Todd Family Office in New Zealand, says in an interview with [i3] Insights.
“By design, we’ve made [the portfolios] global because we recognise New Zealand is very small in the global scheme of things, but also because the assets of the Todd Corporation and also the family’s personal assets are typically domestically focused,” Albiston says.
By design, we've made [the portfolios] global because we recognise New Zealand is very small in the global scheme of things, but also because the assets of the Todd Corporation and also the family's personal assets are typically domestically focused
“So, having a family office that is global in nature just provides that diversification and complements, in many respects, their other assets.”
He says the team does not explicitly instruct external fund managers to exclude investments in sectors the Todd Corporation is active in, but the types of managers they invest with tend not to have much overlap with its activities.
“Take energy for example, just the nature of the types of managers we would select for the portfolios tend to not have too many energy-type businesses in them. Those businesses are quite capital intensive and so are not widely represented in the portfolios,” he says.
“So it provides a really nice kind of diversification and contrast to the business activities.”
Managing Liquidity
The Todd Family Office invests money amassed by seven generations of the Todd family and the current family consists of several hundred people and a wide variety of ages, from quite elderly members to newborns.
Having such a diverse group of people means the team runs a series of different portfolios with varying risk profiles.
“We don’t have the one single portfolio; we have hundreds of different portfolios. We have a series of eight models and an advisory network to go out and talk to each of the family members, and they’ll have different entities [through which they invest],” Albiston says.
“They might have their own account, they might have a descendants’ trust, or a family trust, and then the advisers help them select what particular portfolio they should invest into for that particular entity. That’s all managed on a wrap platform.”
The model includes eight portfolios that range from very conservative to full growth, the latter being 100 per cent invested in equities. Initially, Albiston thought 100 per cent growth assets would be too aggressive, but he found there was demand for this configuration.
Most of the family entities sit around an 80/20, growth/income split, what we call our growth plus portfolio. But we did create a new one that was 100 per cent growth, and this portfolio has about 10 per cent of the total funds under management in it
“Most of the family entities sit around an 80/20, growth/income split, what we call our growth-plus portfolio. But we did create a new one that was 100 per cent growth and this portfolio has about 10 per cent of the total funds under management in it,” he says.
“As you can appreciate, a large family with wealth passing through multiple generations, there’s a long time horizon that comes with that.”
The diverse make-up of the family group also means certain segments need high levels of liquidity as they are starting to build their own families or life events take place.
“If you have a young family member and they want to buy a house, they can’t sell out of their family company; there’s no liquidity on that part of their portfolio. But we can give them money [from the investment portfolio] in three to five days to buy that house,” Albiston says.
Many family offices around the world have embraced a United States endowment-style strategy, under which large amounts of funds are invested into illiquid assets, including hedge funds and private equity. But the Todd Family Office has steered clear of private markets.
“We’ve avoided the private markets because of the need for liquidity, the resources it would require [to manage these assets] and we found that the fees are quite high in those markets compared to public markets,” Albiston says.
“But we don’t think that over the long term we’ve been particularly hurt by missing out on some of those opportunities.”
Investing in private markets can be quite clunky, he says. The investments are often large and very specific to the skill of a manager. This means it is hard to fire a manager without selling out of the investment too.
“We can get out of our investments very quickly if we lose confidence in a manager. In those private markets, I’d say that is much more challenging to do,” Albiston says.
Active or Passive?
Albiston is not dogmatic when it comes to the active versus passive debate. He sees use for both types of investments. The Todd Family Office uses reference portfolios to measure their performance against and employs active management to outperform these simple, passive portfolios.
But the fund also has a passive sleeve in order to avoid having to take money away from its active managers too often.
“We have a passive sleeve of global equities and that is to facilitate cash flows so we don’t need to disrupt the active investment managers,” Albiston says.
“We do have some quite big flows from time to time. For example, if we’ve got currency hedges that are in or out of the money, then the first point of call would be to either put some more money towards passive or pull some out of passive to fund the currency losses.”
We have a passive sleeve of global equities and that is to facilitate cash flows so we don't need to disrupt the active investment managers
Although in the past the fund used to take a more dynamic approach to asset allocation, in more recent years the team has stuck with a strategic asset allocation.
“We found the implementation of [dynamic asset allocation] not so easy; the value-add from those decisions was inconsistent,” Albiston says.
“But we have a rebalancing program that takes the portfolio back to its strategic weights if the drift moves too far away and we’ve found it actually incrementally adds a little bit of value through time.
“For example, over the last couple of months, just before the pullback of the last few weeks [in April 2024], we’ve been selling equities and buying bonds because our portfolios had slowly drifted away with the strong market performance of the last six months.
“We were selling a lot of equities and buying bonds and that has added a bit of value over the last month or so as equities have pulled back.”
Keeping Motivated
Albiston has been with the Todd Family Office for over two decades, an unusually long tenure in an industry where most professionals are continuously on the lookout for the next gig.
He credits his long career with the company to the variety of activities his job requires, not only on the investment side, but also in speaking with family members and investment colleagues over the years.
“I’ve really enjoyed it because you get to speak with some really, really clever and interesting people,” he says.
But ultimately, he feels the family office’s values are closely aligned with his own.
“There is a personal kind of alignment with that, which has kept me in the business for over 20 years,” he says.
“We’ve got four values: Think family, Own it, Deliver as one team and then, finally, Do the right thing. And if you take the first letters of those, it actually spells Todd.”
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.