Disruptions in the Investment Industry

While investing has never been straightforward, investing today in the face of current uncertainty feels overwhelming to many long-term investors.

Faced with today’s starting valuations and current yields, many investors have little confidence that the traditional equity/bond portfolio that has generated meaningful returns over the past 30 years will be able to produce the investment returns expected and likely needed by a family to maintain wealth for generations.

Amidst the current uncertainly lies opportunity; many families are materially modifying their investment strategies and portfolio goals to more nimbly—and opportunistically—address the new environment.

Many families are pursuing direct investments in operating businesses as the logical result of the challenges of a more traditional investment portfolio, as described in my article from the 2018 FOX Foresight^TM publication. 

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Many sophisticated investors have moved
 away from the perceived precision of the mean- variance optimized asset allocation approach
and acknowledge its many limitations.

Current flows into indexed investments suggest that many investors are rethinking their reliance on active managers to generate potential returns. Coupled with getting the asset allocation “right,” many investors have relied upon active long-only managers to produce “alpha” by selecting stocks that will grow faster than the market, and to manage risk by avoiding potential “loser” stocks or getting out of the market at the right time. 
 

Hedge funds have generally delivered on the promise of volatility reduction but have been less successful in delivering strong fee-adjusted returns, particularly since 2008. Many investors sought alpha by investing with smart, nimble managers, as they hoped that the generous fee arrangements would incentivize exceptional investors to produce strong risk-adjusted returns. 
 

Following the financial crisis, many investors allocated additional capital to private equity funds, seeking higher returns and more tax efficiency
 

Given the observations noted previously, it may seem logical that many investors are moving away from the reliance on traditional investments in marketable securities or hedge and private equity funds to generate strong returns. Instead, investor’s appetites have increased to buy operating businesses or direct real estate, in the hope of better aligning the investment with the time horizon and objectives of the family. 
 

Investing today is enormously challenging. As the industry continues to face disruption, families and family offices are joining together to question long-standing approaches, and to find ways to collaborate where they see opportunities.

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