To continually understand the needs of investors, last week we invited Eric Wong, Director of TCG Capital to come in to talk to us about how family offices invest, what are their needs and potentially where can fintechs help during our AQUMON's Smart Talk session. I've known Eric for over 30 years and it's such a pleasure to finally pick his forward-thinking mindset.

Eric established TCG Capital in 2003 as an asset management and financial advisory firm focusing on investments with superior risk adjusted returns that are uncorrelated to major asset classes and advising family office and corporate clients.

 

 

Lots of nuggets of wisdom from our Smart Talk session with Eric:

The interesting thing for me is how whether you are large scale family office or an individual investor there are logical principles we can both implement to improve our overall investment experience and performance. Ideas such as investing into uncorrelated investments to protect yourself (especially during market downturns), controlling your cost/fees and experimenting with some side business/channels beyond just investing to further help you build your wealth are all smart ideas we can learn from.

I want to once again thank Eric Wong from TCG Capital for his insightful sharing. Hope you all enjoyed this and more interesting Smart Talk sessions to come.

 

 

1. Investing and most businesses often require quite opposite mentalities.

 

Many private bankers or wealth managers know successful entrepreneurs or business leaders who are terrible investors and this is sometimes because business often rewards activity whereas investing usually rewards inactivity in terms of making investments though there should be a lot of activity in research and thought. The need for activity psychologically can perhaps be addressed by allowing for a small experimental investments budget for learning.

 

 

2. A liquid, ideally uncorrelated to mainstream assets war chest is key to capture the rare opportunities.

 

The fact is the best time to invest is also when most people are losing their shirts, liquidity is scarce and assets are deeply discounted which does not happen often e.g. 2008/09. Whoever can survive if not thrive when asset prices start collapsing will have the ammunition to buy at the bottom. The key factor here is correlation to mainstream assets with the goal being to allocate some portion of the portfolio to liquid, uncorrelated assets.

 

 

3. Small scale experimentation and making mistakes is vital to grow and improve as an investor.

 

It is important to experiment and make mistakes during good times when it can be afforded in order to add skills and experience. There is often a tendency in finance to try to appear conservative and to not appear to be experimenting. We probably all know finance professionals with 10 years experience but actually have 1 year of experience repeated 10 times. Who knows the experimentation may turn into a new endeavour that creates wealth.

 

 

4. For most investors there is no illiquidity premium.

 

One of the sacred cows in finance is the illiquidity premium from investing in private equity which maybe locked up for multiple years. We feel similar returns net of manager fees can be achieved with liquid instruments such as a low volatility index which better reflects the target companies of buyout funds and by applying leverage as buyout funds also do. Furthermore it is near impossible to instantly get the exposure to private equity and the cost to properly due diligence such investments would be prohibitive to most investors.

 

 

5. The illiquidity premium is not financial but psychological/political.

 

The illiquidity premium does exist but mainly in the mind. Not having to face mark to market fluctuations in asset values is much more comfortable psychologically even if private equity return measures like IRR are highly flawed. Ironically because private equity behaves like a lagged, levered S&P due to the nature of valuing such investments it ironically does serve to de-correlate investment portfolios and it drives many pension funds to invest into the space even if manager fees and such eliminate the illiquidity premium.

 

 

6. Control over the investment may be more valuable than diversification.

 

Many investors believe in diversification but seasoned investors would be careful of over reliance on diversification especially among highly correlated assets and prefer control over the investment. For example managed accounts are a key tool to have control over the activity of managers and to be able to cut them off instantly but are often not used due to the operational burden and responsibility. As the former US Secretary of Defense General James Mattis says “be polite, be professional, but have a plan to kill everyone in the room.”

 

 

7. Investors should pay attention to costs

 

Costs in all forms from commissions to manager fees make a large impact on returns. When Warren Buffett had a hedge fund his fee structure was 50% of returns above 4% but he also took 25% of losses. Also important is building infrastructure or finding partners to aggregate volumes or assets to push down fees. This is what brokers and fund manager do and investors should also do this and approach investments as a business. Family offices are particularly good candidates to achieve this due to their sufficient asset sizes.

 

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