Multi-family office Sand Aire’s client base comprises 14 wealthy families and endowments, and its clients tend to have very long-term objectives that focus on capital preservation rather than accumulation. They want sensible growth without excessive risk and so having money in the right asset class at the right time in the cycle is crucial.
Simon Paul, the group’s head of client services, says that the firm’s view is that the only way to make money over the longer term is to be active in asset allocation – to reduce exposure at times when the market is high and increase it at times when the market is low. When a client approaches the group, it spends a long time judging their appetite for risk. Often the starting point is the client’s unwillingness to lose any cash and the group will clearly explain any asset outside cash carries a risk of losing money.
The group invests across seven asset classes— cash, fixed income, equity, private equity, property, commodities and a catch-all class termed ‘unconstrained’. It does not separate out ‘alternatives’—for example, if it invests in a long/short equity fund, it will include this under its equities allocation.
Based on discussions with the client, the group will model a portfolio with an allocation across the seven asset classes. For the very risk-averse, this will likely include cash, fixed income and the unconstrained style. The group’s model back-tests this against historic returns and it brings out a maximum drawdown level. This is the typical loss that can be expected from top to bottom were the client unlucky enough to invest at the top and ride it all the way down.
In this, Paul says the group aims to give the client a worst-case scenario, believing “drawdown is a more important test of risk than short-term volatility. From there, we will adjust the asset allocation to bring it closer to the client’s tolerance level.”
Risk analysis based on historic figures necessarily has its limitations. For example, when the group used the model in 2006–07 it obviously did not anticipate the horrendous drawdowns of 2008 and figures therefore looked better than they would do today. Paul concedes “the system is not perfect, but we use the model conservatively and were generally happy with how our risk analysis held up during the crisis”.
Over the past two years, the group has become more active in tactical asset allocation. Paul says: “The aim is for this to have a meaningful impact on returns rather than being limited to a few percentage points here or there. If an asset is overvalued, making small changes will not protect the portfolio.”
For each client, the group has a completely neutral allocation as well as a minimum and maximum level in each asset class, which are managed round the central risk position. This gives the acceptable risk for bull and bear cases and the client knows at all times the framework within which their money will be invested.
