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Wealth Manager: Clarmond House's MD explains why multi-family offices don't work

Wealth Manager: Clarmond House's MD explains why multi-family offices don't work

Like many in the industry, Clarmond House chief executive Chris Andrew learned as much about what does not work as about what does in his formative years in the private client world.

Fast-tracked to become an investment manager at family office Consulta, he was thrown in at the deep end early on.

‘I went straight from university to a family office based in London at the age of 21 and I didn’t realise at the time that this was unusual,’ he says. ‘It was a single family office, a Latin American family with around $2 billion in assets with beneficiaries all over the world.

‘A family office is a totally different upbringing than in a private bank. I was given a lot more responsibility early on and it is not just what you do but how you behave. You never knew when people were coming in and whether they were worth millions or not.’

He looks back fondly on his time at the firm. As an early adopter and large holder of hedge funds, Andrew was able to meet the great and the good of the hedged world at a young age and developed a passion for asset allocation.

When the firm changed direction to become a multi-family office he was spending a lot of time with third party clients, which enabled him to build up an enviable contacts book in the family office world and an insight into different approaches to running wealth. But against the backdrop of the financial crisis, his exposure to both led Andrew to believe the multi-family office structure was flawed and hedge fund pricing was unsustainable.

‘Jon Hunt, the former owner of Foxtons, was on the advisory board. I took him round different family offices but you have to ask what different families have in common – they have different values, needs and goals. What do the Flemings, Alex Scott or the Hambros really have in common apart from the fact that they are families?’ he asks.

‘A single family office is undoubtedly the most attractive way to have your money run if you have enough to justify it, but that number is going up and up.’

He accepts that many families are not interested in setting up their own family offices and the businesses do have their own problems. Besides the normal hassles of hiring people and finding premises and so forth, there is the in-built difficulty of incentivising people, particularly when many senior people will want equity in the business.


‘It set me thinking what I wanted to do next,’ he says. ‘It was around the time of the financial crisis and what was clear to me was that the gap in the market was people with between £1 million and £20 million who were being incredibly badly served by the private banks, paying high fees for bad performance. They probably cared more about the bad service, and with my experience and background in asset allocation, I knew I could deliver a better service.’

Andrew put his money where his mouth was, launching Clarmond in early 2010, which has a twin-pronged approach to looking after clients. It runs its own bespoke asset allocation model for direct clients but also offers what is effectively a consultancy service for wealthy families on either a one-off, or commonly, an ongoing basis.

The consultancy, or ‘firewall’ service, as Andrew dubs it, is where he will work with wealth individuals or families who chose not to set up their own family office and have typically spread their wealth around several private banks after selling their businesses.

‘A lot of European clients have got around £150 million and have invested £25 million or so with different banks, and feel it has gotten out of control,’ he explains.

‘I can sit in between them and the private banks and see what they have got. I act as a firewall and stand between them and the private banks. I go in with them and get all of the details of where they are invested.

‘My aim is not to reduce the fees they pay. My fee is an additional one on top. My role is to make sure that the client understands their portfolio, and make sure the portfolio is set up to meet their objectives.’

He says in fairness, many of the banks have not been given particularly detailed or well thought out mandates, which often results in the overall portfolio getting out of kilter, particularly when the banks often don’t know how the other mandates are being run.

The review process may involve giving a single bond mandate to one bank and an emerging market equities one to another, with the aim being to play to the underlying managers’ strengths.

On other occasions it may involve switching banks if, for example, he discovers it has a 23-year-old cutting his teeth on the clients’ £10 million portfolio, a situation he has come across.

Most importantly of all, though, is to ensure that the client understands how their portfolio is positioned and why.

‘For the firewall service, we have quarterly meetings. We will have one of the managers come and present, and we have another couple of non-executive directors and take minutes,’ he says.


‘It’s not a family office, but it puts a structure in place to oversee the running of the clients’ money.

‘Some are one-off cases, but it normally leads to an ongoing relationship. It can be difficult to quote for, you cannot scale that business up, and you want ongoing revenue.’

The firewall service looks after around £300 million in assets, albeit spread across sterling, dollar and euro mandates. The direct asset allocation service is considerably smaller at around £50 million, but Andrew says this has the most scope for growth and is the big push moving forward.

‘The fact it is £50 million is partly me going slow, but also, since theoretically I am going to be doing this for a long time, I want the right clients,’ he says.

‘I spend a lot of time with them, finding out what their objectives are. The way we are going to scale the business is through a managed account platform.’

The group has been running the managed account internally for some time, taking a multi-asset approach: investing across equities, fixed income, commodities and commercial property accessed through exchanged traded funds (ETFs).

Called Generations, this approach is designed to provide a dynamic core for client portfolios using a predominantly rules-based asset allocation model, which allows him to spend more time around the edges looking at specialist areas, such as sector funds.

Andrew developed the group’s investment process in 2007 and describes it as uncomplicated, yet one that yields good results.

‘It is not a complicated process. The way we do asset allocation is clear, ranking which we think will be the best performing asset classes in real terms,’ he explains. ‘As long as you get your ranking right and avoid the worst asset class over the cycle, you will outperform.

‘If you look at the old ways of running portfolios, such as efficient frontiers and mean variance, if you had run it at the end of the 1970s you would have bought into the 20-year commodity bear market. Similarly, at the end of the 2000s, you would have had a large equity holding and got smashed.’

The approach takes into account a variety of inputs across the different asset classes to enable the team to rank their preferences and tilt the portfolio toward their favoured asset classes.

For equities, inputs include real GDP growth, the dividend yield of the index adjusted to Cape [cyclically-adjusted price to earnings], while for fixed income, they include current bond yields and projected inflation.

‘Commodities are the favoured asset class, and the reason is that when real interest rates are negative, commodities always tend to perform very well and when inflation is higher than interest rates and currencies devalue, real assets are the place to be,’ he says.


‘We know fixed income is going to be a bad place for the next 10 years when interest rates rise.

‘Looking at equities, we think that the S&P 500 is going to deliver an annualised real return of 1% over the next 10 years, but that’s not to say that some areas, such as technology, won’t outperform.’

He describes the decision to opt for the managed account structure and a clean annual management charge of 1% (ranging down to 50 basis points depending on portfolio size) as a response to client demands for transparency and daily liquidity – precisely what clients have not been receiving from the hedge fund industry.

‘Managed accounts are a reaction against the hedge fund industry. Hedge funds have delivered high fees, opacity and illiquidity. It’s fine if you want that for part of your portfolio, but clients really want transparency,’ Andrew says.

‘Fund of hedge funds are dying. Some will survive but you can’t afford to charge two and 20 in a zero interest rate environment. The return on hedge funds is always linked to interest rates because they set it as their risk free rate.

‘We saw it in 2008 and 2009: [hedge funds] continue to make money from management fees but investors lost out.

‘If you look at John Paulson, everyone thinks he is a genius. He went from $2 billion to $6 billion and then $30 billion and $40 billion, but then took it back down to $25 billion. His performance was net negative overall – and he is not unique.’

Andrew says there does remain a core of good hedge fund managers out there, many of whom he saw 20 years ago that are still delivering solid returns, but says the sector is filled with overpriced mediocrity.

Many of these he finds clogging up client portfolios within the firewall service, although he says a mishmash of direct equities and misallocation to geographies remains the most common issue.

The amount of initial work needed is reflected in Clarmond’s charges, which are typically 1.5% in the first year, dropping to 0.75% thereafter.

As the business rapidly approaches its third year anniversary, the growth plans are in place. Andrew says that realistically he cannot look after more than a dozen families, but the managed account is scalable and expected to become a strong source of growth.

The group’s cost base is low, with Andrew having two fellow directors, one in South Africa, where his two-strong research team is based, and the other in the US.

The client base is also geographically diverse, with individuals and families in London, various parts of Europe, South Africa, Japan, the Middle East and Botswana, and the firm also has its eyes on Jeddah and Kuwait.

‘I can’t look after more than a dozen families, but we are seeing a lot of interest in our managed account that we can scale up and it will become a large part of the business,’ Andrew adds.

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