Episode 1 - Getting Rich vs. Staying Rich
Download MP3Welcome back to the Our Family Office Podcast. Over the course of this season, we're exploring the areas of focus for a purpose built family office and the ways in which a family office can improve the lives and relationships of Canada's wealthiest families. On today's episode, we will be discussing investments, and I'm happy to be joined by our cofounder and chief investment officer, Neil Nisker. Neil has over 50 years experience on Bay Street. And as you'll hear today, he is as energetic as ever.
Adam:Neil, thanks for joining me.
Neil:My pleasure. Thank you for inviting me.
Adam:So to start with, let's talk about, philosophically, how our investment team builds portfolios for our clients and how we think about specifically the difference between, as you like to say, stay rich versus get rich.
Neil:Adam, as you mentioned, you know, we are in the stay rich business, not get rich. Our families we serve are in the ultra high net worth, space, which is defined globally as $30, 000, 000 US in assets, and we manage liquidity for these families. We build portfolios with very little risk, and I'll define that and get back to that in a moment. But what I mean by stay rich and not get rich is they're already very wealthy. They've already made the money.
Neil:Now preservation of capital is paramount, but also the idea of, educating their spouses, their offspring, grandchildren, about how to be good inheritors of that wealth, and also understanding the risks you take. So having spoken at conferences around North America for the last 30 plus years, 1 of the talks I give is the other r word, rethinking risk and return. And when you're wealthy, you don't need to take very much risk at all to get a great return. And, you know, I'll elaborate on that in a moment, but the point being that we have very conservative portfolios that outperform, 6040 model, and we're very happy to serve this market segment with very little volatility.
Adam:And I think it's important that listeners understand what it means that, you know, our our client families have made it already. So, you know, we will look at a family's, financial picture and see that their needs are met. Maybe their children's needs are met. Their philanthropic desires are met. So unlike a family that is maybe striving to save for retirement, the goals in their lives that they were seeking, they found.
Adam:And maybe they have an active operating business. So, you know, they may be anyone that is in a private enterprise is taking on a lot of risk, concentration risk. It may not feel like it. Sometimes, it doesn't if you're if you're the 1 running it. But in their portfolios, we can then say, well, we're going to find the best managers around the world.
Adam:And on a risk adjusted basis, we will perform much better than, you know, what we would compare to a a typical 60% bonds 60% stocks, 40% bonds portfolio that a typical Canadian might be in?
Neil:Yes, Adam. You know, let me quote Warren Buffett. Warren Buffett says there are 2 rules for investing. The first rule is don't lose money. The second rule is just remember the first rule, and that's all the rules there are.
Neil:Now you don't have to take a risk to earn a good return, and this is something that we're showing not just our clients, but we're actually, as I introduce this at conferences around North America, we're in a way, giving this away. Now what am I referring to? I'm referring to the way $1, 000, 000, 000, 000 sovereign wealth funds are managed, large endowment funds are managed, or the manager that we have in common. When I say we, I mean everyone listening to this podcast has a manager in common, and that is Canada Pension Plan. They're managing some $600, 000, 000, 000 for us by being 65% in anything but a stock and bond.
Neil:Why? Because there are so many other asset classes that are less risky than stocks, and many that aren't correlated to bonds. So we manage money from an absolute return point of view. I joke and say we serve it's not a joke. We serve very demanding families.
Neil:When the market's up, they expect to be up. And when the market's down, they expect to be up. And , you know, I'm happy to share with you on this podcast how we do it.
Adam:And there are a couple of reasons why, most typical Canadian investment portfolios don't look like CPP's portfolio. Right? That is 60% alternatives. Right? 1 is, illiquidity, which is not appropriate for for most investors, and the other is the the high minimums that a lot of these alternative managers, require.
Adam:So let's start first with the idea of the the illiquidity premium and why ultra wealthy families can afford to tie up some money for some period of time, not necessarily have the the daily liquidity that stock and bond portfolios offers?
Neil:I do want to talk about liquidity, but I want to do it within the context of understanding asset classes. The first 100, 000, 000 that a family makes, and it could be the first 10, 000, 000 that a family makes, comes from really 2 major asset classes. 1 being private equity slash venture capital, and the other being real estate because you could leverage 75%. Both of these asset classes are quite illiquid. Now if you have your own business, that's private equity.
Neil:And I know you love management because guess what? You're the management. But the point being that you don't need daily liquidity once you have a certain amount of wealth. You can have monthly liquidity, quarterly liquidity, annual liquidity. And we have a lesser amount, but we have private equity and real estate investments that are less liquid than once a year.
Adam:Now let's say you don't need your whole portfolio to be daily monthly liquid. Right? We till build liquid portfolios, but with a sleeve that we know okay. If you have $30, 000, 000 in your investment portfolio, you're not gonna wake up tomorrow and suddenly need 30, 000, 000 in cash.
Neil:No. No. You're a 100% right. And we budget. We have budgets for liquidity, understanding our family's needs for liquidity.
Neil:Look. Half our portfolios, half the assets we manage are daily monthly liquidity. If you're gonna, you know, buy a new cottage or buy a a home, you know, in Florida, you'll probably have a month to to make up your mind. And because, you know, we're managing, a lot of the family's liquidity, it's never an issue. You know, a number of families draw on their portfolios on a monthly basis, and we always plan for that.
Neil:We are a planning firm. But we understand that you should have money invested, okay, with liquidity as far as 10 years, but understand, you know, what that budget for liquidity look like. As I say, half our portfolios are daily, monthly. 3 quarters of portfolio are daily monthly quarterly. So we understand this, and we do this, and it's customized for each individual family.
Neil:We also budget for potential capital gains. We also budget for correlation to the riskiest asset class, which is equities. You know, and we budget for risk, of course, because we focus on risk. And that's something else that, you know, I'll just mention, here, is we have a number of strategies that I call watching paint dry strategies. So I'm not sure when the last time you watch paint dry, but it's really, really boring.
Neil:You know, it goes on kind of dark, and then a couple hours later, it dries, you know, a little lighter. But these are boring strategies. So we have strategies with very little risk at all. In other words, if you get 50 basis points, half of 1% every month, plus a top up at the end of the year, and you get that for 15 years, what's the volatility? It's almost a 0 like cash.
Neil:And when you find asset classes like that, and I'm referring to mortgages, which are not all risky. There are lousy mortgage managers, and there are great mortgage managers. And we obviously do a lot of due diligence, at least 50 hours of due diligence. We have executive summaries, 20 pages long of the due diligence. But we find asset classes where the risk we take is less than the return that we get.
Neil:Every family deserves 1 unit of return for every universe they take because risk standard deviation is quantifiable.
Adam:And let's talk about that. So if you look at, let's say, a a stock portfolio, so the historical returns of the stock market's about 9%. Yes. The standard deviation, which is a a quantifiable measure of of risk of volatility, is 16 to 18%. So in other words, very quick math, for those listening.
Adam:You get about a half a unit of return for every unit of risk that you're taking if you were to to divide 1 into the other, where the way that we are looking to build portfolios is that for every unit of risk you're taking, you should be getting at least 1 unit of return. And in order to do so, we are an independent manager. So I know the investment team searches around the world, and you get pitches every day from managers that are seeking investment, to find the best managers, best in class within each asset, and build portfolios that are going to serve our clients over the decades to come.
Neil:Yeah. That you know, Adam, as you said in the introduction, I've been doing this for, it'll be 52 years, next month. The idea of searching the world for the best asset class is number 1, where the historic risk of that asset class is less than the historic return is the first thing we do. We manage liquidity as part of asset architecture of a family. Because families have private equity, they may have real estate, they may have a lot of when we look at the liquidity, we look how this piece of the puzzle, okay, think of a jigsaw puzzle, fits together with all of the assets.
Neil:Okay? Then what we do is we then search the world for the best managers that have a historic track record of outperforming their risk. So in other words, again, as you said, Adam, correctly so, for every unit that they took, they got more than 1 unit of return. For every unit of risk they took, they got more than 1 unit of return. It's simple.
Neil:We actually call it the simple investment ratio, just dividing risk into return historically. And I challenge I ask everyone on this call, look at your last year's, performance, whether it be a 60 40 model. Look at your last 5 years performance. Get your manager to show you how much risk they took. It's very important to understand when you focus on risk adjusted returns.
Neil:Having said that, we then find the best managers that we possibly can around the world. Okay? And some of them have a $10, 000, 000 minimum, and that's ticket size. You know, and we're not gonna allocate $10, 000, 000 in 1 strategy, you know, for our family, so we have an aggregation vehicle to do that. But the bottom line is we're constantly looking for and we have 24 different strategies that gives us a very low standard deviation risk of our portfolios, half of bonds, and yet we're beating that 6040 model very nicely.
Neil:In 2022, when bonds went down 12% and stocks went down a lot more, that 6040 model was down some 16%, and I'm very proud to say that every 1 of our families was up in 2022.
Adam:And I wanna go back to something that you mentioned about the the minimums, and that was something that we touched on earlier is the idea of, you know, some of these asset managers, particularly in alternative assets, have very high minimums. They are institutional managers. They don't market to the retail public. They don't have offerings to the retail public. And so in order to get access to these managers that have, in many cases, a 20, 25, or 30 year track record of outperforming the their asset class, their benchmark, you need size.
Adam:And 1 of the advantages that we are excited to offer our clients is that while they may not have size on their own to get access to that manager, as a firm, we have access because we are, as a firm, treated as 1 client, and so we meet the minimum.
Neil:Yes. And for some reason, there are managers out there who would like us to become a client. So we're we've gained a reputation. I'm happy to say a very positive 1. We've been honored by our peers, to win a number of, North American awards, and including last year best outsourced chief investment office, in North America.
Neil:It's nice, when we compete positively against, our American brethren, if you will. They've been doing this a heck of a lot longer in the family office space. But we have a way of getting in and aggregating our assets. We tend to, you know, give 25, 30, 000, 000 to a manager. But it takes us a long time to find that right manager.
Neil:For example, you know, think of the asset classes. It could be lending, private equities, secondaries, real estate. And there have been asset classes we've looked at, like life settlements, for example. But in the last 10 years, returns have been compressed from, like, the low teens to high single digits. Or and you have to tie your money up for 5 to 10 years, and we won't do that unless we get a 15% plus return.
Neil:Infrastructure, for example. Again, you used to get low teens, but so much money has chased this kind of asset class that now they've been compressed to to middle single digits, and we're not there on purpose. Again, you have to tie your money up. So this is back to your question, Adam, about illiquidity and premium. If we don't get a 15% plus return, we don't wanna tie that money up for more than 1 year.
Neil:And it just seems that things are working very well for us because we've taken this institutional approach, okay, just the way, as I said earlier, the $1, 000, 000, 000, 000 sovereign wealth funds or CPP manages our money. Okay? And it works. Between 65 70% of our assets are in anything but a stock and bond, and we're passive on long only. Okay?
Neil:And I don't know if you wanna get into this, but it's important for people to understand that it's very, very difficult for an active long only manager to beat their benchmark or index net of fees. In my history, some 25 years ago, chairing some public foundations investment committees and some public foundations, we fired some of North America's best managers because they did not beat their benchmark or index net of fees after 10 years. And we didn't have the proliferation then that we have now with ETFs. If you cannot beat the market net of fees, then be the market for literally no fees, and that's what we do today.
Adam:And I think it's important to understand that is the idea that, you know, we are active where the alpha is. Right? So where markets are extremely efficient, you're probably better off just paying lower fees, but we can find areas where there are inefficiencies, where we can get an illiquidity premium, where we don't mind tying up money, where we can meet these high minimums in these alternative asset classes. I know you touched on a couple of different asset classes in in your last comment. And 1 of the advantages of being independent is we don't have a budget where, oh, we need to assign a certain amount of money to this asset class.
Adam:If there's no opportunities there, we can just avoid it. We don't need to invest in that. We can invest anywhere we want as long as, as you said, we're getting that sufficient return for every unit of risk that we're taking.
Neil:Yes. You know, there are managers and there are managers. And let me give you 1 example, hedge funds. So what are hedge funds? Well, if go back to 2, 008, 2009, there were a lot of hedge funds, but half of them closed.
Neil:Now why did half the hedge funds close? Well, hedge funds typically charge a a fee to manage the money, let's say, 1 a half percent or 2%, and then they get a performance fee of 20% over some benchmark or hurdle rate. And when the great financial crisis of 2 008, 2009 came, okay, half the managers could never see themselves earning back above that hurdle rate, so they closed down and they opened up across the street. Now we'd never go or never visit a manager like that. That isn't what we do.
Neil:We have a very disciplined process to the kinds of managers we wanna work with. We want skin in the game. We want a long track record. We want to understand the strategy. But the point being that in if you're going to visit the hedge fund space, okay, there's a big huge dispersion between a top decile manager where you're better than 90% of your peers, and a bottom decile manager when you're worse than 90% of your peers.
Neil:1 of the important things to look at hedge funds is try to find a manager who makes money on the short side. A hedge funds goes long. A hedge fund goes short. There are very few managers in the world who consistently make money shorting stocks. That is something we look at.
Neil:Now, again, I'm giving you the benefit of over 5 decades of experience in what I've learned. I've got a lot of scars, you know, to show for it, but the bottom line is we have a different approach to finding those right managers, and I'm very proud to say that it's working.
Adam:And it's also and this is something you alluded to earlier, the idea of education. Right? We are I mean, we're talking here kind of broad strokes. But, of course, when we onboard a family, we are looking to we are eager to give them information as much as they would like about who the managers are, their backgrounds, the due diligence that we've done. We want our client families to feel empowered that we have nothing to hide.
Adam:We're proud of the portfolios that we've built, and we wanna give them the information so that they can feel like, okay. I'm gonna trust our family office because I've seen what they do, and, you know, they're gonna build this portfolio better than someone else will.
Neil:You know, I'm glad you brought that up, Adam, because even though every provincial security regulator in Canada, starting with the Ontario Securities Commission, gives us discretion as a portfolio manager, we don't take it. It's very important for us that every client, every family understands why this asset class is important to their asset architecture, with all the other things that they have in their wealth, and why this manager is amongst the best in the world. So we do have executive summaries, and we speak to each client about the asset class, we give have a recommendation about how much we should invest, why this makes sense, and they give us a nod 99% of the time because they trust us. But it's important for us that our families all be educated and engaged in this process. People have said I'm process anal.
Neil:It's probably very, very true. I'm happy, from that point of view. But the point is that it's important to us that people understand, and the more they understand, the more trust and the greater percentage of the wallet that they eventually give us. Not every family gives us all their money day 1. Sometimes we're doing a lot of planning for the family because they're selling real estate or they're selling a business, and they anticipate liquidity and wanna know how we do we plan to build a portfolio for them to maintain their wealth.
Neil:The other thing I'm very proud of in our family office is the integration between the wealth planning and the investment and how we meet every week and discuss every single family, whether we're remitting taxes for them, whether we're doing planning, whether we're working on a prenup or postnup agreement, looking at their wills. And this is all very important to us, why we start our family office, why we're owned by 50% of the firm is owned by the families we serve, because we want the firm to be here for a number of generations, where the grandchildren we're serving today will be with the firm with their grandparents. But the idea of engaging the families, educating them, their children about the asset classes, the risk they're taking, is something that is part of our DNA.
Adam:A great note to end today's discussion on. Neil, thank you as always.
Neil:My pleasure. Thank you for having me.
Adam:I hope you enjoyed today's conversation. Thank you so much for listening. Our Family Office is Canada's first purpose built shared family office, and the Our Family Office podcast is produced by Henry Shew. Please visit ourfamilyoffice.ca for more information about our firm, and don't forget to like, comment, and subscribe so you don't miss an episode. See you next time.
Adam:The information in this podcast is presented as a general educational and informational resource only. While certain participants in this podcast may be registered to provide investment advice as a representative of our Family Office Inc, itself a registered firm in certain Canadian jurisdictions, this podcast does not provide individualized investment, financial planning, legal tax, or insurance advice, nor is it meant as a recommendation to any listener to buy or sell any specific securities or otherwise take any other investment action. Any action you may take as a result of the information presented in this podcast is your own responsibility. Our Family Office Inc and each of its representatives that participate in any podcast disclaim that any listener should rely in any way on any of this content as investment, tax, legal, or insurance advice. Listeners are encouraged to consult with their individual investment adviser and other financial professionals prior to taking any potential investment actions or making any insurance or tax decisions.
