S2 E3 – How the Rising Generation Thinks About Investing ft. Charlie Scharfe
Download MP3Welcome back to the Our Family Office podcast. This season, we're talking about the rising generation and what makes them unique. Our theme this week is next gen investing. On this episode, you'll hear a conversation I had with Charlie Scharfe, a portfolio manager here at Our Family Office. In this episode, Charlie and I spoke about the similarities and differences of investment approaches between generations, the challenges and complexity of ESG investing, and how our family office works alongside the rising generation to build portfolios aligned with their goals.
Adam Fisch:I hope you enjoy it. Charlie, thanks for being here.
Charlie Scharfe:Thanks for having me, Adam.
Adam Fisch:So we're going to talk about the next generation and their approaches to investing. What's similar? What's unique? So let's start with what's similar. So when we're thinking about next generation clients, what's been consistent?
Adam Fisch:And we've started working with inheritors, that rising generation. What do you think is similar to their approach that's just across generations, it doesn't change?
Charlie Scharfe:Yeah. There are certain things that, whether across generations or just maybe universal investor truths, people don't want to lose their money. That one's pretty universal. Good start. People want to make a decent return for the risk that they're taking. So those things go across generations, across timelines. All investors, I think, have those in common.
Adam Fisch:And they're still, I think for the most part, thinking about a long time horizon. Right? It might not be maybe they're more focused on the shorter term because they have maybe less experience, but they're still thinking about multi generational wealth.
Charlie Scharfe:Right. At least everyone that we deal with, I think, is on a very long time horizon aside from a few cases where maybe if you're buying a house in the future or something very near term that's coming up, most investors with Our Family Office are thinking on a, you know, very long ten year plus time horizon.
Adam Fisch:Right. But that's a good point. I mean, we're when we're working with younger generations, they might have more expenses coming up in the near term compared to maybe retired clients that really don't have any large outlays coming up, they're just thinking about, okay, what's going to be for the future? What am I going to donate to charity? You know, their spending is a little bit more routine. They're not buying a house. They're not thinking about kids' tuition, things like that as much.
Charlie Scharfe:Yeah, exactly, and even just general uncertainty. Like at that stage of life, you don't know if you're going to have a family, how big the family's going to be, whereas older generation, you might be a little more certain what your years look like, for the next ten or twenty years compared to if you're 20 or 30 years old.
Adam Fisch:Right. Yeah. So let's talk about how the younger generation actually approaches investing, And one of the differences compared to prior generations that people talk about a lot is more, being more particular about where your investments are and how you're being invested. And there's been a rise this century, let's say, of what you would call ESG investing. So let's talk a bit about what that is, how it's risen in popularity, and then how it's maybe fallen out of favor in recent years.
Charlie Scharfe:Yeah, for sure. So ESG investing stands for environmental, social, and governance, and it's a way of thinking about investments while integrating these other factors that maybe aren't purely based on return and risk. So you're thinking about environmental, which is, you know, is this investment going to be positive or negative for the environment, either from a climate change lens or pollution, or is it taking up land that was natural land once? Social, the S and ESG that is more, how is it affecting the community? Is it integrated with what the community needs, or is it just about a profit motive? And governance, that's more corporate governance. Are the board of directors independent? Are they making decisions for the right reasons, or is there conflicts interest going on within the decision?
Adam Fisch:Right, how do they treat employees?
Charlie Scharfe:Exactly, yeah.
Charlie Scharfe:That is what ESG stands for. You're right, it's a fairly new construct like in the 2000s. Prior to that, I think there were still many people who would align their ethics with their investing goals, and many religious groups would say avoid what they would call the sin stocks. So even far back in history, people would invest and then exclude maybe tobacco or gambling or firearms manufacturers. So people have been doing something that is like ESG investing for a long time, but it only kinda came into the prominence, came into popularity and the term ESG more recently.
Charlie Scharfe:And it was actually there was a report written for the UN called Who Cares Wins, and that report mentioned ESG and used that terminology in the early two thousands, and that's when that term started to become popular and started to become used in investment mandates and things like that.
Adam Fisch:And it t really gained a lot of popularity because it's I mean, for of an obvious reason, like, it feels good. It sounds good. Right? If you're thinking like, well, do you want to invest in a way that is positive for the environment, positive for the community? You know, instinctively, it's an easy yes answer.
Adam Fisch:But I think what investors have found and, you know, advisers have have found in more recent years is it is more complicated and a little bit messier than the titles would suggest. So maybe share with listeners what is it about ESG investing that makes it a little bit harder to do than it might first seem?
Charlie Scharfe:Yeah. It's very complicated, and it's basically one big gray area. Right. So we could go and peel this onion for hours and hours, and we'd never even hit every kind of way that people invest in an ESG manner, because to have a positive or a negative impact in these areas can be very subjective.
Charlie Scharfe:And what is a positive impact investment for one person may be totally different than how another person views a positive impact investment, and even people can be focused on different parts of the ESG. Someone may be only concerned, their main concern may be environment and climate change. And they're not really, the S and the G is not top of mind for them, where another investor may be in a totally separate bucket when they think about ESG investing. So that's of what makes it complex, is it's in the eye of the beholder what is a good ESG investment?
Charlie Scharfe:And then even within that, how do you do it? How do you execute on kind of your philosophy? If you want to be good for the environment, how do you make positive investments for the environment? Right. And there's tens and hundreds of different ways you can approach that, and there's different ways of thinking or measuring, are you actually having a positive impact or not? Or is it more just because you don't want to be associated with something, or do you want to have a real measurable impact on the outcome?
Adam Fisch:Yeah. I mean, I think to give some specific examples, you know, I think people that are focused on the environment, the obvious choice for a lot of people is like, Well, I'll exclude, you know, energy companies, oil companies, those sorts of things. But those are also the companies that are investing the most in renewable energy. So if you're avoiding those, are you really making the pro environmental decision, or is the pro environmental decision to own those and maybe, you know, become more of an active voice and say, I want you to invest even more in green energy. Right? So it's not as simple as just saying, well, I'm gonna avoid these companies because the companies can be more than one thing at once.
Charlie Scharfe:Exactly. It's a totally gray area, and that's where there's different methodologies for how to do ESG investing. And you kind of gave a perfect example with the energy companies. One is called exclusionary, which is very simple, so it's easy to do, it's just I'm not going to invest in the companies that I don't want to kind of have a part in. So exclusionary doesn't cost you much, it's easy to do, you just don't put money in the companies you don't want to be involved with, so you wouldn't invest in the energy companies.
Charlie Scharfe:But as you mentioned, maybe perhaps more impactful, but very hard to measure, an activist ESG investor might say, well, I'm going to invest in those companies because I think I can enact positive change. They're bad companies, and if we change them to be better, that might be the most impactful. And there was actually an example of this. There was a hedge fund called Engine Number One, a semi famous example that I don't know if this kind of background story is true, but this is what they say, that the founder of the hedge fund was at dinner with his family, and he was an environmentalist. He was on the board of environmental foundations, and his son asked him how he reconciled that with his investment in energy companies through the hedge fund. So he thought about this, and this hedge fund, engine number one, actually took a stake in ExxonMobil. Mhmm. And Exxon's a huge company, so it was a very small stake. I think they invested $40,000,000 it's like a fraction of a percent of ownership. So you say, well, how much can they really impact with a fraction of a percent of ownership? But they wrote an open letter to all shareholders saying that Exxon had their denial of climate change was a, bad for the environment, and b, causing them to make bad business decisions.
Adam Fisch:Right.
Charlie Scharfe:So they're very small. They can't affect change on their own, but many big institutional investors, pension plans and charity investors, kind of followed on and signed on to this letter that they wrote, this open letter. And in the end, there was a shareholder vote, and they had three new directors, independent directors, elected to the board of Exxon. So they did do some change.
Charlie Scharfe:Which again, if you measure it, can you measure it? You know, that is an activist approach where instead of ignoring or not investing in the company that you don't like, they invested and tried to push the change they wanted to see. Right. The drawback of an activist approach is it's harder, obviously. There's a lot more work.
Charlie Scharfe:It's more expensive. They estimated they spent $40,000,000 trying to get other investors to vote in accordance with them and everything. And in the end, you don't really know how much change was impacted by what they did. It seems like some positive changes were made, but there's no way to tell for sure.
Charlie Scharfe:So harder, more expensive, and in the end, you still don't know, but it's a different methodology of applying these ESG principles.
Adam Fisch:Right. So looking at our own portfolios, can you give an example of a socially conscious investment, let's say, how we decided to make an allocation to it, and what our own philosophy has been around impact?
Charlie Scharfe:Yeah, definitely. So there's a few examples I can give. One is a real estate development fund that is impact focused, and impact, just on a little sidebar here, impact investing is kind of a subset of ESG. What makes impact investing different is you have to at least try to measure the impacts you have. So ESG investing, you don't necessarily have to measure what you've done.
Charlie Scharfe:You can say, we've incorporated, we've looked at their environmental policies and their governance, but there's no measurement required. If you're doing impact investing, you're saying we're investing part of this motive is not only profit, but also social good to have an impact. Impact investing, you're supposed to measure.
Adam Fisch:Right. There's an expectation that there's some measurable change.
Charlie Scharfe:Right. So you can see at the end of the day, at least try to see, was there real change here? So we invested in a fund that was a real estate impact development fund, and they have that as part of their main philosophy is, yes, we want to profit, but we also want to drive positive change, and one example that they measure is affordable housing. So they have metrics where they say, we want every one of our developments to have at least ten, fifteen, or 20% affordable units. And they have to measure, well, what is affordable?
Charlie Scharfe:It's x percent below the market rate. Right. So there's outcomes you can see. Yes. We develop these buildings.
Adam Fisch:Either you meet that goal or they don't.
Charlie Scharfe:Right. You can see the buildings developed. You look how many units are affordable. Is it the percent that they set out to make? So it's a little bit more measurable. There's some guideposts that can tell you if you were successful or not as opposed to kind of typical exclusionary ESG investing, you don't know at the end of the day.
Adam Fisch:Right.
Adam Fisch:So let's change gears a little bit, just looking more broadly at the younger generations and how they think about investing. And one kind of obvious one is social media. Right? Getting different ideas about how to invest on your own. Certainly, younger generations have grown up with the idea of DIY investing that older generations may not have.
Adam Fisch:It was much more common to work with an advisor and that kind of thing in past decades. So how do we balance younger investors that maybe want to experiment, invest on their own, versus our philosophy of, you know, stay rich, not get rich, wealth preservation, that sort of thing?
Charlie Scharfe:Right. I think balance is the right word that you used, and I don't think there's anything wrong with kind of having a bucket of capital that you experiment with or put into specific maybe niche investments that wouldn't be part of a traditional portfolio that we would build at Our Family Office. And I think you're right, it does tend to be more of that in the younger generation, which I could only theorize why. I think maybe some of it is technological. The younger generation tends to be a little better with technology, not to generalize, and a little more in tune with things that are up and coming sometimes.
Charlie Scharfe:And again, I've got kind of older generation clients who are very astute at technology and like up and coming investments too, so I won't generalize, but that's sort of the trend I see. But like you said, balance is the important word here, and if you're gonna be doing something maybe speculative, maybe higher risk, or maybe just new, so you're not sure kind of what the future holds for it, you can still do that in a safe manner as long as you have the appropriate sizing in mind. So if 90% of your kind of liquid net worth is in a stable portfolio that's going to protect you in all market environments, and you carve off five or 10% for kind of the investments you're interested in, the up and coming investments, maybe the more speculative investments that you want to make, that's fine because you've already kind of set your risk level by the amount you're choosing to invest.
Adam Fisch:Right. Right. You can either determine your risk by how risky your investments are or sizing, as you said. Right? So you choose five or 10%, and it's large enough that if it does really well, it can make a meaningful difference.
Adam Fisch:But if it goes to zero, you know, the hope is, the expectation is kind of your family's future or your family's lifestyle is not gonna be materially affected because you've still put the majority of your liquidity in a safe allocation, you know, our asset architecture that's gonna grow steadily over time.
Charlie Scharfe:Exactly. And, like, to put it as simply as I can, if you take 2% of your net worth, you can invest it in the riskiest thing you can find. I don't even know what it is. Theoretically, the riskiest investment you can find, and guess what? The most you can lose is 2%.
Adam Fisch:Right.
Charlie Scharfe:So by setting those sizings appropriately, you can really protect yourself in all situations.
Adam Fisch:Yeah. And I think it's important to emphasize that, because I do think that there's a certain skepticism among some members of the rising generation of working with kind of quote unquote their parents' advisers, and there's stats out there that, you know, 80% of them plan to leave their parents' advisers when they inherit the wealth and that kind of thing. And our approach is, you know, I don't think we've ever told a family member of, like, you can't invest in something on your own. You know, if you wanna buy gold, crypto, invest in a friend's company, whatever, like, you can do it.
Adam Fisch:We're not gonna tell you not to. We'll discuss sizing, and we might talk to you about the risks to make sure you understand it. But I don't think in every meeting I've had with a client, I don't think we've ever told someone like, no, you can't because you have to keep this money with us.
Charlie Scharfe:Yeah, exactly. It's all about sizing and kind of what you want to keep safe, and what you want to use either as a hobby or for something that you have a belief in. It's just all about sizing. Like you said, that way, as long as we've controlled the risk level, then you can do whatever you want, really.
Adam Fisch:Yep. And when you think about younger investors and how they approach investing, how much do you think that, you know, let's call it 30 and under have been influenced by the market that they've grown up in? And what I mean by that is, you know, they're in most cases too young to remember the great financial crisis and markets since then have been by and large, rising continuously. It's basically been a fifteen plus year bull market, and they may not remember what a real recession looks like the way that older generations do. How do you think that affects the way that younger generations think about investing?
Charlie Scharfe:I think it does have a big impact, because living through something is different than knowing about something.
Adam Fisch:Right.
Charlie Scharfe:Lived experience versus just knowing that it happened. It's like visiting a country versus reading the travel guide.
Adam Fisch:Right.
Charlie Scharfe:So that, I think, plays a big role, because as you mentioned, public markets have been perpetually going up. Those are volatile, more risky asset classes. When they have gone down, they've bounced back very quickly, so there hasn't been a lot of prolonged pain experienced by investors under 35, say. And even if you go back, because it may be more analogous to the tech bubble in early two thousands you know, the the Nasdaq went down over thirty percent three years in a row.
Adam Fisch:Right.
Charlie Scharfe:So nobody investing now for the last fifteen years has ever experienced anything like that. And a lot of people investing now are very concentrated in high growth tech companies. So, you know, that's a combination that could be dangerous because it people who lived through three years, 30% down each consecutive year, I think that goes into your investment DNA.
Charlie Scharfe:Whereas if you just know that it happened twenty odd years ago, I don't think you internalize that to your decision making as much as much as you try. There's just no way to do it.
Adam Fisch:Yeah. It's very hard to recreate what it would feel like to have your portfolio, you know, lower, essentially lower month over month every year for three years when you've grown up in an environment where downturns last six weeks. It's very hard to imagine what that would feel like. So again, it's not about, you know, it's not about us telling younger investors, don't take risk, but, you know, they may not have lived through experiences the same way that would help them appreciate the value of that balanced downside protected kind of portfolio.
Charlie Scharfe:Right. Right.
Adam Fisch:Like, if you had That's where education is really important. Right? Building trust.
Charlie Scharfe:Yes. That's And where, like you said, even with education, there's no substitute for living through it, I don't think. But if you can at least try to control the risk a little, try to control sizing so that you're a little more diversified, you're not all in, you know, 90% in high growth tech stocks, then you can set yourself up to be a little better protected in the scenarios if they come that are very bad.
Adam Fisch:Right. Well, this is a great conversation. Thanks so much for being here, Charlie.
Charlie Scharfe:Thanks for having me, Adam.
Adam Fisch: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 rate, review, and subscribe so you don't miss an episode. And of course, share it with your family. See you next time.
Adam Fisch: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 listeners should rely in any way on any of this content as investment, tax, legal, or insurance advice.
Adam Fisch:Listeners are encouraged to consult with their individual investment advisor and other financial professionals prior to taking any potential investment actions or making any insurance or tax decisions.
