As a multi-family office, we work a lot with family governance. Family governance is a catch all for helping organize the planning, management and decision-making structure for the family’s business and estate related entities. This includes the appropriate succession, education and involvement planning process for future generations.
Governance is the soft side of the total financial solution that we provide to clients. It takes experience and it takes patience. Lots of patience!
The diagram below represents the three independent and overlapping parts to this process.
The critical difference in the family governance process vs. the corporate governance process in most public companies is the involvement of the family. Yes, I know there is usually a founder in most public companies, but over time their interests usually decline, and nepotism is not tolerated.
With the typical family, nepotism is to be encouraged and we are dealing not just with the business of governing entities, but the past bias and experiences that the family brings with them to the process.
Let’s say Dad encouraged his sons to be very competitive towards each other growing up. Dad has now passed on but the two sons, as part of the management and governance of the family entities, continue to undermine and one up the other due to this learned behavior. This creates dysfunction in the governing process and lengthens the time and effort of the advisor to get something done that moves the family towards its desired goals.
The Key to The Process
We believe the key to the process are strong family vision, mission and value statements that are reinforced across generations by the current family leaders. This strong set of family statements then is the basis for everything the family does going forward.
In the Christian faith, we many times ask ourselves “what would Jesus do?” In the family context everything and every decision that is made should fit within the family vision, mission and values statements. This means how businesses are run, estates are planned, the types of giving that is done and how future generations are educated within the family unit.
This single purpose allows the family to stay agile. Staying agile is the ability to rapidly adjust to change by adapting from an initial stable state. In English, this means the family must be an adaptable unit that uses the family statements to traverse an ever-changing world and family dynamic.
In the diagram above, we see most families tend to use a top down structure in their family communication and governance (left). However, to maintain agility, a better structure might be one where family leaders direct and are involved giving and receiving feedback from those family members involved in teams within the family structure.
Some of these teams may have more formals structures such as the defined management for a family business and others may have a more informal structure, such as that of a family council that involves generations currently not involved in more formal structures.
The key to maintaining an agile family is communications.
Communication and Education
For the family to effectively overcome the “shirtsleeves to shirtsleeves in three generations” curse that tends to affect 70%+ of all families, communications and education are a must. Effective communications can be as simple as a monthly conference call or a bi-annual family meeting.
We believe what we bring to the table is the ability to help direct and facilitate these meetings so that everyone is heard, business is accomplished and there is a framework in place to encourage each successive generation to be a part of the governance process.
Ideally within this process is an environment where younger generations are encouraged and nurtured towards a time where they take the mantle of leadership. We see all too often, however, that the family instead tends to criticize those younger generations for their lack of knowledge or experience without laying out a path for them to gain the very experience they lack. This further creates family conflict and dysfunction, which hurts the family’s ability to stay agile, and thereby, perpetuate its wealth and its mission/vision past the third or fourth generation.
This is an area where a family council can help involve these younger generations while encouraging an ongoing dialogue with Generation one or two elders. I have also seen where Generation three and four have been involved on investment committees or even allocated a part of an annual foundation gift to start to involve them in the family’s business.
Building an effective family governance forum is an evolving process. By definition, family governance entails embracing a broad range of perspectives, multiple generations and people who have other things going on in their lives. It can be difficult to maintain the momentum.
Family members who work in the business and are used to more direct and efficient process can find this process frustrating. The process of building a family business governance system requires patience, perseverance in the short-term. It also required agility, open communications and creativity.
Most families find the long-term result of a stronger family and aligned systems produces a rewarding outcome for both the family and its enterprises. The most successful of these families see their wealth and family ideals perpetuated well past the third generation.
The new year is upon us and it is unlikely 2019 will be anything like 2018. However, each year we do our best Carnac The Magnificent impression and try to forecast the possible winning investment themes for the coming year.
Our track record is a bit fuzzy, just like my memory of the Tonight Show when Johnny Carson was the host, but we still persevere.
Here are our five investment themes for 2019:
Let’s take them one at a time quickly.
Short is the New Long!
No this isn’t some forecast about the latest fashion trend, although that may be more interesting to many of you. In case you didn’t know, short (or shorting) refers to selling (stocks or other securities) in advance of acquiring them, with the aim of making a profit when the price falls.
The simplest example is the investor who borrows 1000 shares of General Electric (GE), he sells the borrowed shares and then hopes to buy them back at a lower price at a time in the future and return the shares to its owner, thereby pocketing the spread.
We believe 2019 will be the year that stock markets finally trend lower with a series of lower highs and lower lows. We may see some kind of rally in the first quarter of 2019 following the fourth quarter sell off, but we believe the trajectory of Federal Reserve interest rate hikes and balance sheet reductions will continue to put a strain on U.S. growth (and consequently world growth) and thereby be reflected in lower equity prices.
Hey, we have not had a recession in over ten years, we are due!
In a recession, stocks tend to trend lower and those who short stocks (as opposed to buy and hold stocks, called being “long”) tend to win.
Cash is King
Cash has been trash for the past ten years. Leverage has been the place to be with historically low interest rates and a slow growth economy.
Now with markets, both stock and then ultimately economic, headed lower, cash will be a much better store of value. This stable store of value will also allow smart investors to cherry pick the deals that will likely be available when markets finally bottom in 2020 or 2021.
Interest rates are still historically low, but a low return on cash still beats a negative return any day!
Gold and Silver Will Challenge Three Year Highs
Gold has been headed higher and silver recently broke above prior trading levels and it appears that precious metal in general want to move up.
Many times precious metals do move up at the beginning of a stock market trend change.
So logically, if we look at the above chart it would make sense that precious metals (gold in the chart) would challenge recent highs at 1370 and maybe move much higher depending on the severity of the economic decline.
Fixed Income is Back!
Interest rates moved higher for three quarters of 2018 and this was a negative for fixed income, but now with the economy expected to cool, we believe rates will continue to moderate or at least chop sideways.
This should be good for fixed income securities as lower interest rates mean rising fixed income prices.
A flight to safety may also increase demand for fixed income securities as cash has to go somewhere once it is removed from the equity markets.
So far in the fourth quarter sell off this has held true, however, rates have not declined as much as I would have expected so this could change as soon as economic growth returns to the system. In English this means we believe rates will decline with the markets, but could start rising again as soon as the predicted Bear Market subsides.
Trend Followers Will Have a Massive Year
It has been a tough ten years for the trend followers who primarily use managed futures. This group outperformed all other manager types in the Great Recession of 2007-2009, however, they have had a rough go of it the past ten years, as you can see below.
We believe this manager group which trades financials, commodities, currencies and more will have a fantastic 2019.
Why? Because we believe there will be a solid trend to the downside and little the government can do to stop it once it get’s rolling.
These guys know how to short and have the models to give them the sell signals to execute them. 2019 could be a very good year for them!
Well there you have it, our top five investment themes for 2019. We hope you and your family have a Happy New Year!