Case Study: Building an investment strategy to better serve multiple generations

The Whitlock family wealth came from the sale of legacy real estate holdings. In the seven years following the initial liquidity event, the wealth was managed by two investment banks. The family’s portfolio was made up of multiple trusts of different sizes, invested mostly in US stocks, ETFs, Treasuries, and municipal bonds. The investments in the children’s trusts mostly paralleled those in the parents’ portfolios—all invested with the goal of wealth preservation. No member of the family was a professional investor; they had little experience in making investment decisions at scale.

CLIENT BRIEF

• Client: Whitlock family
• Source of wealth: Legacy family real estate investments
• Situation: Seeking a portfolio strategy that serves the interests of multiple generations
• CA relationship: Discretionary portfolio management

The mother, Jane, was the family’s financial decision-maker, but her children—having reached their 40s and in the midst of building families of their own—wanted to become more involved in managing the family’s wealth. After investing in a local startup, one of the daughters became intrigued by the opportunity to capitalize on new and emerging innovation to boost the return potential of investments. She wondered if there was a place for this type of investing for the family more broadly, and if the family’s current providers were capable of, or experienced in, private investing for families. A period of market volatility spurred the second generation’s concern further, causing them to wonder if the family’s assets were receiving the sophisticated thinking and hands-on management they needed.

CLIENT NEEDS

The Whitlock family asked Patrick, their estate planning attorney and trusted friend, to help them find a firm that could provide:

• Strategic investment guidance: An objective assessment of the family’s investment approach and its fit to the family’s objectives
• Access to a more sophisticated, broader set of investment ideas: Advice on, and exposure to, more global private and public investment opportunities
• Family wealth experience: An understanding of private clients, and experience in working with multiple generations, especially those who intend to transition decision making
• Personal and trustworthy counsel: A trusted sounding board and partner for both the parents and children, and a direct relationship with the person making investment decisions for their portfolio

Through his own professional advisor network, Patrick was familiar with Cambridge Associates (CA) and our expertise working with family investors. He introduced the Whitlocks to Daniel, an Investment Director at CA.

OUR SOLUTION

After a series of exploratory meetings, Daniel took on the role of lead Investment Director for the Whitlocks’ dedicated CA team. With other members of this team, Daniel conducted a full Family Enterprise Review, which entailed an extensive assessment of the Whitlocks’ family wealth ecosystem, including their assets; investment structures and vehicles; goals and interests; spending and cashflow requirements; time horizons and risk tolerance; family wealth decision-making and governance structure; and operational needs. (See Portfolio Construction: A Blueprint for Private Families for additional insight into how we build portfolios and our family enterprise review process.)

During the enterprise review and conversations with the family, Daniel understood that Jane’s preference for a larger allocation to safer, more conservative, investment choices was rooted in her desire to preserve the family’s wealth for future generations. However, in running several scenarios and spending analyses with the family’s assets, Daniel was able to demonstrate that, for the Whitlocks’ expanding family (including grandchildren) to enjoy such opportunities, the family’s wealth would need to grow significantly more than could reasonably be expected of their existing portfolio approach. While this conservative approach had been seen as the surest way to protect and preserve wealth, the CA team’s thorough explanation and in-depth scenario testing helped reveal that such an approach would likely instead erode wealth over time, especially as the wealth was disbursed across multiple family members.

Through their discussions with Daniel and his team, the Whitlocks learned about opportunities to compound their wealth at a higher rate without significantly increasing their risk profile, while still maintaining enough liquidity and a balance of risk-mitigating assets to weather an extended market downturn. CA recommended a portfolio structure of 75% equities, including new allocations to private assets, and 25% in protection and safety-oriented assets.

In addition, Daniel highlighted for the family how combining their trusts into a pooled family investment vehicle could not only provide cost savings and other efficiencies, but also the scale needed to access institutional-quality investment opportunities to support long-term growth targets. Otherwise, asset levels from individual trusts would have been too small to be attractive to most top-tier private equity and venture managers. The family’s investment committee was then formed to include both generations of family members. As part of this process, Jane appreciated CA’s help in educating the next generation on the full extent of the family’s wealth, which she had been uncertain of how to communicate on her own. She found the enterprise review process useful in clearly and objectively sharing this information, and the next generation’s role in governance of the LLC as the ideal way to engage her children in the responsibilities of significant wealth ownership.

OUTCOME

The parents are happy that their children are taking a more active role in the family’s finances and that the new asset allocation is designed to improve the likelihood that future generations can enjoy the same financial security that the core family members have experienced. The family has enjoyed the opportunity to learn more about active investing in both public and private markets, and the benefits of a hands-on approach to managing their family’s wealth.

Looking ahead, the family is progressing toward its targeted positions in venture capital and private equity investments. On the safety- and protection-oriented side of the portfolio, Daniel has established fixed income and hedge fund positions designed to provide diversification and volatility reduction benefits, especially during times of market dislocation. Outside of transitioning the investment portfolio to CA, the family is becoming more active in its philanthropic ventures, with the next generation expanding their roles in the family’s charitable giving and considering creating a family foundation.

This narrative has been fictionalized to ensure anonymity, but is based on actual client work.