Pictet Report 3 May 2010 English

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issue three | may 2010the family: governance

and investment

Bll eThe roa ahea: geopolitical a macroecoomic prospects, p4

rll NpSome lessos from acial history, p6

L GItegrate wealth maagemet employig all forms of family capital, p9

spn a.snReectios o family life a choosig moey maagers, p15

rlf BnLessos for wealth preservatio from the past ecae, p18

sn P n plThe opportuities withi asset classes, p20

y BnnPictets strategy, p28

m snBehavioural ace a goal-base asset allocatio, p30

Jn BnlGoal-base allocatio i practice, p32

m rPostscript, p34


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Foreword We have great pleasure i itroucig this thir Pictet Report,which focuses o family goverace a ivestmet marketsi the post-crisis era. These themes were iscusse at a two-ay iformal symposium i the Swiss Alps which broughttogether families from arou the worl i late March thisyear. The followig pages summarise a uique iscussioof the particular challeges that face families i portfolioorgaisatio a goverace. They also offer a variety ofperspectives o the global ivestmet eviromet a theimpact of the great creit crisis o a rage of asset classes.

The evets i the markets over the past three yearshave teste the resolve of almost every ivestor, but thetesios ca be more ifcult to resolve i the cotet of afamily. Iformig the iscussios at the symposium was apresetatio that emphasise the importace of the iiviualtalets of family members. These assetstheir capacitiesare

too ofte overlooke, weakeig the ability of a family topreserve wealth through the geeratios. Participats offeretheir ow eperieces of how they iscovere the importaceof such assets i their family portfolio.

The symposium also aalyse the macroecoomicimpact of the crisis a its cosequeces for a rage of assetclasses. The presetatios of the istiguishe speakersa eperts who le the iscussios are summarise i thefollowig pages, alog with the isights of Pictets strategicthikers o the lessos from the past ecae a the Baks

ow ivestmet approach for the post-crisis worl.Fially, the symposium cosiere what ca be leartfrom the relatively ew isciplie of behavioural ace,a how it ca be applie i maagig family portfolios.Of particular iterest was the iea that the eceptioalstresses suffere by ivestors as the crisis ufole wereeasier to hale whe ivestmet strategies combie auerstaig of how humas actually behave, rather thasimply the ratioal moel assume by classical ecoomics.

Pictet & CieMay 2010

Pictet & Cie editorial teamStephen Barber, Olivier Capt and Ninja Struye de SwielandeDesign & editorial consultancyWinkreative | RapporteurJohn Willman | PhotographyBrje Mller


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coNteNts

in anlBll eThe roa ahea: geopolitical amacroecoomic prospects, p4

rll NpSome lessos from acial history, p6

Fl GnnL GItegrate wealth maagemetemployig all forms of family capital, p9

t Fl PnlIvestmet orgaisatio amaagemet withi the family, p11

spn a.snReectios o family life a choosigmoey maagers, p15

inn mkrlf BnLessos for wealth preservatiofrom the past ecae, p18

The opportunities withinasset classes

sn PArt, p20

Kl-eb KgnkReal estate, p21

wll cllnnCommoities, p22

Kn Jn

Agriculture, p23Jn GPrivate equity, p24

hn sHege fus, p25

r ollEquities, p27

Investment conclusions

y BnnPictets strategy, p28

Asset allocation

m snBehavioural ace a goal-baseasset allocatio, p30

Jn BnlGoal-base allocatio i practice, p32

Ppm rCa altruism be compatible withmoer ecoomic systems? p34

sp

Gn rnJn Bnl


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iNtroductory aNaLysis

The road ahead: geopoliticaland macroeconomic prospects

The et ecae will be shape byglobal ivergeces i ecoomics a politics

that will have upreictable cosequeces

BiLL emmottFORMER EdITOR-In-CHIEF

THE ECOnOMIST

It is important to analyse the consequences of the financial crisiswith a sense of humility. There is still a sense of shock, not at the

fact of the financial crisis, but at its magnitude and extentat its fundamentally game-changing nature. Plenty of people predicted

that something was going to happen, but Im not sure theresanyone who can honestly say that they predicted its magnitude.

So, suitably humble, let us look at what is happening now inmajor parts of the world.

I the USA a Europe, there is a battle uerway agaisteatio. With eleveragig i the private sector, publicsector leverage is growig i the form of govermet ebt.We will ow see, however, a perio of public eleveragigami fears of a reactio i the bo markets that coul starta sovereig ebt crisis.

Is there goig to be iatio? I Europe, it is Germaythat will etermie the aswer, because it is the olycoutry that coul leave the euro a ca thus ictate theterms of its survival. The et presiet of the EuropeaCetral Bak et year is likely to be Ael Weber, thepresiet of the Buesbak, a I woul place a betthat there will be o moetary policy relaatio uer aGerma-le Europea Cetral Bak.

A feasible sceario for Europe is eatio for a euro zoeachore by Germay, i which the souther Europeacoutries are force to accept cuts i wages a prices to re-establish competitiveess with Germa uit labour costs.

Util the political cosequeces of that approach becometoo ramatic for Germay to tolerate, we shoul epecteatio to be the rule.

O the other sie of the Atlatic, the Feeral Reserveis less politically iepeet tha the Europea CetralBak, the tolerace of iatio i the Uite States ishigher a US has a more eible ecoomy. If US growthis 2.53.5 per cet or more, if there is the sort of iovatioa corporate restructurig we associate with the US,a if the emographic structure cotiues to be

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reivigorate by immigratio, the US authorities are likelyto allow higher iatio tha their Europea couterparts.

Chinas parallel with 70s JapanI Asia a the emergig markets, iatio is comigthrough quite rapily. Chias respose to the acialcrisis has basically cosiste of a huge boost i creit. Chiais the sort of society a ecoomy that ca absorb booms

a busts i asset markets, but it caot live with ouble-igit iatio for very log a or will the authoritieswat to o so.

I this, a goo aalogy is the Japa of the 1970s, afterBretto Woos came to a e a the coutry facerapi iatio owig to the oil crisis. Japa wet througha sigicat move upmarket a the ha aother 15to 20 years of strog ecoomic growth base arouthe microchip, the compact car, cosumer electroics.Historical parallels are ever perfect but the challegefacig the Chiese authorities is similar: to get back cotrolover iatio through currecy revaluatio. The capitalresources release woul allow Chiese compaies to moveupmarket a to become geuiely global.

So although Chia faces a awkwar ajustmet,I thik there will be some form of substatial currecyreform withi the et couple of years. There will bepolitical a social ifculties, but I woul place my beto it maagig to re-emerge as a stroger coutryjust asJapa i i the latter part of the 1970s to eter its globalheyay of the early 1980s.

Oil and commodities may not be that scarceTurig to oil a commoity prices, oe surprise at thisstage of the acial crisis is that oil is at USd80 a barrel.

After the Lehma shock a the rop i global GdP, itshoul be much lower. The reaso why it has hel up isthat OPEC has bee successful i prouctio restrait asupply cotrol.

Forecastig the price of oil is always agerous,but I thik ema will ot be as strog as previouslyepecte. The high prices of recet years have ecouragesubstitutio, with ivestmet i electric cars, a surgeof govermet moey ito reewable eergy aitesie govermet regulatio of emissios a ofeergy use.

O the supply sie, Iraq is haig out cotracts,

epectig to get its output back from 3 millio barrels aay to 12 millio. There is ew ivestmet i Brazil, a bigepasio i Africa a Chiese ivestmet pourig itocoutries with ew reserves. These supply resposes mayweake the positio of OPEC.

So I oubt whether its right to assume that peak oilprouctio a the ieorable rise of urbaisatio i Chiaa Iia mea that oil a commoities are goig to bescarce for the foreseeable future. I woul place a moest ahumble bet agaist that prospect.

A qualied shift in power towards ChinaFially, geopoliticswhether there is a shift i the balaceof power betwee the USA a Chia. There is uoubtelya shift uerway, but there are three reasos to oubtwhether it is quite so preictable as is ofte suggeste.

First, the USA is i relative eclie, just as it has beesice its peak i terms of the global balace of poweri 1950. It is also o the efesive, with huge public

ebt, a major war i Afghaista, the fall-out from Iraqa cotiuig global resposibilities. But while it isuer great strai it has strog eough characteristicsemographically, politically a psychologically to be therst amog uequals i 2015 or 2020.

Seco, while Chia will icrease its global iuece,it will it harer to keep its hea ow a avoicotroversial situatios as it i urig the 1990s.Ieorably, it will itself i positios where it hasto make choices a ecie how to couct itself imultilateral orgaisatios.

America may surprise on theupside, with Europe and Japan

having deationary problems, andChina and other emerging markets

forced into adjustment

Thir, other coutries will also be icreasig i power acapabilitiesIia, Brazil, may smaller Asia coutriesa eve, perhaps, some souther Africa coutries.A strog Iia a a strog Brazil restrict Chias ability

to become a omiatig power i the 21st cetury. Therewill be rivalries betwee some of the risig powers apolitical tesios, particularly betwee Chia a Iia,a potetially betwee Chia a other coutries.

So my epectatiolae with humilityis that Americamay well surprise o the upsie, with Europe a probably Japa facig severe problems ue to eatio, a Chiaa other emergig markets themselves force ito aajustmet. It will be a worl i which oil a commoitiescaot be epee upo to prouce cotiue price rises,thaks to the workigs of supply a ema. A it willbe a worl i which politics, the iteral politics of

govermet a geopolitical tesios, will have someupreictable cosequeces.

Bill Emmott spent 26 years at The Economist, 13 of them as Eitor-in-Chief,uring which time its circulation more than ouble to over 1 millioncopies a week. He is the author of several well-receive books, incluing

20:21 Vision an most recently,Rivals: How the Power Struggle Between China,India and Japan Will Shape Our Next Decade. He has won several prestigiousawars, incluing the 2009 Geral Loeb Lifetime Achievement Awar ana special awar from the UKs Wicott Fouatio.

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Some lessons fromnancial history

The wiesprea scal crisis will evetually lea toiatio, because emocracies rarely choose eatio,

a govermets will force people to buy their ebt

russeLL NaPierCOnSULTAnT GLOBAL MACRO STRATEGIST

CLSA ASIA-PACIFIC MARKETS

The lesson of financial history is that government will be themost influential force in investment over the next few years.

The way that govermets see markets has chage sicethe start of the acial crisis, as ca be see from thechagig views of the leaers of the British Coservativeparty. I 1989, Margaret Thatcher sai, You cat buck themarket. Toays Coservative party leaer, davi Camero,took a ifferet view i davos last year, whe he sai: Itstime to assert a fuametal truth: that markets are a measto a e, ot a e i themselves. Markets are there toserve our society, ot to suck the joy out of it or trample overits values. So we must shape capitalism to suit the ees ofsociety; ot shape society to suit the ees of capitalism.

History shows that acial crises evolve ito scal

crises a the what Ill call acial suppressio. I plaiEglish, that meas govermets will be forcig privatesector capital where they wat it to go over the et coupleof ecaes, after 20 years i which govermets free upcapital to go where it wate to go.

America cannot borrow its own currency foreverTop of the list will be govermet bos. Foreigowership of US treasuries has ow reache 54 per cetthese are foreigers who are leig to Americas iollars. I the 1970s, whe roughly 20 per cet of US ebtwas owe by foreigers, Charles e Gaulle sai it wasa eorbitat privilege that this coutry a o othercoul borrow i its ow currecy. This is the mostusustaiable thig i ace a it will e i thisbusiess cycle.

The cause is that Chia a arou 70 other coutrieshave refuse to allow their currecies to appreciate. Theyare fuig the US govermet ebt, holig ow iterestrates a subsiisig the borrowig of private busiessesmispricig ebt for a geeratio. This has cause several

bubbles i recet years, but the big oe is the mispricig ofUS govermet ebt.

What will brig this to a e is iatio i Chiaa other emergig markets, because holig owechage rates meas givig up cotrol of moetary policy.Historically this always leas to iatio. At some poit ithis busiess cycle, risig iatio i emergig marketswill force them to revalue their currecies a that will ethe usustaiable mispricig of ebt.

This is ot immiet: iatio i emergig markets isrisig, but ot at etreme levels. They ca quite happily livewith it util it reaches ouble igits. It will be a govermet

ecisio to e it, ot a ecisio by the market. This will berive by bureaucratsAsia cetral bakers.

Governments will force banks to buy their debtThe historical preceets ca be see i the Chart o the left,which shows the ratio of US feeral ebt to gross omesticprouct sice 1792, projecte forwar by the CogressioalBuget Ofce to 2019. Throughout much of Americahistory, the ratio rose for oe reaso: to kill peoplethat is,to ght wars. But i the 1930s, it chage with Keyesia

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120

100

80

60

40

20

0

%

2010 CLSA Asia-Pacific Markets (CLSA)

1790 1805 1820 1835 1850 1865 1880 1895 1910 1925 1940 1955 1970 1985 2000 2015

us public debt/gdp ratio


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ecoomics, which raise the ratio to keep people alive. TheWester worl has promise to pay pesios to people whohave ot save for them a to pay for their healthcare.despite 3 per cet GdP growth, govermets have ruscal ecits year after year.

The last time public ebt reache 100 per cet of GdP,the worl of capitalism a ace was marke by capitalcotrols, price cotrols a creit cotrols. These were

ecessary to sustai such levels of ebt: by the e of theseco worl war, about 80 per cet of the creit provieby the commercial baks was provie to the govermet.Capital cotrols were the most importat factor iforcig bakers to buy public ebt. now, to hoour theircommitmets to their people, govermets will agaihave to force the baks to buy their ebt. That will requirecapital cotrols sice savers will prefer to ivest i the fastergrowig emergig markets tha i their ow govermetebt if they are free to o so.

It will be the bakig system that es up owiglots of these govermet securities. The proportio of USbak total assets that are Treasury a agecy securitiesis at arou 10 per ceta all-time low. To take it back tothe 1993 level woul mea buyig about USd1.5 trillio ofUS govermet ebt. With USd1 trillio of US ebt to beissue, it woul make sese to buy it because short-termiterest rates are very low.

I see o threat to acial markets toay, because baksarou the worl will buy their govermet ebt. So willforeig cetral baks i orer to hol their curreciesow as wester ivestmet ows i. As a result, the yielo treasuries is likely to rise slowly, a other acialmarkets ca copeparticularly the equity market.

Remember, equities are not anasset: they are that ne sliver of hope

between assets and liabilities

Democracies opt for ination, not deationThe big ecisio for people maagig moey ow iswhether the future is iatio or eatio. Fiacialhistory tells us that it will be iatio, because emocraciesrarely opt for eatio. Hog Kog was able to hol its peg

to the ollar urig its crisis by eatio, because it is ota emocracy. I similar circumstaces, Argetia ha toevalue its currecy because as a emocracy it coul otcope with eatio. The attempt ow to force eatioo Portugal, Irela, Greece a Spai coul estroya emocracy i Europe.

There is potetial for iatio i the level of bakreserves which have reache USd1.2 trillio i the US. Ifthe baks start to use these reserves to icrease creit, wewill see very high levels of iatio. That will be goo for

equitiesi every post-war situatio where iatio hasrise, that has bee goo for equities util it reaches arou4 per cet. Above that level, cetral baks react a try torei i iatio through higher short-term iterest rateswhich meas lower growth.

Turig to the equity market, the cyclically ajusteprice-earigs ratio i the USthe measure preferre byRobert Shiller a Warre Buffetthas see etreme swigssice 1861, from below 10 to above 40 times over as littleas ie years. My research ito what makes equities cheapo the four occasios I have stuie1921, 1932, 1974,1982shows that it is eatiowhe assets rop faster

tha liabilities. As log as eatio is hel off, equities willhol upwhich is why they have rise over the past year asgovermets acte to avoi eatio.

I the log ru, however, I believe there will be asovereig ebt crisis i the West which coul lea to risigiterest rates that woul threate eatio. I previousbubbles, it was possible to use moetary policy a thescal policy to avoi eatio. But with high govermetebt to GdP levels, there is o leeway to repeat this strategyif govermet bo yiels have to rise.

I believe the govermet respose will be to closemarkets through capital cotrols a force people to buy

govermet ebtfor eample by raisig bak capitalaequacy ratios. The game has chage, a it is politicsthat will be the most importat factor i the future.

Russell napier is a cosultat global macro strategist with CLSA Asia-PacicMarkets, the inepenent brokerage an investment group base in HongKong. He was Asian equity analyst for CLSA between 1995 an 1999, anwas ranke number one for Asian equity strategy in major polls of moneymaagers i three of those years. His rst book, Anatomy of a BearLessons fromWall Streets Four Great Bottomswas name Investment Rea of the Year bythe Fiacial Times i 2006.

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FamiLy GoverNaNce

Integratedwealth

managementemploying

all formsof family

capitalThe capacities of family

members are valuable assets

whose recogitio ca setivestmet goals thathelp preserve wealth

through the geeratios

Lisa GrayFOUndER And MAnAGInG MEMBER

GRAYMATTER STRATEGIES LLC

When thinking about managing familywealth over the long term, there are manytypes of wealth other than nancial andmaterial assets. The most important of theseare the capacities of family members, whichare often neglected in planning wealthmanagement strategies.

The eterprise that creates wealthbegis with a iea, which sprigsfrom the itellectual capacities of thecreator. The creator also has socialcapacitiesthe etwork of coectiosto raise acig a the abilityto get the busiess off the grou.Fially, there are the huma capacities,the persoal abilities a power toimplemet the iea. Fiacial amaterial assets are a result of muchmore importat types of wealththe itellectual, social a humacapacities of iiviuals.

Sometimes these capacities arereferre to as a form of capital, but Iprefer the wor capacities, becausecapacities are limitless. We have o ieahow far these capacities ca go a wehave o iea eactly what types of suchassets we have i our family uless we out what they are. A stuy by TheWilliams Group of 3,250 families over20 years up to 2003 put the failure rateof the itergeeratioal trasfer of

wealth at 70 per cet. discussios withcolleagues suggests that the gureis closer to 85-95 per cet. I otherwors, fewer tha a thir of familiessuccee i trasferrig their wealthow through the geeratios. So howca we use these capacities to improvethe success rate?

John and Marge wantto step down and skievery slope they have

not so far visited

First, I suggest that these types ofwealth shoul be treate as aotherpart of the portfolio. They are assetsof the family, but they ofte gourecogise a are ot factore

ito wealth maagemet plaig.The portfolio of the family might bemuch larger tha its members arecurretly aware.

Seco, while traitioal acefor istitutios sets oe ivestmetgoal, with behavioural ace there aremultiple goals for the familya everyfamily member has multiple goals fortheir lives. We have to uersta thosegoals, which may iffer betwee thegeeratios. I maagig wealth, it iseasy to assig a role to family membersespecially chilrewhich may ot beappropriate for them. It may ot reect

their iate capacities which coul helpregeerate the family wealth.

So a family goverace system mustbegi by ietifyig the ees acapacities of the family members athe settig appropriate goals to plugito the wealth maagemet plaigprocess. This ca be illustrate bylookig at a case stuy which is otreective of real life, but which hastwo possible outcomes. The outcomesare both very etreme a real life is

somewhere i the mile, but theyillustrate the power of this approach.I woul therefore like to itrouce

you to the Skee family, which ows aUSd1.2 billio busiess. The parets, Joh a Marge, ow a portfolio ofivestmets, a wat to step owi ve years to ski every slope i theworl they have ot so far visite.They ite to pass the busiess o to

authentic family assets


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their so Mike, who has a high prolei the compayot least through hisattractive ace Zia, who is iviteto all the best parties, where he meetspeople a brigs i busiess. Theythik he has the atural acume totake o the busiess.

Their oler aughter Susamaages the Mile Easter regiowith her husbavery successfully.They hope to show that they are worthyto ru the busiess because they havethe talet a the passio for it. Themuch youger aughter Aa is a

afterthought who spes a lot of timejet-settig arou the worl to see herfries a appears i the meia forifferet reasos tha Mike. Almosta member of a ifferet geeratio toher sibligs, she is see by the familyas a black sheep.

What might have happenedif they had talked to eachother and come up witha different set of goals?

So the Skees, ot havig talke to thechilre a assumig they uer-sta where the real talets are, haveset the goal of passig the busiess oto Mike. They see Susa a her hus-ba as a support team who will still

maage their regiothey ackow-lege they have oe a goo job, butot much has bee mae of it. Theyo ot kow what to o about Aa,apart from tryig to protect the wealthfrom her epreatios. A they areucertai about what to o about Ziasrequest for shares i the compay as a

marriage gift.What they have ot fou out arethe goals of the family members. Aareally wats to be a microbiologist aa philathropist. Zia, who kows herbeauty will ot last, aske for sharesi the compay to ace a esigcompay. Mike loves beig i thespotlight but oes ot feel up to thetask of ruig the compay; he isot about to cofess this to his father,however, sice he thiks he woul loseeverythigicluig Zia.

I the absece of commuicatio,the Skees have the wrog set of goals.So Susa a her husba becomefrustrate a break away to form arival compay which takes marketshare. The shares start to fall, aMike proves totally iept at ruigthe compay. Aa becomes cliicallyepresse, thikig o-oe cares abouther. Joh a Marge have to liquiatetheir ivestmets to put more moeyito the compay to save it. The two

of them ivorce, Joh takes his shareto start aother compay which failsmiserably a he becomes homeless.

What might have happee ifthey ha talke to each other acome up with a ifferet set of goals?They woul have leare of Aasambitios i microbiology. Talkigto Mike might have fou out that heloves the compay, but oes ot havethe talet to ru it. The a talk withSusa a her husba woul have

show how much they care for thebusiess a ha the talet to ru it.So there coul have bee ifferet

goals that recogise the capacitiesof each family member. Suppose thatistea of haig the busiess toMike, it is take over by Susa aher husba who have the capacitiesto ru it. Mike is pai a allowacea becomes compay spokesperso,

where he is i his elemet. Aagoes to a goo school a gets herPhd i microbiology. Zias ambitiosare recogise.

now Susa a her husbareesig the prouct successfully,aig to the success of the compay.Aa teams up with Zia who has

become a fashio esiger a theyevelop eco-friely ski apparel whichcreates a ew source of icome for thecompay. The family wealth growsbecause the Skees have recogise theassets i their portfoliothe capacitiesof the family members.

The family can fulll itsdream through educating

family members and

helping them contributeto the family wealth

Eve if the outcome is ot so perfect,the family ca still full its reamsthrough the richess of eperiecei eucatig family members ahelpig them to cotribute to thefamily wealth. A Joh a Margeare able to step ow a achievetheir goal of skiig all the slopes

arou the worl.The lessos for family goverace

are that the perspectives of ifferetgeeratios shape the way memberssee a treat each other. These familyyamics must i tur shape thegoverace structure: the goals mustbe ietie so that appropriateecisios ca be take. These goals itur will shape asset allocatio, so thatifferet risk proles ca be chose toachieve them.

Lisa Gray foune Graymatter Strategies LLC in2002, after 21 years in the wealth managementinustry. She consults with US-base aninternational families an their avisers on thedirect iuece of geeratioal perspectives, familydyamics ad goverace o wealth maagemetdecisios. She has writte several books, icludigThe New Family Ofce: Innovative Strategies forConsulting to the Afuent, and Generational Wealth Management: A Guide for Fostering Global FamilyWealth. She is a regular contributor to theJournalof Wealth Management.


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The Family Pael

Investmentorganisation

andmanagementwithin the

familyFamilies iscuss

goverace issuesa the challeges

face i geeratioal

successio

moderators

JeaN BruNeLMAnAGInG PRInCIPAL

BRUnEL ASSOCIATES

Lisa GrayFOUndER And MAnAGInG MEMBER

GRAYMATTER STRATEGIES LLC

Questions of family governance are criticalto the enhancement of wealth and itstransmission through the generations. Thissection draws on the wisdom and experienceof a panel of families to analyse thechallenges of organisation and managementwithin a family. Their real-life examplessuggest solutions to the problems that

families wrestle with in creating nancialmanagement structures that reect theneeds of all their family members.

Amog the issues face by mayfamilies is the right way to orgaisethe ivestmet process i ways thatrecocile the views of family members.As Jea Bruel, oe of the moerators,sai, there is much to lear about howto avoi cogitive errors a emotioalresposes from behavioural ace,which is iscusse i a later cotri-butio from Professor Meir Statma.Structures are eee that reuce the

risk of makig the ba ecisios thatca estroy family wealth.

There are also the huma relatio-ships familiar to every family arouthe worl, which become morecomple as families epa throughthe geeratios. Lisa Gray, theother moerator, poite out i the

previous cotributio the importaceof recogisig the talets a capaci-ties that are part of a familys autheticwealth. Commuicatio a gover-ace structures are essetial i settigivestmet goals, makig ivestmetecisios a workig with avisers.

The pages that follow summarisethe replies give by the pael membersto the issues raise by the participats.While some isagreemets came tolight, there was remarkable uaimityo some of the questios tablefor iscussio.


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Who shoul joi the family

I a era of greater equality betweethe sees, shoul spouses becomefully participatig members of thefamily i maagig its wealth?Shoul truste employees who haveperforme eceptioally be rewarewith membership?

Family goverace structuresofte limit participatio to irectesceats of the foueri somecases oly to those bor i welock.While this rule was questioe i thepael iscussio, ivolvig spouses wassee as a potetially agerous move.

We brought spouses oto our boara ito operatig compaies, sai oeparticipat. But their ivolvemet iecisios le to coicts with members

of the family a hurt relatioships.It was ot worth the pai.

We brought spouseson board, but that

led to conicts withfamily members

Lisa Gray, oe of the moerators, sai

she ha see eamples of families thatha brought i spouses a mae itwork. However, aother participatsai that where spouses ha epertise,the better optio was to ivolve themi committees below boar level.

noe of the families presetha offere membership to trusteemployees, though some sai theygave maagers prot shares a evestock optios i operatig compaies.Ivestmet maagers coul be give

remueratio structures similar to thecarrie iterest icetives i privateequity, where a 2 per cet maagemetfee a 20 per cet prot share iscommoplace.

You ca eve pay morethree afty, sai oe participat whose familystill operate several compaies. Ithe e, this is very similar to a stockoptio pla.

As oe of the two moerators of theFamily Pael iscussio, Lisa Grayecourage participats to talk abouthow they ha ietie assets amogthe members of their families. Oeseco-geeratio family memberspoke of his eperiece with hisaughter, a how she was owhelpig maage the family wealth.

Had I thought 23 yearsago that our daughtercould do this, I would

have said No way

She was ot oig well at high school,a I was cocere that she it likemathematics. We iscusse what shewate to o at college, a she saishe wate to o art, which she love.

Ulockig the familys assets

Our philosophy was that we wat-e our kis to o the best at whateverthey wate to be, so she grauatefrom art college. She followe that upwith a Masters, but whe that wasishe, she reture home with oapparet aim.

We sai she eee ow to takeresposibility for her estiy, awithi 48 hours it ha clicke. Sheapproache a gallery for a itership,a she is workig there ow.

It suely occurre to me thatshe coul help with art ivestmets. Iopee a fu for her a aske her tomaage it. If she is successful, she willbe able to o more.

Ha I thought 23 years ago that

our aughter woul have bee able too this for us, I have sai no way.My wife a I cosier it a great giftthat she is able to pursue her iterestsa help the family.


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Of all the issues raise with the FamilyPael, the oe that omiate much ofthe iscussio was whe a how toivolve the youger members. Therewere two broa groups of aswersthough they were ot mutuallyeclusive a both focuse o teachigchilre about the resposibilitiesthey face.

I have cousins overthat age that I wouldnt

give a credit card to

The rstapparetly the majorityviewwas that while preparatio coulbegi earlier, the right time to begito take o resposibilities was i thechils tweties. We tol our aughtershe ha some moey a year before shegrauate, sai oe seco-geeratiofamily member. But we ae that shewoul ot have access to it util she

ha show she coul be resposible imaagig it.Two of the pael members ha

establishe iepeet careers ibakig before returig to ivolve-met with their families.

Oe participat sai that 26 wasa goo age for a chil to become aault beeciary a take o geuieresposibility. But she ae that this

How to ivolve the chilre

Keepig the family together

Several questios i the Family Paeliscussio cetre o what to o aboutfamily members who wate to cash i

their share of the busiess.The geeral view was that they

shoul be allowe to o sothoughoe Europea family member poiteout that cashig i coul be ifcultif the wealth was still tie up i thefamily busiess. However, a LatiAmerica participat sai that hisgrafather ha foresee the ee forfamily liquiity a ha create afu that coul also be use to epathe busiess.

Aother pael member sai thatit was importat to cotiue to havea relatioship with such iiviuals.If the busiess oes well, they willbe upset a it will create tesios ithe family. Some i my family whoha take their shares a ivesteit i baly i 2008. It has beeimportat to keep them ivolve withthe fouatio.

shoul follow a perio of preparatioto give the chil the tools to halethe resposibility, with traiig,practical eperiece a ivolvemeti philathropy.

A thir-geeratio family memberi his thirties still to have chilreset a very strict timetable for thesuccessio. Ieally they shoul becomebeeciaries at 25, sit o a boar at 30,take more roles at 35 a assume fullresposibility by 40.

But aother pael memberquestioe whether some family

members were reay for resposibilityeve at 40. I have cousis over that agethat I woult give a creit car to,he commete, to laughter.

The alterative view, perhaps morerelevat whe there is still a familybusiess to ru, was to begi as earlyas possible. As oe thir-geeratiofamily member put it, My fatherstarte takig me ito the ofce whe Iwas very youg, just to listeperhapsbecause he ha bee throw i at the

eep e by his ow father.He cocee, however, that thechilre coul ot be throw iwithout ay preparatio. They must betaught to uersta the importaceof workig har a carryig out theirsocial resposibilities... Brig them iearly, but o ot give them too muchresposibility too early.

Maagig the family

As families grow through thegeeratios, maagig relatioshipsbetwee members a brachesbecomes importat. Several paelmembers sai that robust goveracearragemets were eee to regulatethese relatioships.

Oe Lati America participatsai his family fouatio, owivolvig the thir geeratio, ha17 shareholers. While his father aa ucle ha ru its affairs sice hisgrafather ie, each brach of thefamily was persoally represete othe boar.

We have a very strog familyassembly two or three times a year sothat people ca be iforme a their

frustratios give attetio. A smallergroup, the family coucil, represetstheir thoughts to the boar.


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May of the families woere howmuch they shoul be ivolve ithe eterprise. The pael iscussioshowe a clear cosesus from familiesi favour of appoitig professioalmaagers a lettig them maage.

The family shoul make thestrategic ecisios a leave the ay-to-ay maagemet to the professioals,sai oe pael member.

Aother sai the mai job of theboar was to hire, support a re thechief eecutive, who shoul work with

Workig with trustees

Trusts ofte provide a effective struc-ture for maagig family wealth, butmay families struggle with the idea ofhadig over decisio-makig toidepedet trustees. Several familiesasked pael members questios abouthow it worked i practice.

There is always a ager that thetrustees become a self-perpetuatigoligarchy, sai oe seco-geeratiofamily represetative. The familyshoul at least be able to re them.

Aother pael member sai hisfamily coul ot appoit trustees butcoul re them. Its like a loae gu,he ae. You have oe, but the iea isot to use it.

Its like a loaded gun,you have one, but the idea

is not to use it

Trust ees raw up i aearlier geeratio also ee to bereviewe as circumstaces chage orew evelopmets emerge. Reraft-ig the trust ees is elaborate, saioe paellist. I practice what happes

is the leaig family members have aiscussio with the trustees.

A very high level of trust is eeeto prouce goo co-operatio, sheae. The formal ecisio has to betake by the trustees.

Maagig the busiess

a clearly ee maate. She ae:The chief eecutive woul be wise toliste to the boar.

A thir family member stressethe ee to keep the family fromiterferig with ivestmets ecisios.Whe our fu fell 36 per cet i2008, the family freake out a mostof the portfolio was liquiate. Wehat built the appropriate structuresa give them the right iformatioto uersta the strategy.

Family membersi the busiess

What shoul be the role of family

members i the busiess? directig,but ot maagig, was the share viewurig the Family Pael iscussio.

Our family always wats to the best maagemet, sai oemember. We felt we lose greatmaagers if they ha to competeagaist a shareholer. But you ca stillsit o the boar a be ivolve i aoperatig compay.


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Reectionson family

life andchoosing

moneymanagers

Blackstoes co-fouershares isights from a

successful career i busiess

stePheN a.schwarzmaNCHAIRMAn And CEO

THE BLACKSTOnE GROUP

Being a manager is different. Managersare made, not born. It is an experience-based job, involving complex systemscalled human beings. They dont always dorational things and something that shouldtake a week can take a year and a half.

Whe you are youg a eperiece,

you thik you thik you ca just tellpeople what to o. But you have tocoa them, maipulate them a givethem icetivesyoure playig chesswith all these people. Makig peopleo what you wat them to o whilebelievig it is their iea is a artasmay families have leart.

Choosig the right people i moeymaagemet is really importat. Italk to them about aythig they areitereste i to hear how their miswork. do they oversell? Are they self-coet? How o they eal withucertaity? do they respo to achallege? Are they out of cotrol?How much will they press agaist thelimits of what is permissible?

Ive always wanted tobe successful. I remember

looking at my littlesuburban lawn as

a child and thinking,I dont want to be here

I oly work with the best peoplethe 9.5 to 10s. People who are 8s areserviceable, a people below that areuseless. Its like a goo marriage: hagi there for the right perso. I evercompromise. deep i your heart, youkow whe youre pickig the wrog

perso, but you thik you ca make itwork. But over time, the aw you rstsee will evetually ail you.

It is importat to uerstawhe chage is comig. Every so ofte,you observe somethig that makes osese. Look arou a see if theresaother piece of ata that oest makesese. Puttig the two together helpsi seeig whe cycles are chagig.

Most people o the wrog thigthey buy at the top a sell at thebottom. This is because they wat tobe psychologically comfortable, aivest whe prices are risig. Oe wayyou kow youre at the top of a cycle isthat all your stupi fries are makiga lot of moey.

Ive always wate to be successful.I remember as a chil lookig at mylittle suburba law i Philaelphiaa thikig: I ot wat to be here.I wat to be somewhere where I careally o somethig.

Whe I set the rm up, I gavemy two chilre a percetage ofmy iterest. But I ever tol them:I wate them to thik they wereice mile-class people. Whe myaughter grauate from HarvarBusiess School at 25, I took her tothe stuet catee a tol her whatshe ha. But I aske her ot to tellher youger brother who was still aisagreeable teeager.

I aske him about his plas, sicehe was ot oig too well at school. AsI was 46 a hopig to live aother 40years, he woul be 56 whe he iheritefrom me. How woul he live for 40 years o what he was able to o? Youmust have a secret pla, I tol him.

He it have oe, he replie,

but sai that I woult let him starve.I sai the ifferece betwee otstarvig a a quality life was huge.He evetually wet to duke LawSchool a got a job at a leaig lawrma I tol him about his iherit-ace at 25 also.

now we have plaig sessioswith my brother who is a moeymaager. A it is importat toiscuss with your chilre how to usewealth to make a impact o peoples

livesto lear how to get pleasure fromcharitable activity.

Stephen A.Schwarzman is Chairman an ChiefExecutive Ofcer of The Blackstone Group,which he co-foune in 1985. He began hiscareer at Lehman Brothers, where he was electeManaging director in 1978 at the age of 31,servig as Chairma of its Mergers & AcquisitiosCommittee in 1983 an 1984. Mr Schwarzmanhols a BA from Yale Uiversity a a MBA fromHarvar Busiess School.


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A JP Morgan study based on the Forbes listof the 400 richest Americans published in1982 found that by 2004 only 15 per centof the people were still on the list. Now,being dropped off the Forbes 400 list doesnot exactly condemn a family to a life of abject poverty, given that the lower limitof the Forbes 400 list in 2009 was USD950million. Nevertheless, the question of whether the wealth of a family will lastbeyond a generation, or even several

generations, is one of critical interest.

Oe reaso why 85 per cet of thosefamilies were o loger i the list was

ot that they were overtake by thosejust behi them, but that the periofrom 1982 to 2004 was eceptioal

iNvestmeNt marKets

Lessons for wealth preservationfrom the past decade

The best way to preserve wealth is to create it, but the acialcrisis has show how har that is without some sort of ege

roLF BaNzCHIEF InVESTMEnT ARCHITECT

PICTET ASSET MAnAGEMEnT

we ca make you richivestmet i abroaly iversie portfolio of a-cial assets caot geerate wealth. Eveif you outperform the market by a fewper cet, the value ae ist substa-tial. Wealth creatio has to be baseo some ki of a egethe abilityto geerate abormal returs, retursthat are higher tha those available ithe capital markets.

For a family wantingto preserve wealth, it is

a good idea to remain inwealth creation

Those abormal returs ca come froma family busiess with itellectualproperty rights, or artistic skills, oreve the outrageous luck of wiigthe lottery. They ca come frometraoriary crimial activity afrom privilege, such as a moopolycoferre by a moarch or leaer.

Wealth i itself is also a ege, if itprovies access to opportuities otavailable to other ivestors a allowsfamilies with log time horizos to bepatiet ivestors. Ege will geerallybe limite to a certai area of activity,so it will require a certai amout ofcocetratio: iversicatio is aamissio of isufciet ege thatecessitates spreaig risk.

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i terms of wealth creatio. It was aperio whe globalisatio allowethose etrepreeurs who ha trulyiovative services or goos o offer togeerate amazig amouts of wealth.At the same time, the rearragemetof certai socialist ecoomies alsoprovie the basis for great wealthcreatio. So the eemy of wealthpreservatio is wealth creatio.

All families need an edgeFor a family watig to preservewealth, therefore, it is a goo iea toremai i wealth creatio. A espite

some of the avertisemets that cer-tai private baks put outthe sugges-tio that if you give me your moey


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To a value beyo what is availablei the market requires some ki of askill, some ki of a avatage. It cabe temptig to sell a asset that hasgive a family ege, but etrepreeurswho sell are ofte isappoite withthe returs o their wealth they eari the markets. If a family has a ege,

it will be easier to preserve their wealthif they retai the strategic asset. But ifthe strategic asset has goe, how cathe value of a portfolio of acialassets be preserve?

Its expensive to live extremely wellThe preservatio of wealth requiresthe geeratio of a real returaftercosts, after withrawals, after tathat allows the ower to maitaipurchasig power. But the iatiorate that is relevat i measurig realreturs is ot the cosumer priceie, because the icrease i pricesof the goos a services cosumeby wealthy families is much greatertha that of commoities a thebasic thigs i life. The thigs thatare most esire are i ite supply, yet ema is risig because of theicreasig wealth i the worl. As theCost Of Livig Etremely Well Ie,measure by Forbes sice 1976, shows,the iatio rate for such families

is about 3 per cet higher tha CPI(see Chart above).

The if there are withrawals,whether for cosumptio or phila-thropy, the retur has to be evehigher to preserve wealth. If 4 percet of the wealth is withraw each year a there are 1 per cet frictiocosts such as taes, that as aother 5percetage poits to the retur eeeto maitai wealth. now CPI+8 percet is ot available from moey

market fus. Preservig wealthrequires takig some risk.Moreover, while families have

the avatage of beig log-termivestors who ca ivest i relativelyrisky portfolios, pursuit of CPI+8 percet may ot be sustaiable. Supposeyou ivest USd100 i a 50/50 portfolioof US equities a e icome stocksthat is suppose to yiel 6 per cet a

year with a volatility of 9 per cet, but you caot sta the iea of losigmore tha 10 per cet. If you are a log-term ivestor, you have a less tha1 per cet chace of fallig below thatbarrier after te years. But you have aalmost 20 per cet chace that sometime over the et three years the 10per cet loss barrier will be hit. A ifyou hit the barrier a you sell, it tursout that i 95 per cet of cases yourportfolio woul have recovere by thee of the te years.

The investment horizonfor families may be

very long, but it is hardto avoid looking atshort-term returns

Finding a survivable strategyThe ivestmet horizo for familiesmay be very log, but it is har to avoilookig at the retursespecially i

years like 2008 whe markets are iturmoil. It ca be particularly ifcultto hol to log-term strategies isuch times for families that are veryetee or where wealth is uevelyistribute. Oe of the lessos of 2008has bee that some strategies thatlooke goo i bull markets ture outto be usustaiable i perios of stress.So without the aitioal retur

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erive from some ki of ege, itis very ifcult to preserve wealthover the very log term. What ca beoe, the, to reuce or elimiate theerosio? Oe is to avoi the eightivestmet threats ietie i a JP Morga stuy: cocetratio ofwealth, speig, leverage, ta, familyyamics, liabilities such as lawsuits,currecy uctuatios a govermetactio. Aother is to create a gover-ace structure that preserves wealth,rather tha issipatig it.

I the e, however, familiesmust choose a survivable strategy

a oly they ca ecie what sort ofstrategy they ca stick with throughthick a thi. directioal bets oequities, bos or balace portfoliosthat looke as if they woul prouceouble-igit returs te years ago oot look so attractive with hisight.Whether you ca live with suchoutcomes a with the rawowsassociate with more aggressivestrategies is for you to ecie.

Oe way to reuce reliace o such

irectioal bets is to have a ege,whether it is a strategic asset or accessto successful ivestmets such asprivate equity, hege fus or property.But, i orer to make a success of thoseivestmets, you still ee the egecoferre by access to geuie skill.

700

600

500

400

300

200

100 1976 1980 1985 1990 1995 2000 2005

Cost Of Living Extremely Well Index (CLEWI)

Overall consumer price index (CPI)

1976=100

Source: Forbes

cost of living extremely well index


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The art market has gone through anextraordinary transformation over thelast few years. Five to ten years ago, itwas mainly Western European and North

American collectors buying art by Western European and North American artists.Today you have artists from all over theworld whose works are also bought bycollectors from all over the world.

It has become so much easier to geta overview of the global art marketthrough the remarkable techologicaliovatios of the past twety years.All the iformatio you ee to value awork of art is accessible o the iteret,where you ca the prices realiseo works by artists goig back to 1850.

Theopportunities

within assetclasses

Iustry specialistsreview ivestmet

opportuities after theacial crisis.

The combiatio of techologicalavace a the worlwie iterest icollectig has create a much strogera more trasparet market.

Most Ol Masters, Impressioistsa Moer Art are lost to the market.The best collectios ca ow be maei Cotemporary Art.

The iformatio that is availableshows that the market has always rise.There are perios of reajustmet,such as happee whe Japaesebuyers, who ha omiate auctiosof Impressioists a Moer Arti the late 1980s, stoppe buyig i Jue 1990. The sol rate at the maiauctios i Loo a new Yorksuely fell from 85-90 per cet to

Art

Coece is returig i the iteratioal artmarket after sales agge urig the acial crisis

simoN de PuryCHAIRMAn And CHIEF AUCTIOnEER

PHILLIPS dE PURY & COMPAnY

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arou 50 per cet. The umber ofworks beig offere for sale roppesharply because owers i ot feelthat it was a goo time to sell.

Somethig similar happeei October 2008. The art market atrst seeme totally immue to thecreit cruch, but after the collapse of

Lehma Brothers, the sol percetagefell sharply agai a far fewer workscame o to the market. But this lastejust oe year, a whe Ay Warhols 200 One Dollar Billswas auctioe bySothebys i new York i novem-ber 2009, it was sol for USd43.8milliocompare with the estimate ofUSd8-12 millio.

I this years sales, volumeshave bee risig sharply. The mostotable sale i 2010 has bee AlbertoGiacomettis sculpture, LHomme quimarche, which sol i Loo forUSd104 millio i February. This saleestablishe a ew worl recor for awork of art sol at auctioa sig thatcoece is oce agai returig tothe market.

Factors that enhance the valueof a work of art

Qualitya subjective jugemet; every artisthas goo ays a ba ays. The better thequality, the higher the value.

Raritya work shoul be either too rare,or too commo. If too rare, a marketcaot evelop.

Conservationthe work must be i goostate. Ask for a coitio report o itsphysical state.

Internationally collecte artists will beworth more tha those whose followigis locally base.

Marketingis importat to reach everypotetial cliet.

Taste is evolvingthere are great shifts itaste, which ca affect the value of worksof art i the future.

Local lawssome coutries have laws thatrestrict eports of works of art, whichsharply imiishes their value.

Sizesomethig which is too large or toobulky has a limite marketot everyoehas a large place to isplay them.

The auctioneerifferet auctioeerswill attract ifferet prices.

There are some fundamental truths aboutreal estate that are easy to overlook whenassessing investment opportunities.

The rst truth is that real estate priceskept pace with gol prices over mayceturies, eve though the supply ofgolulike lawas risig. But ithe past 150 years the price of lai cities has rise much faster. Weaalyse the sale prices of la icities like Muich, Zurich a Parisover the past 150 years a fou thatreal estate prices are ow much higheri gol terms. While the amout ofgol has rise arou four times overthat perio, la prices have goe upte times.

House prices i the US a UKhave rise much faster tha populatiogrowth. The US populatio has rise by1.4 per cet a year over recet ecaes,

but prices have rise four times faster.The UK populatio has rise muchless, but house prices are almost fourtimes higher tha i 1995 a eighttimes those i 1975. While the bubblehas burst, there is a worlwie ightto quality by people with eoughliquiity to buy prime properties.

There are isavatages to owigreal estate. It is a illiqui asset, espe-cially whe the market turs. However,this ca be a avatage if it is harer

to sell at the wrog poit i the cycle.May of Europes wealthiest familieshave owe la for geeratios.

You are also a prisoer of local laws.Govermets treat most capital wellthese ays to attract foreig ivestors,but whe they ee to raise moey, theytur to real estate taes. There are alsoregulatios such as ret cotrols, labourlaws, re coesteats outumber

lalors a get regulatory icetivesfrom the legislators.

Real estate ees goo ma-agemetwithout it, yiels willfall. A trasactio costs are aissue: buyig or sellig real estateaywhere i the worl costs about6 per cet o average.

The real estate cycle lasts about 14 years o average, a has oe so forceturies. It is harly ever a V-shaperecoverythe ow-cycle a bottomlast arou eight years before theupswig. People o ot wat to sellat the bottom, a trasactio costsmake sales slower. Bottom-feeers areofte too early: the trick is to buy a fewyears ito the bottom a sell three orfour years after the recovery begis.

Real estate is oe of the leastcorrelate assets globally, largelybecause the market is rive by local

setimet a local law. I the lastcycle, however, we saw the highestcorrelatios ever, with prices rive bythe securitisatio esks i Loo anew Yorkit was rive by liquiityrather tha fuametal ema.

The ve commandments of real estate

There are times ot to buy aythig; there

are times to sell (almost) everythig.A rui i the cetre of tow is always better

tha a palace i the coutrysie.

Walk the eighbourhoobecause you willot be able to chage it.

Always ask yourself this questio: woulI like to work or live i this builig myself?

A ot forget: trust your gut istict.If you i ot like a property at rst sightthere was a reaso for it.

Real estate

Real estate prices have rise strogly i recet ecaes,but ivestors ee to watch for the pitfalls

KarL-erBo KaGeNecKFOUndER

JARGOnnAnT PARTnERS

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billio of ivestmet after a periowhe Chiese growth emae ewsupplies. It also isrupte the sup-ply chai, with small suppliers uableto get creitleaig to a lot ofestockig. That estockig measthat stocks must ow be repleishe,settig the scee for a perio of risigcommoity prices.

I expect to see bi-ation,with raw materials risingbut no wage price spiral

As for oil, supply is more or less cappeat 85 millio barrels a ay. Icremetalsupply is showig very little eticrease, with low growth i o-OPEC supply a Saui cacellatio

of large oil projects. Whe oil reacheUSd145 a barrel, biofuels were able

Commoities

Slow growth i supplies a cotiuigicreases i ema make har assets attractiveivestmets i a perio of ecoomic ucertaity

wiLLiam caLLaNaN

CHIEF InVESTMEnT OFFICERFORTRESS SECURITIES

There has been a shift in the commoditycycle in recent years, which means thatcommodities begin to rise in price at lowerrates of global economic growth than in

previous cycles. Between 2002 and 2008, global GDP growth of 2 per cent triggeredcommodity price ination, compared with a

4 per cent threshold between 1980 and 2001.

This pheomeo reects severalfactors. Oe is the growigimportace of Chia as a cosumerof commoitiesits itesity ofcommoities use is three times thatof evelope coutries. Meawhile,supply is becomig more ifcult,with ew sources fou i smallereposits that are geologically morecomplea ofte i coutries wherethey are state-cotrolle.

The acial crisis icrease the

supply issues by leaig to the cacel-latio a elay of USd250-USd300

k

90

80

70

60

50

40

30

20

10

0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90

Marginal production cost per barrel (USD)

Low CostMiddle East

Medium Cost ConventionalUS, Gulf of Mexico, Alaska, North Sea,

Caspian, most Latin America, Africa, Far East

High CostConventionalEnhanced Oil

Recovery,Oil Sands,Orinoco,

Coal to LiquidsRussia,

US Stripper Wells

World oil supply, MMB/day, 2009

Source: Petroleum Industry Research Association

how rising oil demand raises the price


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Agriculture

Agricultural la has emerge as aasset class which attracts the iterest

of ivestors worlwie

KeN JoNesHEAd OF AGRICULTURAL InVESTMEnT And

RURAL PORTFOLIO VALUATIOnS, SAVILLS

to a oly about 500,000 barrels aaya prove cotroversial. Therewas ema estructio i OECdcoutries, but the greatest potetial isi emergig markets where oil is oftesol below global prices.

I the comig perio, I epect tosee bi-atio, where raw materials

rise but there will ot be the wage-price spiral that traitioally roveiatio. At the same time, there willbe a lot of volatility i prices cause byfeast a famie ivetory cycles,which makes it harer to sustaiivestmet a will lea to cotiuiglow supply growth.

Turig to gol, ivestors owsee it as hege agaist iatio, with

fears of iatio as ecits rise aemography puts pressure o gover-met bugets. Corporates, meawhile,will face margi squeezes if they haveo pricig power, a growth may besluggish. This will make commoitiessuch as gol attractive i comparisowith stocks.

I this comig perio of likelyiatio a volatility, efesiveivestmets may be attractive if asovereig ebt crisis creates ramaticuctuatios i securities markets.While there will be a case for tacticalallocatios to protect agaist volatility,there coul be a place for loger-termivestmets i har assets to hegeuratioal liabilities.

Marc Faber, the investment adviser often

known as Dr Doom, advised investors in February 2010 to buy farmland and gold. He saw agricultural land as a defensiveinvestment, but there are positive factors thatmake it an interesting asset class, especially

for those with historic ties to the land.

The rst factor is worl populatiogrowth, a with it the ema forfoo. There are fears that there issimply ot eough prouctive lato fee the worl, especially give

the teecy i emergig marketsto upgrae from a rice-base iet towheat a meat.

Aother factor is fuel security,especially after the last oil price spike.The US is goig ito bioethaol i abig way, a while etractig it fromcor or wheat is ot a efcietcoversio process, the plats that havebee built must be supplieputtig

upwar pressure o foo prices.

Meawhile, coversio from sugarcae i Brazil is the most efciet wayto prouce bioethaol, with the wastebure to prouce reewable eergy.

La is a ite resource: as MarkTwai sai: Buy la: theyre otmakig it aymore. Agriculturalla is beig lost ramatically all overthe worl80,000 hectares a year toevelopmet i the UK aloe. Largeareas of the worl are at risk fromrisig sea levels, while other areas that

coul prouce foo lie uuse becauseof political problems or wars.Agricultural la is the base poit

for ivestors: aythig oe to it forevelopmet will a to its value. Lais uerstoo a value, especiallyby wealthy ivestors. A i mostcoutries, owership of agriculturalla is treate very sympatheticallywhe it comes to iheritace taes.

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24p p | 2010

:

We define private equity as leveragedbuy-outs, and it is interesting than anasset class that has leveraged in thetitle has fared very well through the

financial crisis. One would think thatif it had leverage as one of the drivers of its business model, it would have beenvery badly hurt. Perhaps it is because wedo not mark to market every day, unlikethe stock market. But looking throughthe 20-30 companies we own, we saw avery sharp decline and we have seen a verysharp rebound.

This asset class outperforms publicmarkets because of competitiveavatage, kowlege, ifferetiatio,isciplie a cotrol. It is simple, butot easyit is very har to cosistetlyretur two times the moey to

ivestors, which is our target. Butivestors ca wipe out all that ecessretur by timig ivestmets balyor pickig the wrog maagers. Thelatter is true for every asset class, butit is compoue with private equitybecause you are i it for te years.

The Chart below shows ata for allleverage buy-outs i north Americaa Europe betwee 1997 a 2009.The average purchase price over therst few years was betwee seve aeight times earigs, with leveragequite high. But meia returs for thefus iveste i those years were isigle igitsthe lie o the chart isfor the top quartile where returs werei the mi-tees. Compaies boughti the otcom boom years were sol i2001-03 i the ecoomic owtur.

Private equity

Cosistet ivestmetthrough the cycle is ecessary to reapthe ecess returs of this asset class

JohN Garcia

CHIEF ExECUTIVE OFFICERAEA InVESTORS InC

Ivestors ca ivest through fusi commoities, or i compaiesthat make agrochemicals or farmmachiery. But the real play is i theraw material: freehols give ivestorseibility a capital growth, eveif reveues are usually moest ievelope coutries. Coutries where

freehols caot be bought by foreigivestors offer leasehols with thepossible opportuity of future legalchages to allow them to be coverteto freehol.

Mark Twain said,Buy land: theyre notmaking it anymore.

I believe there has bee a paraigmshift. La may be see as a efesiveivestmet, but it is provig attractiveto ivestors such as George Soros whohas a massive la holig i Brazil thatcotiues to grow. Sovereig wealthfus are ivestig i agriculturalprouctio i Africa a Lati America.

Farmla is a traitioal hegeagaist iflatio, a there are majoropportuities. Remember too, that thereare importat risks, which makes truste

local parters absolutely essetial.

What to look for when investingin agricultural land

Water availabilityshortage is thebiggest risk, with climate chage affectigestablishe farmla

Infrastructure to get proucts to marketat a reasoable price

Able in-country managersa agroomiststo maage the farmla

The availability of freehold investments,which offer the greatest eibility athe chace of a capital gai

Political stabilityla is a log-termivestmet

A welcome for overseas investors, ota threat of atioalisatio

Tax ratesa whether there are reciprocalarragemets with your omicile

Repatriation of capitalif you cat get it out,ot put it i.

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Debt

Equity

Average Purchase Multiple 7.5x

Economicdownturn

Economicdownturn Top quartile

Net IRR

12.0x

9.0

6.0

3.0

0.0

(Debt + Equity)/EBITDA Net IRR* %

40

35

30

25

20

15

10

5

0

Source: Standard & Poors Q4 2009 Leveraged Buyout Review*Internal rate of return

7.9x 8.1x 7.7x

6.3x

6.1x

6.5x7.1x

8.2x8.6x

9.8x

8.3x

7.1x7.4x

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

leverage/purchase multiples vs private equity returns


25/36

p p | 2010 : 25

Fus that iveste urig theotcom bust pai lower prices i termsof earigs, a their returs weremuch highereve meia performersi well. Whe the recovery followe,purchase prices rose agai, with muchhigher leveragea it is har to seethe 2004-07 vitages performig wellif they sell i the owtur cause bythe acial crisis.

The right way to ivest i private

equity is to o so cosistetly over thecycle, to get the ecess returs thata te-year commitmet to this assetclass ca provie. Yet ivestors te tosee it as a opportuistic ivestmet, jumpig i a outusually at thewrog time. More was iveste i2006-08 tha i the 20 years beforethat, a the returs are likely to bepoor whe those ivestmets arerealise over the comig years.

I the years before the acial

crisis, there was too much moey withtoo much leverage chasig too fewassets. now that rms are stresse,with fus har to raise, the limiteparters are i a much strogerpositio vis--vis the geeral parters.now is a goo time to get back itoprivate equity as it returs to the basicsof what mae it successful after araically ysfuctioal perio.

Hege fus

The best hege fu maagers castill use the tools at their isposal to

outperform other asset classes

heNry swieca

FOUndERTALPIOn LLC

Hedge funds have done well over recent years, as the Chart overleaf shows. Theyhave returned a little over 9 per centa year since the start of 1994 and 6.6 percent over the past 10 years. Returns have

fallen over the past two years, but theyhave outperformed stocks during the

financial crisis.

There is wie ispersio i the spreaof hege fu returs, a the fusthat have outperforme are those thatuse the available tools to best effectleverage, usig erivatives, goig shorta cocetratig positios, combiewith goo risk maagemet. These

allow the best hege fu maagers tooutperform a passive equity portfolio.High quality meium- a log-termbos have also performe well overthe past few years, as the Chart overleafalso shows. Lookig back to the 1970s,however, log-term govermet bosperforme very poorly i a ecae ofhigh iterest rates a iatio, whilestocks performe e a gol acommoities very well. I the 1980s,the reverse was the case: govermetbos i etremely well, gol acommoities i baly a stocksi very well as the log bull marketgathere stregth.

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: k

So timig is everythiga theeviromet ow coul harly bemore ifferet from the 1980s: theiterest rates were very high, but fell;ow they are low a likely to rise.Ivestors i bos i the 1980s hafabulous yiels, plus capital gais as yiels fell. If yiels rise with iterest

rates over the et few years, there willbe very poor returs o bos.With equities, P/E ratios are ow

ouble what they were i the 1980sas are valuatios of publicly traestocks. Corporate taes were falligi the 1980s a will be risig ow.Uioisatio fell i the 1980s, givigmore power to corporate owers: thatis reversig. Equity prices will otperform as they i i the 1980s.

Ivestors make the wrog ecisiosi these markets. I March 2000 at thetop of the bull market, bo yiels

were high, but moey owe itostocks. I October 2002, ivestors tookmoey out of stocks at the bottom ofthe bear market a put it ito bos.Toay, the public are ivestig ibos but ot stocks. The message isto be very careful of bos.

Hege fus were sol i recet

years as proviig equity-like returswith bo-like volatility, but that wasa mirage. May fus suffere athe iustry has leare a lesso. Thefuture lies with maagers who offertrasparecy o their strategies, whouersta volatility a have goorisk maagemet.

usd annualised returns to end jan 2010

Hedge Funds

Credit Suisse/Tremont %

Equities

MSCI World NR %Bonds

JP Morgan GlobalGBI TR %

Balanced Global

Lipper Mixed Asset %

Since inception 9.3 5.7 6.4 4.1

10 years 6.6 -0.1 7.0 1.7

5 years 5.9 1.6 5.0 1.7

3 years 2.2 -7.3 8.8 -3.32 years -1.2 -10.6 5.2 -5.9

1 year 17.5 36.6 6.6 25.2

Source: Pictet Alternative Investments, Lipper, MPI Stylus


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p p | 2010 : 27

Equities

Ivestors with a log-term perspectivea a cotraria approach ca

beet from substatial real returs

richard oLdFieLd

CHIEF ExECUTIVEOLdFIELd PARTnERS

My rst boss, a veteran equities inves-tor, took me aside on my rst day with theadvice: Equities are life, bonds are death!

Im not sure Id go quite that far, but equi-ties are certainly back on the agenda in thelast 12 months, after being overshadowedin recent years by bonds and alternativeinvestments. And as the Chart below shows,they have provided a reliable real returnaveraging 6.2 per cent a year over 160 years.

Looke at over this very logperspective, every upset i betweeeve the 1929 Crashlooks like a miorblip. That log-term tre is reassurigto may families. The Chart alsoemostrates the volatility of equities,a shows that it is usually ot a gooiea to buy whe equities are at the tope of their performace rage.However, eve the, equities retur to

their tre withi a few years.

My rst boss told me:Equities are life,bonds are death!

We have just ha a ecae of zeroreturs o equities, a it is very rareto have two such ecaes i successio.This oes make it eormously more

probable that there are ecet retursahea. But the volatility of equitiesspeaks agaist 100 per cet allocatiosome cushio of comfort is sesible.Ivestors with such a cushio willfeel less pressure to sell at the wrogtime, a the optimal size of thecushio will epe o the iiviual.For families it will be the very log-term returs that matter, a the

volatility meawhile will be irrelevat.But ealig with that volatility willepe o the circumstaces atemperamet of the ivestor. Ulikeistitutios, families o ot have toworry about quarterly uctuatios itheir wealth. Iee, what I woul callcostructive ioleceot reactigto evetsca be a goo strategy. Theaverage perio that istitutios holequities for has falle from three yearsto te moths over my workig lifea for every trae there is a cost,which cumulatively reuces returs.

Oe coutry where there havebee two ecaes of zero returs oequities is Japa, which illustrates twoimportat aspects of ivestmet. First,the importace of iversicatio: whileiteratioal equity markets ow teto move together over the short term,

rates of retur ifferetiate themselvesover the meium a log term.

Seco, two importat attributes tolook for i a ivestmet are that itis cheap a hate. The most popularivestmets are ot likely to o well,because everyoe is i them alreay.

A al poit is o the ifcultyof choosig asset maagers. Researchby Cambrige Associates shows that

those asset maagers that have justprouce top quartile asset growthte to uerperform i the followigthree years. That is aother eampleof the agers of popularity: it shoulecourage ivestors to be ifferet alook beyo those who are the talkigpoit i the ivestor commuity.Immeiate past performace is oguie to the future, so it pays to beucovetioal a avoi followigthe crow.

Constructiveindolence can be

a good strategy

Whe we look for avisers, we look atthe people, assessig their qualitiesa commo sese; their approacha whether it makes sese; theirprocess, favourig a simple oe; a theeviromet they are i, avoiig those

workig i a pressurise evirometthat ecourages short-termism.

k

14

12

10

8

6

4

2

0

Source: Datastream, CS Global Strategy/IDC

Log index (returns per annum)

Trend = 6.2%Standard Deviation = 33.9%

Panic-7.3%8yrs

Secular Bull11.1%24yrs

Aftermath2.9%12yrs

Reflation9.5%13yrs

Inflation-2.5%14yrs

Bubble22.4%9yrs

Deflation-1.3%14yrs


Stagflation2.8%14yrs


Aftermath

1849 1869 1889 1909 1929 1949 1969 1989

US long-term real equity returns

us long-term real equity returns


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:

Ivestmet coclusios

Pictets strategyWe ot believe i peak oil,

we like large liqui stocks, gol

a emergig market ebt

yves BoNzoNCHIEF InVESTMEnT OFFICER

WEALTH MAnAGEMEnT dIVISIOn

Most investors work on the assumptionthat the future performance of asset classeswill be reasonably similar to the past.On this basis, most asset classes appearto be fairly close to fair value, with a

few outliers.

The US ollar looks cheap o aymeasure, especially as other curre-cies uergo structural realigmets.So too o Japaese stocks, which traeclose to book valuethough with osigs yet of improvemet. Gover-met bos look epesive, but theslope of the yiel curve is at a recor

high. US equities are a little above fairvalue, but ot so much as to be see asa major bubble.

All i all, othig stas out asstatistically sigicatif the futureis like the past. However, US stocksare traig at roughly 2.2 times bookvalue, after fallig below the log-term orm of 1.8 times i 2008 as acosequece of acial sector write-ows. If there were aother majore-ratig i valuatiosas happeei the 1930s a the late 1970s-early1980sstocks coul isappoit for aseco ecae i a row. That woulhappe if there were either severeeatio as i the former perio, oretreche iatio as i the seco.

Our view is that if policymakersi the evelope worl were tocut buget ecits to log-term

sustaiable levels a raise iterestrates back to more ormal rates, therewoul be a tetbook eatio spiral.But we thik govermets are awareof this ager, with cooriatio ofaccommoative policiesalbeit withtesios, ivergeces a recurrigo-a-off stimulatory policies. Sopolitics will be a key river i markets,more through moetary policy thathe slower trasmissio process ofbugetary ajustmet.

Politics will be a key driver

in markets, more throughmonetary policy than

budgetary adjustment

We are ot believers i peak oil, butthe icreasig challege of etractiomeas we believe we have see peakcheap oil. Our referece price isbetwee USd60 a USd90 a barrel,which we see as creatig a meium-

term equilibrium betwee reuctiosi supply to keep the price aboveUSd60, a reuctios i ema if itrises above USd90.

Our view o US stocks is that theS&P500 is likely to trae i a rage of800 to 1200. If it rises above 1200, therisk-rewar ratio becomes uattractive.It will fall below the 800 level olyif policy mistakes lea to eatio.

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expected returns annualised in usdnext 10 years

E (R) = expected return by Pictet Wealth Management (PWM)

E (Alpha) = expected net outperformance by PWM

E (TR) = expected total return (risk premium and alpha) by PWM

Asset class E(R)% E(alpha)% E(TR)%

Cash 2.2 0.0 2.2

Government bonds 3.0 0.0 3.0

Corporate bonds 4.5 1.0 5.5

High yield bonds 7.0 1.0 8.0

EM hard currency debt Avoid - -

EM local currency debt 8.5 1.0 9.5

World equities developed 5.5 2.0 7.5

EM equities 7.5 1.5 9.0

World equities small caps 6.5 2.0 8.5

Real estate Heterogenous - Heterogenous

Private equity 10+ - 10+


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p p | 2010 : 29

I this market, you shoul chooselarge liqui stocks which you ca move

quickly a cheaply: oil services areewable eergy will be key themes.

Superior growth inemerging markets is a nearcertainty over the coming

decade, but not a reasonto be overweight

O gol, we re-etere that asset classi 2002perhaps our best ever assetallocatio call. It is best value as aalterative to paper assets, a itsprice is ow at the log-term averagei relatio to the dow Joes IustrialAverage. Our forecast is that it hasfurther to ru i the et ve years,probably to USd2,000 a ouce. Itwoul take severe eatio or high

iatio to justify prices substatiallyhigher tha that.

As aother currecy iversicatio,we also like emergig market ebtfor its yiel a capital appreciatiopotetial agaist the ollar a theeuro. But it is worth rememberig thatthere is o correlatio betwee GdPgrowth a equity returs. Superiorgrowth i emergig markets is a earcertaity over the comig ecae, but itis ot a reaso to be overweight i theirstocks relative to evelopig markets.

Fially, the Chart opposite is oursummary of the epecte omialaual returs o the mai assetclasses over te years, together with ourestimates of the ecess performace toepect from a goo maager.

Five guiding principles...

Strategic asset allocatio shoul beyamic a forwar-lookigtherear-view mirror ca be misleaig

Markets structures, rivers aopportuities chage a lotso ivestmetprocesses must evolve

Oly macro ivestors survivethere is opoit i beig a epert i a ea asset class

Relative valuatios are useless a eveagerousits better to be approimatelyright tha precisely wrog

Alpha (i public markets) is a zero sumgamethough alpha opportuities ca stillbe ietie through a top-ow aalysis.

...and two misconceptions

There is o correlatio betwee GdPgrowth a equity retursespite thestrog cosesus that emergig marketswill outperform

We cosume alpha i ollarsthe lowerpercetage returs use to measure theperformace of ivestmet maagers oot always reect alpha estructio.

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30p p | 2010

:

Asset allocatio

Behavioural nance andgoal-based asset allocation

Ietifyig ivestmet goals ca help ivestors to avoi themistakes mae by cogitive errors a emotioal resposes

meir statmaNPROFESSOR OF FInAnCE, LEAVEY SCHOOL OF BUSInESS

SAnTA CLARA UnIVERSITY, CALIFORnIA

Over the past 18 months, it has sometimes felt that we are in an investment wara fierce war against the investment markets

that we are losing. The quotation oppositefrom Sun Tzus The Art of War, a book that

has nothing to do with investment, soundsas if it was written to describe what hasbeen happening to investors.

I wat to set out a strategy, which hasthree elemets, to protect ivestorsagaist that feelig:

Make yourself an ally i the ivestmetwar by kowig your goals, youremotios a your cogitive errors.

Make science your ally, by uerstaigthe sciece of huma behaviour.

Make your nancial adviser your allygoo oes take care of your healtha your well-beig.

The logic a psychology of behav-ioural ace ca help us i this aim.With staar ace, ivestors areescribe as ratioal iiviualswho ca hale all the iputslike acomputer. Behavioural ace assumesthat we are ormal, which meas otalways ratioal. Sometimes we areormal smart a at other timesormal stupi, a we ca try tomaimise the ratio of smart to stupi.That is the most we ca get.

The brais of ratioal ivestorsare ever full. The brais of ormalivestors caot absorb all the

iformatio. A just as we use thetools of sciece to make eyeglassesthat help us clarify our blurre visio,we ee to use sciece to make seseof the comple worl of ivestmet.That sciece has ietie a series of

cogitive errors which lea us to makeba ivestmet ecisios.

Oe is the represetativeesserrorcause by our teecy toietify patters i ata. This isthe essece of itelligece, a itis geerally importat i everyaylife that we o so. But sometimes weietify patters that o ot eist.Here are four commo varieties of therepresetative error.

Hindsight errorig pattersi hisight that are ot causal.Aalysig ata ofte helps proucetraig rules that woul have bee

successful i the past, but they o otwork i the future because they justhappee to work by chace.

Availability errorbasig theoryo the iformatio that is available.After a ecae of losses, we eaggeratethe probability of losses. Promoters oftraig avertise the wiers, whichleas us to eaggerate the probabilityof beig wiers.

Conrmation errorwe look foreviece that corms our claims a

beliefs a iscout the opposite. Ilookig back over the acial crisis, itow seems ievitable that it happeebecause some people preicte itsseveritybut may more i ot.

Over-condencewe all thikwe are above average. You shoul ask yourself who is o the other sie of atrae, a why he oes ot kow whatyou kow.

k

do you think that now is a good time to invest in the financial

markets? % of investors who agreed

90

60

30

0

13,366Dec 0755%

10,938Feb 00

78%

7,890Mar 0341%

Feb 99 May 00 Aug 01 Nov 02 Feb 04 May 05 Aug 06 Nov 07

Source: UBS Index of Investor Opt imism

%


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p p | 2010 : 31

I aitio to cogitive errors such asthese, we all brig our emotios itoacial ecisios. Whe makig apurchaseof a house, a car or a stockthe ecisio is affecte by how we feelabout that purchase. With the stockmarket, we move from euberace tofear a jump to coclusios, which

oes ot make sese.The Chart opposite shows a Gallupsurvey by UBS, which ufortuatelyee i 2007, so we caot followit through the acial crisis. But itshows that i February 2000, arouthe top of the otcom boom, 78 percet of ivestors sai it was a gootime to ivesta we all kow whathappee after that. After the marketsslumpe, oly 41 per cet sai it was agoo time i March 2003a that wasequally wrog. We te to be our owworst eemies.

Draw them in with theprospect of gain. Take themby confusion. Use anger tothrow them into disarray.

Su TzuThe Art of War

now while we sometimes o these stu-

pi thigs, we are very goo at learig.The worl looks pretty at to us, yetthere are very few people who thik theearth is at. We have bee coviceby scietic eviece that the worl isroua that it revolves arou thesu, rather tha the other way rou.If we ca lear this, we ca lear toavoi our cogitive errors a emotioswhe puttig together portfolios.

Behavioural portfolio theory tellsus that we thik about moey i terms

of goals. Oe of our goals is ot to bepoor, so we wat a safe retiremet.Aother goal is to be rich a so thesame people who buy pesios ooccasio buy a lottery ticket. Thesame people are risk-averse, buyigisurace, a risk-seekig, buyiglottery tickets.

The solutio is goal-base assetallocatio. Oe goal might be to retire

with a secure icome, aother is topay for the chilres eucatio aa thir to bequeath moey to thechilre. They have ifferet timehorizos, from the eucatio goala few years away, to retiremet i 15 years a a bequest i 40 years. Soyou ivest as if this moey belogs tothree ifferet people: the retiremetperso, the eucatio perso a thebequest perso. Each goal requiresa ifferet risk/rewar ratio, but thethree combie o a efciet frotierto create a sigle overall portfolioallocatio that we ca be comfortablewithas the Chart above shows.

If we ca frame our goals a assetallocatio this way, it matters. SupposeI ru through my acial pla witha acial aviser a he says there isa 90 per cet chace that I will achieveall my acial goals, I go home to mywife a tell her there is a 10 per cetchace that we are goig to live o thestreets. But if he ivies my moey itwo parts, oe for retiremet a oefor the possibility that we ca leavea lot of moey to the kis, I tell my

wife that the chace that we ca haveeough moey for the rest of our livesis as close to 100 per cet as we ca get,a there is also a 20 per cet chacethat we caot leave a big bequesta we feel much better. It is thesame moey, but I leave the acialavisers ofce feelig thigs are e.A if there is amage, I kow that itwill be where I ca sustai it.

Evolutio has mae us proe tocogitive errors because we leare to jump to coclusiosto recogise ourmothers or to make sap jugemetsabout a approachig preator. Johnash, the brilliat mathematiciaa ecoomist who also suffere fromschizophreia, was aske how it wasthat he coul ot uersta that theimages he saw were halluciatios. Hereplie that they came to him i thesame way as i his isights i mathsa ecoomics.

Why is it hard to resist

intuition, evenwhen it is wrong?

Joh nashA Beautiful Mind

We just have oe braithere is oauiliary brai to check our brai forwhat is real a what is a halluciatio.We rely o sciece for that: this is whywe measure the temperature of waterot by stickig our ger i it butby usig a thermometer. Ivestors

must use the tools of sciece so theyo ot make mistakes i theirivestmet strategies.

Meir Statman is Glenn Klimek Professor ofFinance at the Leavey School of Business inSanta Clara University, California, an VisitingProfessor at Tilburg Uiversity i the netherlads.Professor Statman has also receive numerousawars, incluing a davis Ethics Awar an aMoskowitz Prize for best paper on sociallyresposible ivestig.

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30

25

20

15

10

5

0

Expected return %

Retirementsub-portfolio

10 20 30 40 50

Source: Meir Statman

Standard deviation %

Educationsub-portfolio

Overallportfolio

Bequestsub-portfolio

goal-based asset allocation: the efficient frontier


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32p p | 2010

:

Goal-based allocationin practice

The isights of behavioural aceca help i accommoatig risk,

especially i times of acial crisis

JeaN BruNeLMAnAGInG PRInCIPAL

BRUnEL ASSOCIATES

Most of us have a minimum of three fundamental goals in our lives that we

need to think about in constructing abehavioural finance portfolio. They are

personal, dynastic and philanthropicand while there are those who focus ononly one of these goals, such people arerare. What I have learnt from the work of

Meir Statman is the need to think of individual sub-portfolios associated witheach of the goals.

O persoal goals, it seems ico-ceivable for most people to take riskswith the moey they ee for shelter,

foo a life. They will, though, beprepare to take greater risks to meetyastic goals of leavig moey tothe chilre a succeeig geera-tios. If a iiviual is aske whatretur they are seekig o their wealth

a their level of risk tolerace, theywill usually aswer that they watthe highest possible retur at thelowest risk. But by focusig o goals,capital ca be allocate to each witha appropriate balace betwee riska retur.

Goal-base asset allocatio shoulbe a four-stage process:

Identify the goalsjust as i a restauratwe choose ishes rather tha igre-iets, the aim is to select goals thatthe ivestor is comfortable with.

Quantify the goalsto raw up a buget,

a if ecessary prioritise those goalsso as to live withi the buget.

Structure the sub-portfoliosfor each ofthe goals, takig ito accout aycostraits such as risk tolerace orliquiity prefereces.

Optimise the whole portfolio to esurethat there are o iteral coictsbetwee the sub-portfolios athat the overall portfolio is prueta iversie.

I the curret eviromet, thereis a serious issue with ecisio riskchagig horses at the wrog time.While people o ot wat more risk itheir portfolios tha they ca stomach,it shoul be easier to live with aicrease i risk whe the portfoliois separate ito high-risk a low-risk buckets. So if equities fall, it isstill possible to see that lifestyle goals

Jean Brunel is the Managing Principal ofBrunel Associates, a rm that provies wealthmanagement consulting services to ultra afuentfamilies. He spent most of his career in theinvestment management group of JP Morgan,becoming chief investment ofcer of its privatebank in 1990. At JP Morgan, he worke in the US,

Japan, Hong Kong, Singapore an Australia from1976 util his retiremet i 1999.

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are ot threatee a to be prepareto wait for equities to recover so thatloger-term goals ca be met.

Behavioural nanceis not a magic bullet,

it just recognises thatpeople are normal

Varyig the eitios of the bucketsmay also be a optio. Some familieshave wate a ightmare protectio

bucket over the last two years. Thatis a goo iea if that is the way theythikif they feel better for isurigthemselves agaist a umb ecisio.The importat thig is to be able torelate to the portfolio whe ealigwith abormal evets.

Behavioural ace is othigmore tha the recogitio that peopleare ormal, rather tha ratioal. Thisisight is ot the absolute magic bullet,but it has helpe people we work withto feel better about their ivestmetsa stay the course through theacial crisis.


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Matthieu Ricar is the son of French philosopher Jean-Francois Revel anartist Yahne Le Toumelin. He obtaine a Phd in cell genetics from theInstitut Pasteur, but subsequently abanone his scientic career to livein the Himalayas an stuy Buhist contemplative practice. A Buhistmonk, he has since 1979 acte as French interpreter for His Holiness thedalai Lama. He is the author of several books, inclu

Pictet Report 3 May 2010 English

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Transcript of Pictet Report 3 May 2010 English