At the same time, the family offices pay close attention to performance measurement, including comparing the results to given benchmarks, weighing performance against current and future spending needs and protecting the asset base. Portfolio performance, it should be noted, is seldom measured solely on the basis of absolute returns, but takes into account a number of other factors, taxes preeminent among them.
A Focus On Taxes
Indeed, family offices are especially attuned to the tax ramifications of portfolio management (Exhibit 3). The tax efficiency of an investment portfolio is generally predicated on the degree to which any capital gains are sheltered or offset, something that family offices in our study proved to be particularly adept at.
But for most family offices it is far more than just a matter of matching winners and losers. Because of the level of wealth involved, some family offices are able to adopt their own tax-saving (or tax-deferring) strategies, such as creating a private exchange fund to deal with the problem of holding low-basis, concentrated stock.
Given the time put into finding, vetting and monitoring investment managers, one might well ask whether or not it's worth the trouble. The answer is a resounding yes (Exhibit 4).
We were able to examine the commingled investment performance of 78 single-family offices, using the family policy statement as a point of reference, to evaluate the investment performance. The findings showed that the 78 single-family offices surveyed easily exceeded their stated benchmarks in each of the three years examined.
Part of that success can be attributed to the fact that family offices are highly attuned to tax-reducing strategies. Access to, and the use of, alternative investments also played a role. However, a large part of their investment success could be traced to the fact that family offices have better connections than most people-they are very rich people who know other very rich people.
Personal and professional connections, coupled with the aggregate wealth they can tap into, helped the family offices get into under-the-radar investment opportunities that were often highly profitable, whether it was a new hedge fund, a private equity investment or a cutting-edge investment strategy. Exceptional wealth, once again, has its rewards.
Hannah Shaw Grove is managing director and chief marketing officer of Merrill Lynch Investment Managers. Russ Alan Prince is president of the consulting firm Prince & Associates.