Postcard from Asia

Family Office Alpha Report

By Keith Danko

April 11, 2016

I recently traveled to Asia to meet with investors and other finance professionals. The 16-hour flight from New York to Hong Kong reminded me that while it may be a small world, it still takes a long time to travel across it. It also gave me time on the return trip to reflect on the interesting dynamics prevalent in the investment world of Hong Kong and mainland China—a topic much discussed and speculated about, yet often misunderstood.

In retrospect, what surprised me most was how much the concerns of family offices in Hong Kong and Asia mirror their counterparts in the US and elsewhere in the world.  Here are some takeaways:

The Asian Family Office: East Meets West

Through my various conversations with individual and institutional investors in Hong Kong, I saw that family offices in Asia, while half a world away from us, have perspectives strikingly similar to those of Western family offices. They have their own portfolios of liquid stocks from developed countries, similar exposure to private equity and other alternatives, with surprisingly limited speculation or exposure to the mainland Chinese markets. Their concerns about the Chinese market and its volatility are similar to the rest of the world’s.

Most if not all investors there have specific investments in China—in businesses or in real estate—but do not present them as major holdings in their portfolios. Asian family offices have a healthy view of both the potential rewards and the potential risks of China. The sense I got was that they have developed a keen awareness for the right amount of exposure, and the wisdom of how to balance short term risks with what will no doubt be the longer term rewards.

Different Currency, Similar Outlook

I also noted the familiar emphasis on liquidity.  As with Western family offices, the family offices in Hong Kong are focused on providing income and consistent growth for all members of their extended family, which can translate into a complex structure to manage. Concerns about the amount of liquidity in the portfolio, and about preserving wealth for the next generations, are as prevalent as they are in any family office.

The institutionalized family office itself is a newer phenomenon in Asia. Despite that, Asian family offices largely resemble their counterparts in the US and Europe, one of their hallmarks being lean, hard-working staff who must remain attuned to global markets. Such attention demands an intense focus requiring long hours, as most of the world’s liquid global markets trade outside of Asian business hours.

Critical Mass: The Chinese Middle Class

As all visitors know, Hong Kong has a tangible vibe that manifests from the time you arrive. Now, the economic momentum of China is noticeable as well, with the growing prosperity of the middle class a key driver. The Chinese middle class has developed into a critical mass—according to the annual Credit Suisse wealth report from 2015, its number stood at 109 million adults, eclipsing the US number of 92 million (with middle class loosely defined as having wealth in the range of USD $50-$500K).

Growth is also expansive in the wealthier Chinese echelon. The 2015 RBC World Health Report shows that China’s high-net-worth population grew 17.5% in the last year to 890,000 and corresponding wealth grew 19.3%, representing a formidable $3.8 trillion of wealth (high net worth defined as having investible assets of US $1 million or more).

The near-term road may be volatile. As an example, during my visit, the high-end shops in Hong Kong were suffering through a lack of shoppers from the mainland, blamed largely on the erratic stock market performance in early 2016. Yet this emerging economy will without a doubt continue to expand. Regardless of its stock market moves and global fears of a slowdown, China has an economy whose size will surpass the US as well as the European Union in a short matter of time.

Though many worry about the risk of another bubble in China, the country’s external debt poses a lower risk than one would suspect. Given that China has very little debt owned by foreigners, the government has greater control over the economy. Also, of the approximately $1.7 trillion of external debt (June 2015) about half was denominated in renminbi, which reduces risks inherent in foreign currency-denominated debt. Chinese FX debt has also declined from its peak two years ago.

An Investment in Higher Education

As an aside, the timing of my trip coincided with the impending arrival of application decision letters from US boarding schools and colleges, which many of my acquaintances in Hong Kong were waiting for. It’s evident that the value of education remains strong; degrees and diplomas from top schools in the US and UK are valuable assets for the next generation to bring back to Asia. The Hong Kong-based alumni of these same schools are also active participants in their local alumni associations. Such emphasis on acquiring top educational experiences, and the credentials and qualifications that accompany them, bode well for future growth.

Outsmart the Monkey!

This Chinese New Year ushered in the The Year of the Red Fire Monkey. Key elements this year are metal and water, with water connoting wisdom and anger, and metal connoting gold and wind—essentially forecasting more financial volatility. The Chinese will tell you that to be successful this year, you need to outsmart the Monkey, a wily, clever and vigilant animal. Hopefully family offices in Asia and elsewhere can accomplish that goal.