Money, if it does not bring you happiness, will at least help you be miserable in comfort. —Helen Gurley Brown

While family dynamics probably haven’t changed much since Count Leo Nikolaevich Tolstoy wrote his famous line about unhappy families, the modern family office has come a long way from 1878 when Anna Karenina was published, adding structure, discipline, academic rigor, and, most importantly, convenience to the management of UHNW affairs.

Ultras place a premium on convenience and they are more than willing to pay for it.  Whether it’s a dedicated family office or a cadre of wealth and client service providers, when you’ve made it big, you need a lot of help, as Deloitte explains in a recent report.  There are operating companies and investment portfolios, estates and staff, trusts, foundations, donor-advised funds, art collections, cars, boats, and planes, accountants, lawyers, and specialized service providers. 

Here to help

We’ve been sifting through this rarefied mix of New York wealth and family service elites, on assignment for a notable Wall Street firm.  Our mandate?  Recruit a professional client service maven who will make the partners’ lives easier and their balance sheets stronger.

Firms like Goldman Sachs, KKR, and McKinsey have dedicated concierge groups to service their partners.  Goldman, in fact, just renamed their partners coverage group the “partners family office.”

One candidate with considerable experience working for billionaires described the work this way:

“My writ was straightforward, Charles: create wealth, reduce taxes, and mitigate risk.  But the job was a little more complicated than that.

“Over the years, I’ve worked with experts on investments and allocations, restructured lines of credit, and arranged and refinanced mortgages. I dealt with accountants, attorneys, and realtors, bought and sold property, art, and collectibles, researched state and global tax domiciles, and negotiated loans on assets.  Whatever the client wanted, you name it.

“But in this job you also have to read people and be the consummate diplomat.  As families grow larger and wives and husbands come and go, competition increases for access and influence.  Don’t ever forget who you work for.”

Where are the ultras?

It’s tough to get a handle on the number of ultra-high-net-worth families in the US, the assets they control, or their objectives because most prefer the shadows to the limelight.

In one widely quoted survey, Campden Wealth reckoned there were 3,100 large single-family offices in North America.  The Family Office Exchange (FOX), on the other hand, cast a wider net, estimating closer to 10,000 SFOs given the relentless growth in global wealth.

As for billionaires, the Hurun Global Rich List 2024 counts one-hundred-nineteen billionaires in New York while Henley Global’s World’s Wealthiest Cities Report 2024 uncovered a mere sixty.

Chart: US cities with millionaires, centi-millionaires, billionaires

As an aside, of the roughly $83 trillion in wealth transfer over the next twenty years, according to the UBS Global Wealth Report 2024, “a notable amount of this wealth will move horizontally between spouses first, before moving to the next generation. In practice, this means a considerable transfer of wealth to women, considering their comparatively higher life expectancy.”

What’s a client service professional?

4400 registered foals, and only 16 or 18 of them make it to the Derby ― John Sosby, Claiborne Farm

What a year.  For the twelve months ending December 31st, 2023, total outsourced AUM managed by the one-hundred-two firms in our latest OCIO Directory reached a record $4.1 trillion dollars thanks to $686 billion in new business, a whopping twenty percent increase.

This chart shows which OCIOs gained the most AUM for the year. We grouped the firms by size, numbers per group, and growth in dollars and percentage.

Winner takes all

Here’s what caught our attention.  Less than a quarter of the firms on our list manage most of the money, about $3.4tn, while the other seventy-nine outsourcers divvied up the remaining $681bn.  The twelve largest OCIOs alone control over $2.6tn or sixty-four percent of the outsourced total.

As for new business in 2023? Almost three-quarters of last year’s gain accrued to these twelve largest providers, thirteen percent went to the next eleven, and those dogged seventy-nine fought for the remaining twelve percent, roughly $83bn.

The Twelve
$420,000,000,000 – Mercer
$329,400,000,000 – Goldman Sachs
$319,000,000,000 – BlackRock
$243,200,000,000 – Russell
$193,500,000,000 – SEIC
$182,100,000,000 – MS Graystone
$169,800,000,000 – CAPTRUST
$164,200,000,000 – J.P. Morgan
$163,000,000,000 – WTW
$157,000,000,000 – State Street
$155,000,000,000 – AON
$121,000,000,000 – Wilshire

As in past years, the largest source of new OCIO mandates in dollar terms came from corporate pensions.

For most OCIOs, however, the corporate defined-benefit world is a land apart and out of reach, actuarial, regulated, and liability driven, with big-ticket AUM on offer.  According to the latest Milliman corporate pension report, the top 100 US DB plans held about $1.32 trillion in assets in 2023.

By the way, only four of these plans outsourced their DB obligations during the year, so there are still a few mandates to be had.

Many firms, many flavors

Each OCIO has its own culture, investment style, and biases.  Some firms focus on indexing and liquid markets, others on alternatives, still others on ESG.  Some customize portfolios, others don’t.

But biases affect risk, allocations, and outcomes.  Alternatives including venture capital and private equity have outperformed in the past and may do so again.

A 2022 University of Chicago paper concludes that “Venture capital performance remains remarkably persistent across funds raised by the same general partner.  In contrast, buyout funds’ performance persistence becomes noticeably weaker over time.”

However, there’s a trade-off in liquidity and transparency.  If it’s liquidity you want, check the fine print for lockups, redemptions, gates, and fees.

“The top LBO funds invest money quickly, but the liquidation of portfolio companies is a long process, requiring more than 12 years from the vintage year,” according to Jeffrey Hooke, senior lecturer, Johns Hopkins University.

Before choosing an OCIO, know which way they lean.

Failure to communicate

Here’s one last point to keep in mind. 

Our spring 2024 OCIO Directory

(download OCIO Directory as PDF)

I worried about so many things during my life, but the really tough hits I never saw coming. — Anonymous

Our 2023 endowment performance report features ten-year investment returns for one hundred thirty-eight US and eight Canadian institutions, the latest available.  In addition, we include one-year returns for 2023, 2022, 2021 along with AUM, as of their respective fiscal year-ends.

NACUBO and Commonfund released their annual endowment study two weeks ago chock full of facts and figures.  Chief among them, the 688 participating U.S. college and university endowments and affiliated foundations returned 7.7 percent, net of fees, for fiscal 2023.  Trailing 10-year returns averaged 7.2 percent.

NACUBO noted that “Historically, institutions with larger endowments often have secured better one-year investment results than those with relatively smaller endowments.  The reverse occurred in FY23, owing to smaller institutions’ substantially larger allocations to publicly traded securities.”

All this is nice to know, but in our line of work, acquiring talent and capabilities for institutional and family office clients, we like hard data on the individuals who drive the investment decisions.  Returns may be historical, but they are useful cues to an investor’s process and discipline.

As it turns out, of the 688 institutions in the NACUBO study, including 138 endowments over one billion AUM and 77 between $500 million and a billion, only about a third have an internal chief investment officer or designated investment head, mostly those in the above mentioned half a billion and up categories.  These are the ones that catch our eye.  The rest use OCIOs, investment committees and consultants, RIAs, brokers, and well-meaning volunteers.

The lay of the land

Institutional investors had a lot on their minds the last few years: Covid and a market crash in 2020, meme stocks and valuation- frenzy in 2021, war and rates in 2022, and bank busts in 2023.  But other than the specter of rate increases, no one saw these disruptive outliers coming.

And yet, the best investors somehow find a way to outperform.  After years of recruiting investment talent, we’ve observed that top performers tend to stay on top, despite the occasional speed bumps.

Cambridge Associates concurs. In a 2022 paper on investment advice for the entrepreneurial mindset, CA studied equity portfolio managers over a twenty-year span and found that, “On average, “successful” managers underperformed about one quarter of the time over any rolling three- and five-year periods.”

Unfortunately, it’s hard to find good data on nonprofit CIOs with twenty years or more of tenure, but ten years is doable.  Hence our emphasis on ten-year performance.

We also list the current endowment CIO or designated head of investments, although often performance was baked in by the prior CIO.

Paula Volent for example, now at Rockefeller University, was for twenty years the CIO at Bowdoin College and her fingerprints linger on Bowdoin’s latest 11.7% ten-year return, topping our charts yet again.

Where are the women?

The cautious seldom err or write great poetry. – Howard Marks’ favorite fortune cookie, Dare to Be Great II

J.P. Morgan Chase is king of the realm these days, but during my time at Chemical Bank there were other big dogs walking the “Street.”

The neoclassical, money-minting, “House of Morgan” sat kitty-corner to our headquarters at 20 Pine.

Next door, David Rockefeller’s baronial fiefdom, the sixty-story, glass and steel slab, One Chase Manhattan Plaza, towered over Chemical’s pre-war high-rise and Jean Dubuffet’s tangled abstract, Group of Four Trees, flipping us off from the courtyard.

And uptown, Manufacturers Hanover lent to the corporate elite from their Park Avenue perch, eyeing with distain Chemical’s middle-market rabble. While high above the fray, Walter B. Wriston’s Citicorp lorded it over us all.

But in the end, Chemical smelled blood, devoured their unwary prey, and for desert had its way with the Morgan name. If you can’t beat them, eat them. J.P. would understand.

That thing called “edge”

Mark LaMonica, Director of Product Management at Morningstar, describes the elusive, hard to define attribute called “edge” as better information, analytics, or behavior. But no one in the investment industry ever built a great business without another edge we call “guts,” the confidence and courage to take a chance.

With vast, industry-wide reserves of talent and resources, the odds of any single firm vaulting organically over the competition are slim to none without disruptive technology, blockbuster products, or an unbeatable track record.

But, disruptive technologies and blockbuster products – computers or ETFs – come around maybe once every fifty years, as Angelo Calvello points out in Institutional Investor. And, while consistent, multi-decade investment superiority isn’t impossible, it’s exceedingly rare.

Promises kept

Jon Hirtle, executive chairman of OCIO firm Hirtle Callaghan considers investment management a mission and describes the stewardship of client wealth as “promise-driven” investing.

When we ask our clients which risk matters most, they almost always place “mission failure” at the top of the list. Serious investors care deeply about keeping their promises.

Those promises can be tallied up to calculate a “required return.” Achieve that required return and we can fulfill our promises; fail to achieve it and we are likely to disappoint the people and causes we love.

But here’s the challenge. To endure and deliver on those promises made, which course can overcome the all-too-common clutch of complacency?

M&A or the highway

History doesn’t repeat itself, but it often rhymes. – Mark Twain?

My grandmother, born in 1896, used to describe recessions as panics – economic brushfires stoked by a bank collapse or two and lurid headlines of panicked customers storming the ramparts, window jumpers, and families in ruins.

The newspapers had a field day flogging the latest hearsay and then it all blew over, but rumors and innuendo were never good for business and banks were always suspect.

It wasn’t until the countrywide “Bankers Panic” of October 1907, triggered by a massively leveraged attempt to corner United Copper Company stock, that political and business sentiment finally coalesced around legislation leading to the Federal Reserve Act of 1913.

As an aside, the right to vote “without regard to sex,” otherwise known as the 19th amendment, passed final muster on August 18, 1920. And it was not long after that my grandmother accepted a steady teaching position at Michigan Agricultural College (aka Michigan State University) and cast her first ever vote for Calvin Coolidge in the 1924 presidential election.  Progress in fits and starts, but progress, nevertheless.

Bygone family conversations came to mind as I scanned the headlines last week.  Labor market healthy.  Don’t be so sure.  Stock market shaky.  What to do?  Rates?  Who knows.  And beware a looming venture capital apocalypse.  Retreads, recycled, reprinted.

But, inevitably, far from that madding crowd, each new generation of investors and entrepreneurs has something inventive in mind, quietly creating those next big things, building a better tomorrow.

In our line of work, acquiring talent and capabilities for institutional and family office clients, we see a steady flow of quality candidates, OCIO mandates, and appealing acquisition opportunities.

2024 is looking good.  Recruit, consult, connect.  We’re here for you.

– Charles Skorina

*Images: The 1907 Crisis in Historical Perspective, The Center for History and Economics