Family office CIO strategies: navigating periods of market turmoil

The current market turmoil – driven primarily by concerns stemming from the coronavirus outbreak – has lead me to reflect upon my experiences working at family offices while living through previous periods of extreme market volatility and steep drawdowns in equity markets. Certainly the circumstances surrounding this episode of market turbulence are unique, and no two examples of bear markets are identical; however, there are lessons learned in how to approach these situations that I find helpful to draw upon when faced with similar situations; specifically how to frame, engage and implement investment decisions with family office Principals during times of severe market stress:

Remain calm, but be diligent and thorough

When evaluating the drivers of the current market environment and their potential impact on the portfolio, do not panic or make rash changes.

  • Continue to focus on the long-term goals for the family, remembering the investment mandate and agreed upon strategic asset allocation.
  • Take a detailed look through the entire portfolio to determine if there are any investments that are particularly at risk, and make decisions on those positions in a timely fashion.
  • Explore and evaluate potential hedging strategies, being mindful that buying protection in periods of elevated volatility can be prohibitively expensive, impacting the value of the hedge.

Continuous and meaningful communication

Staying calm and patient during these volatile times is difficult advice to follow, particularly if the Principal(s) is on edge given potential sharp declines in the portfolio and the constant stream of headlines. Regular and candid communication with the family is crucial.

  • Keep them informed on the latest market activity and the impact on the portfolio, and set expectations on how existing investments will fare if the downturn continues.
  • Determine if there is a change in risk profile and/or pressure points for the principal, and outline courses of action for various short-to-medium-term scenarios based on these conversations. For example:
    • If protection of the principal and reduction of volatility is the primary concern, consider a methodical approach to taking risk off in increments at various levels as the market falls.
    • Conversely, if there are potential opportunities to take advantage of oversold markets, establish a framework articulating what areas are of particular interest, the circumstances that need to be in place to invest, and what the size of those bets should be.

Resist the urge to make large, reactionary changes to the portfolio

Timing the market with any precision and consistency is incredibly difficult, so resist the urge to make large bets in the heat of the moment, when volatility is highest.

  • Market sell-offs driven by unexpected, non-economic events (like the coronavirus) are not entirely based on fundamentals. Therefore, it is virtually impossible in the near-term to predict the extent of the impact of a pandemic or what the long-term economic effects will be.
  • Past outbreaks typically result in a sharp negative move in markets followed by a commensurate recovery. However, be mindful of the effect of the pandemic on business activity and any potential impact to the overall economic outlook, and should review the strategic asset allocation as the long-term effects become clearer.

Maintain excess liquidity

When financial markets are experiencing downward pressure, having sufficient liquidity is paramount.

  • Maintain cash – or cash-like equivalents – that can fund the principal’s expenses and capital commitments for an extended period of time (at least one year). This will help reduce the pressure and unease of riding out a prolonged period of market stress and volatility.
  • Additionally, having excess liquidity during these challenging periods will also serve as dry powder, allowing you to take advantage of investment opportunities coming as a result of the sharp downturns once the market volatility and negative news cycle have subsided.

Develop a course of action

Develop a framework to assess the appropriate time to begin re-investing in the market, and what approach to take when that moment comes

  • Determine asset classes, market sectors/industries, and specific stocks that are well-positioned to outperform on the heels of the market sell-off.
  • Assess areas of the market that stand to benefit from the new economic reality post downturn. Also, identify what areas were oversold in a “baby with the bathwater” scenario and should have an asymmetric return profile once normal market conditions resume. For example:
    • Quality businesses trading with attractive valuations that one,should hold up better if the market downturn is not over and two, are more likely to make a strong recovery when the turmoil has subsided.
    • Specific industries or market sectors that have either been oversold, or should benefit from the post-crisis environment.
  • Re-assess the long-term asset allocation of the family’s portfolio factoring in any changes in economic paradigm and outlook following the market downturn.

Important Disclosures

Opinions and data are as of the date of this article and are subject to change.

Investing involves risk, including the possible loss of principal. Past Performance is no guarantee of future results.

This material has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. This material should not be construed as research or investment advice and is subject to change at any time. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. The information in this article has been compiled from sources believed to be reliable; however, SVB makes no representation or warranty as to its completeness or accuracy. 

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. 

Any investment strategies or ideas discussed in this material are for information purposes only. There is no guarantee that any investment strategy will achieve its objective, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. SVB recommends that investors independently evaluate specific investments and strategies and encourages investors to consult with their own financial and/or other professional advisors before making any financial decisions. 

Investment products mentioned herein, including stocks, bonds, and mutual funds may lose value and carry investment risks. Asset allocation, diversification and rebalancing do not guarantee a profit or protect against a loss in declining markets.

The Chief Investment Office (CIO) provides thought leadership on market commentary, wealth management, investment strategy, and portfolio management. The CIO Notes and market commentary are developed for SVB Private. 

The materials on this website are for informational purposes only, are subject to change and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein.