The Great Recession may have left many wealthy families market-shy, but Bessemer Trust, the largest family office, is acting aggressively on behalf of clients.
The Great Recession may have left many wealthy families market-shy, but Bessemer Trust, the largest family office, is acting aggressively on behalf of clients.
The 100-plus-year-old firm, originally formed in 1907 by Henry Phipps Jr. to manage his family's wealth after he and his partner, Andrew Carnegie, sold Carnegie Steel to J.P. Morgan, started to increase its weighting in riskier assets last year.
It recently boosted growth-oriented assets even further, through investments in mortgage-backed securities, global fixed income, especially in the sovereign markets, and global small-cap equities.
“We want to be pushing the other way on risk,” said Marc Stern, chief investment officer at Bessemer, which began managing other families' money in the mid-1970s. “Leaning into the prevailing wisdom is something we very much try to do.”
For example, the firm, which has $55 billion in assets and 2,000 clients, all of whom must have $10 million to place with Bessemer, recently asked BlackRock, Inc. to make a custom portfolio of non-agency mortgage-backed securities, with no restrictions.
“We don't want to limit the team to a particular credit quality, sector weighting or duration,” Mr. Stern said. “We're looking for strong returns over the next several years, and in this part of the portfolio, we are willing to accept some volatility along the way.”
The benchmark ratio recommendated for clients is now about 68% growth-oriented assets to 32% cash and bonds, compared with a fifty-fifty split a year ago. The firm's allocation to external managers, which generally handle riskier assets for the firm, has also increased to 40% of total assets now, from 35% a year ago, Mr. Stern said.
Mr. Stern joined Bessemer in 2004 from Bernstein Investment Research and Management Inc., where he was head of the wealth management group.
Unlike open-architecture advisory firms, Bessemer uses a combination of internal and external managers to handle assets and believes that having its managers participate in the markets every day helps them make stronger asset allocation decisions for clients.
Global large-cap and mid-cap equities, convertible bonds, commodities and other inflation-linked investments, as well as high-quality municipal and taxable bonds, are all managed inside the firm by a team of about 50 managers, analysts and traders.
Global-small-cap equities, high-yield bonds, mortgage-backed securities, global fixed income, hedge funds (about 70 at this time), private equity and real estate are overseen by external managers, which are in turn chosen by a subset of 30 members of the investment team.
“You need to be like a portfolio manager,” Mr. Stern said. “But it's a question of what managers to own, instead of what securities.”
Eleven members of the manager-picking team focus solely on hedge funds, always considered a growth asset at Bessemer. “It's a particularly critical area,” Mr. Stern noted, because it lets the firm offer its clients specialized strategies that it would not be able to offer on its own.
The hedge fund selection team at Bessemer is headed by Daphne Bradshaw-Mack, who came on board more than 10 years ago from Russell Investments. She finds funds through a combination of word of mouth, conferences and sometimes through funds' approaching Bessemer directly, Mr. Stern said.
Ms. Bradshaw-Mack and her team vet not only the funds' performance but also their counterparties, prime brokers, accountants and lawyers. “That's the guts of the firm, and that determines whether they're going to be able to successfully implement and sustain their operation,” Mr. Stern said.
Sometimes, when hedge funds choose not to reveal that information, Bessemer has to walk away, a policy which has caused it to miss out on very secretive but highly successful managers but which also has allowed it to avoid frauds like the one perpetrated by Bernard L. Madoff. Approached by Madoff feeder funds several times in recent years, the firm always quickly crossed them off the list.
“At the earliest stages of that due diligence, the investment potential went away,” said Mr. Stern, noting that the first red flag was when Bessemer heard it couldn't meet with the fund manager. “We didn't expect a fraud; it was just the blocking and tackling,” he said.
More ordinary funds are chosen with an eye toward strategy, consistent returns, a team-oriented approach, and a deep bench of managers who can assume the lead when necessary. Overall, it's a labor-intensive process, Mr. Stern noted. “It's a lengthy process, and an expensive one, but we're looking to place assets for years and years,” he said.
Bessemer typically adds only five to 10 managers a year, after looking into about 1,000 possibilities. The firm will end a relationship when a manager significantly underperforms or when there's a change in key management that could hurt long-term success. Typically, Bessemer ends relationships with about five managers a year, Mr. Stern said.
Perhaps because of Bessemer's measured approach, its benchmark mix of growth assets and cash, and high-quality bonds returned just over 20% last year, only slightly better than a comparative 70/30 mix of S&P 500 issues and Barclay's Bond Index offerings.
Over the past five years, Bessemer's benchmark has returned 4.5%, compared with 2% for the publicly available comparison. But that's acceptable for Bessemer's generally cautious clients, Mr. Stern said. “In general, it's working well,” he said. “It's essential that we participate in stronger markets and limit our losses in downturns.”
STEERS CLEAR OF GOLD
This year, even while offering clients more exposure to growth assets, Mr. Stern said he and his colleagues are being careful to stay away from some assets, such as gold and commodities, which have been on a tear but are unlikely to outperform for much longer.
Mr. Stern believes that the recession ended in the second quarter of 2009, and he said too many investors are equating higher liquidity with higher inflation by buying into commodities and avoiding dollar-related investments. He believes the far more likely scenario for the global economy is deflation, and, in light of that risk, will look for like-minded managers and keep an eye on asset allocation.
“You constantly need to refresh and rejuvenate your platform,” he said. “You can't sit back and admire it. That won't end well.”
E-mail Hilary Johnson at hjohnson@investmentnews.com.
