Smart money: The science of investing for decades to come

There has always existed, almost by definition, a class of "smart money". It began with the investors, businessmen and speculators who bought the near-worthless debt of the young US states in 1789, correctly gambling that Alexander Hamilton, the first US Secretary of the Treasury, would make good on the paper.

In more recent times it was the developers who bought New York property in the 1970s, when the population of the crime-ridden city was shrinking, and had the patience to wait decades for times to improve.

Of course, hindsight helps to spot smart decisions, and it is impossible to generalise, as families of the rich are prone to the same mistakes and misplaced optimism as the merely well-off.

Yet a rich family has two big advantages when it comes to deciding on the best places to stash its money for the great-grandchildren: time and capital.

For instance, one idea often floated in family-office circles is buying up cheap banks of land that might be valuable in 20 to 30 years' time, based on the impact of big long-term trends.

The challenge for families wanting to invest for decades rather than years is that investment products do not exist to do so - or rather, no asset manager or private banker is going to wait until 2052 to be paid.

"You are not going to get any fund to invest on a 10- to 15-year time horizon," says Stephen Fern, head of the G9 Family Office Network. "Is there a mechanism to reward people today, when the effect of those decisions is 10 years down the road?"

Plenty of mechanisms exist to reward asset managers up front, or when times are good. But the recent failure of high-fee vehicles such as hedge funds is leading many family offices to reconsider.

The alternative then is to "do it yourself". Jack Ablin, chief investment officer of the Harris Private Bank, says there are a number of family offices who think in terms of 60- to 100-year timeframes. "Instead of investing in partnerships, they can invest in the underlying assets," he says.

Such families like to buy land or timber holdings as well as whole companies. "Commonly these families have made their fortunes owning private businesses and intend to continue doing so," he says.

When it comes to reacting to the recent past, in which markets lurched from crisis to hope and back, most families appear to have no special insight. "Between 2008 and 2011 there was lots of dialogue, but not much of families actually doing much," says Mr Fern.

This reflects the fact that in most families, few people are interested in the details of investing, and they are at heart conservative.

"Great wealth is preserved in a portfolio of stocks, bonds and real estate, and in direct investments in good companies," says Charles Lowenhaupt, head of Lowenhaupt Global Advisors.

So, as with any class of investors, there are long-established and experienced sages who can weather a crisis and wait for better times. Many of these are now looking to Europe, and securing investments in real businesses that are robust enough to survive a prolonged dislocation.

© The Financial Times Limited 2012. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation