New York, May 27, 2021: An exclusive ‘Respada CIO Summit,’ the first in a two-part series was hosted on 27 May, by Respada, an invitation-only niche platform providing private market opportunities to the ultra-affluent. Moderated by John Prince, CEO of Respada, the summit hosted an expert panel to discuss trends in direct investments, impact and ESG drivers, co-investing and risk tolerance. Panelists included Eric Olson, CIO of Olson Capital, Masaki Yano, CFO of REAPRA, and Thyra Zerhusen, CEO & CIO of Fairpointe.
The summit kickstarted with Olson outlining high-level considerations that family offices need to have in terms of portfolio management. He said that investment portfolio managers should foremost have a comprehensive idea of risks present on the immediate horizon and how they can be mitigated. In addition to the classic kinds of risks such as directional market risk and credit risk which are “highly likely but controllable,” Olson highlighted sovereign risk as a growing concern. “Globalization of investment portfolios and cross-company exposure are bringing sovereign risk back into the forefront. So, it is important for the investment community at all levels to consider it and for CIOs to have a plan for increased sovereign exposure,” he added. Following risk identification, Olson underscored the need for diversification, terming it as “one of the best tools in risk management and portfolio management”. Illustrating with an example he said, “COVID was a major event in 2020 that highlighted the need for diversification. Any portfolio that had a significant allocation to the US Treasury in addition to other asset classes saw a great benefit”. Further, Olson noted, “We are moving into a transit inflationary period which may or may not be transitory. Associated with that is a huge ballooning of sovereign debt in the US and other developed countries”. Sharing her approach to diversification, Zerhusen said, “Eighty percent of the stocks I buy are mid-cap but to minimize risk I use a good valuation discipline and buy stocks with pretty good balance sheets”. Zerhusen also recommended buying stocks that have products or services that other companies cannot work without.
Hailing from an interesting background of early-stage venture investing, Masaki Yano spoke about his approach to investments. “We have an active, hands-on approach and it is a mix of both, investing and founder or management coaching.” Drawing from Warren Buffett, Yano drew an analogy between a castle and a good investment. “A good investment has a good moat and a good person that governs the castle. In a similar sense, we place a lot of emphasis on the founder and their long-term vision.” Yano also said that his recommendation for allocation to family offices will largely depend on testimonials from founders that he previously invested in. “I think we are unique in terms of how much we focus on the founders.” Additionally, Yano emphasized that venture capital is structurally a good place to invest in. “The cost of investment is low since we invest early and this gives you the benefit of being able to invest in many companies. Further, a hands-on approach helps you manage risks,” he explained.
A good investment has a good moat and a good person that governs the castle. In a similar sense, we place a lot of emphasis on the founder and their long-term vision.
Segueing into the topic of liquidity, Prince asked Zerhusen to share her thoughts on liquidity being trapped in mid-cap investing, where one might have to stay long-term unlike other forms of investing. Zerhusen responded, “Liquidity in mid-caps is better than in small caps. However, over the last couple of years, there was not much liquidity in small and mid-caps because a lot of money had moved into passive and large-cap stocks and momentum stocks. I think the pendulum now is going back to more stock picking.”
Moving on to the topic of risk mitigation, Olson said that the best way to mitigate risks is by having good governance. “The first step is to identify your objectives. For most family offices the objective is capital preservation and liquidity is a part of that.” Giving insight into her risk mitigation model, Zerhusen said “Understanding the business, talking to clients and competitors, and meeting the management are key steps in managing risk,” she added.
The final leg of the summit included a Q&A session where Timothy Trela, Partner Member at Respada, asked if collaboration is commonplace among CIOs. Yano answered, “Yes we do collaborate. Different venture investors invest in different stages and different VCs have different philosophies. So, if a founder does not fit our profile, we refer them to another VC who might be interested and vice versa”. “The other way is during exit when we sell a partial stake that we own to different VCs who like to invest at a much later stage,” Yano added. John McLeod, Partner Member at Respada, asked the panelists if they use stop-loss sell orders with every equity they buy to limit downside risks. Olson answered, “I generally have a stop-loss in mind for every liquid investment that I get involved in. However, whether the order is placed or not depends on the volatility and market conditions”. Olson also added, “I believe in fundamentals and I make trade evaluations and portfolio allocations based on metrics that I think are going to be successful over time”. McLeod further questioned if stop-loss orders are managed after share prices rise so they can be stopped at a reasonable level in rising markets. Olson responded, “A basic determination that CIOs have to make is what are the overall market conditions? Are we in a trending or a sideways market? These are important decisions.” “You are not looking to buy the bottom or sell the top but simple techniques like looking closely at moving averages and divergences in the trending market work well,” Olson concluded.