Q3 2018 Special Report • Family Offices Dynasty Building The world’s 25 wealthiest families have maintained their fortunes over generations p21
Breaching the Wall Private banks are starting to gain access to mainland China p3
CLO Savvy Families are among the investors piling into an esoteric credit market p8
Good Bonds Sustainable fixed income is out there if you know where to look p13
The Prospector Athena Capital’s Lisette Cooper explains how she finds alpha p18 THOUGHT LEADERSHIP PRESENTED BY ANCHIN PRIVATE CLIENT
Estate Planning Under the New Tax Law
WITH THE NEW federal tax law in mind, now is Estate plans may include many different types of a good time to revisit estate plans and make sure transfers—from cash to interests in family-owned they are working as intended. While it goes without businesses to loan forgiveness. Since the tax law saying that each person may have a different could change again, it might be beneficial to give approach to making arrangements for his/her estate, complete gifts now rather than those that are it is especially important to keep estate plans up to gradual or incomplete. Examples of complete gifts date during times of change—such as when a family include cash or securities, whereas an example of an grows or laws are modified. Staying informed about incomplete gift may be a QPRT (qualified personal tax law provisions helps individuals make smart residence trust). With a QPRT, an individual gives decisions about the distribution of their assets. away a primary residence in a trust. Yet if the individual dies during the term of the QPRT, the The recently passed federal tax law contains reforms property is included in the estate, and the transaction that may impact transfers. For 2018, the federal has not been completed. Gifting outright is a surefire tax exemptions for estate, gift, and generation- option for giving wealth that utilizes the increased skipping transfers increase from $5,490,000 in 2017 exemption. to $11,180,000 for individuals and from $10,980,000 in 2017 to $22,360,000 for married couples. Without It is also worth considering the benefits of using intervention from Congress, these exemptions Grantor Retained Annuity Trusts (GRATs). This will revert back to the 2017 amounts (adjusted type of trust allows for gifting with little or no for inflation) on January 1, 2026. This means that transfer tax; this technique works in any regulatory individuals now have double the amount of tax- environment. Non-grantor trusts may be a solution free wealth distribution available if the exemption to the limitation of state tax deductions. Homes, has not yet been used. It also means that individuals businesses, and investment assets can be included who already have used their lifetime exemption, in this kind of trust. Because non-grantor trusts have now have more opportunity to gift without tax their own state and local tax deductions, they may consequences. be an effective way to maximize tax deductions.
The annual gift tax exclusion increased for 2018. Due to the fact that the new provisions to the tax law Individuals may gift $15,000, and married couples could impact estate planning, now is a good time may gift $30,000 before utilizing the lifetime to revisit your arrangements. For more information, exemption or incurring gift tax if the exemption please visit www.anchinprivateclient.com. has been exhausted. Previously, the annual gift tax exclusion was $14,000 for individuals and $28,000 for married couples.
Jared Feldman, CPA Ehud "Udi" Sadan, CPA, CGMA Leader - Anchin Private Client Leader - Anchin Private Client Private Client [email protected] [email protected]
For more resources, please visit www.anchinprivateclient.com.
Bloomberg-APC_082018.indd 1 8/16/2018 10:16:31 AM Contents
BLOOMBERG MARKETS Editor, Bloomberg Markets SPECIAL REPORT • FAMILY OFFICES Christine Harper Q3 2018 Special Reports Editor Siobhan Wagner Features Editor Stryker McGuire
COVER ARTWORK BY JEE-OOK CHOI REST ASSURED WITH Maples Fund Services offers customized operational and technology solutions that enable institutional investors to execute sophisticated investment programs, assets under enhance their risk management and 80B+ administration 10 offices globally governance practices and provide investment teams and fiduciaries with portfolio, performance and risk insight and information across their investments.
Establishment Fund Accounting Investor Services Middle Office Regulatory Compliance Portfolio Analytics and Reporting maplesfundservices.com Forward Guidance Private Banks Are Starting To Breach China’s Wall Around Its Wealthy By CATHY CHAN and ALFRED LIU
ILLUSTRATION BY MATT CHASE
IT’S HARD TO PUT NUMBERS on the vast private banking opportunity in China, but here are some: $29 trillion in household wealth and $15 trillion in the asset management industry. Perhaps the most crucial number right now is the more than $1 trillion packaged by local Chinese money managers into principal-guaranteed investment products, which are the focus of a government crackdown. That intervention has given global banks a reason to reevaluate onshore China, a market that none of them has come close to conquering. What has long looked like a slam-dunk opportunity— the second-biggest pool of ultrarich people in the world—also comes with cumbersome regulations and strong competition from homemade financial brands. But Francois Monnet, head of private banking North Asia at Credit Suisse Group AG, is betting it’s still better to arrive early to the party than late. “Going onshore is a necessity for foreign banks in the next five to 10 years, and it has to start when the market opens up, which is pretty much now,” Monnet says. Credit Suisse is working on a business plan that involves targeting rich Chinese entrepreneurs as the bank’s onshore client base and, later, forming partnerships with local banks and insurers. It would be following UBS Group AG, which has doubled its wealth management head count in China in the past two years and is still hiring. Most other big names in private banking are managing Chinese money from Hong Kong and Singapore.
FAMILY OFFICES 3 The collective fortunes of China’s wealth management business come without providing a China breakdown. uber-rich grew a staggering 65 percent, or closer to the international market, when Still, the barriers to entry haven’t all $177 billion, last year, according to the the yuan is more liberalized with more disappeared. Recruiting experienced staff Bloomberg Billionaires Index, a ranking of products, the foreign banks will be more is difficult. So is marketing yourself the world’s 500 wealthiest people. competitive in that scenario.” against banks operating on a completely The money is showing up all over the Credit Suisse—which gets about different scale: Bank of China Ltd. has world, in condos in Sydney and Vancouver two-thirds of its Asia-Pacific revenue from 288,000 staff spread across the nation. and art auctions in London. But capital wealth management and investment “We’re not trying to compete with controls keep the vast majority within the banking—is looking to build its onshore the local banks,” says Amy Lo, greater mainland’s borders, where a wealth Chinese business from scratch, with a China head of wealth management at management industry unlike any other has focus on marketing asset-allocation UBS. “We want to be the dominant sprung up to grab a slice of the bounty. services and structured products without international player in the market, but we China’s rich tend to be business the guarantees of wealth management don’t need to be the biggest local player owners from their 40s to their 60s who products. If successful, that would pit in terms of number of people and use multiple financial institutions as Credit Suisse head-to-head against UBS, branches. That’s not our strategy.” investment “supermarkets,” Boston which has broken ranks with most global An obvious tactic for foreign banks Consulting Group and Fuzhou, China- peers in the amount of capital it’s is to market their access to global based Industrial Bank Co. wrote in a committed onshore. investment products, especially given December report. The most popular item UBS Group Chief Executive Officer how badly Chinese equities have done on the shelves, wealth management Sergio Ermotti made waves in early 2016 since their $5 trillion crash in 2015. products, typically provide a fixed rate of when he pledged to double the number of But money managers still can’t move return, a set maturity date, and either an staff in China over five years, adding funds out of China without obtaining an explicit or implicit guarantee from whoever 600 people across wealth management, investment quota from the government, raised the money. Proceeds end up in investment banking, equities, fixed one of the nation’s safeguards against everything from corporate bonds to income, and asset management. destabilizing capital outflows. Quota limits property to loans and, sometimes, in a “China is a great opportunity, like it under the main outbound investment layer cake of other products. has been for the last 20 years,” Ermotti program were frozen for three years “China’s wealth management said at the time, a reference to how through April of this year. They totaled products are ones the foreign banks could tantalizing yet elusive the market has been $103.2 billion as of July 30, enough to buy hardly approve because of risk and for non-Chinese banks. just 0.3 percent of the U.S. stock market. compliance concerns,” says Joe Ngai, Some two and a half years later, UBS That helps explain why most global managing partner of greater China at is ahead of schedule: It has 170 people banks, including Morgan Stanley, JPMorgan McKinsey & Co. “The biggest problem working in wealth management in China Chase & Co., and Citigroup Inc., are foreign banks have is they don’t have a and expects to meet its overall hiring focusing for now on serving wealthy value proposition. There are a lot of target by the end of 2018. Chinese outside the mainland’s borders. products they can’t do.” UBS’s local bank got a private-funds Goldman Sachs Group Inc., too, has yet to Enter the regulators. Since they license last year. This means that rather make a major foray onshore; its Chinese pledged to ban banks from selling wealth than sell mutual funds to the mass market, joint-venture partner shut down an asset management products with guaranteed it can tailor Chinese investment funds to management business last year. yields or principal late last year, the local wealthy individuals for the first time “You have to be patient, flexible, breakneck pace of growth in that product through its wholly owned asset and diversified to crack the onshore China line has gone into reverse. Officials are also management company. In December the market. There is enormous potential once opening China up to global finance brands, Swiss lender also unveiled a partnership you have established an infrastructure, committing in April to allow foreign with Qianhai Financial Holdings Co. that’s but it takes time,” Lo says. “The recent companies to own majority stakes in their aimed at winning affluent young customers policy enhancements are a positive securities, fund management, futures, and in a high-tech commercial zone just inside development that will help new entrants insurance joint ventures. the southern Chinese border. coming into the market.” “The handicap for foreign banks’ UBS reported in July that net new wealth business is getting smaller,” Ngai money in the Asia-Pacific region grew Chan is an investment banking and private says. “When the market starts to become 2.3 percent in the second quarter, vs. a equity reporter and Liu is a finance reporter rational, when the rules of the Chinese 0.1 percent drop across all regions, at Bloomberg News in Hong Kong.
4 BLOOMBERG MARKETS SPECIAL REPORT WHEN RELYING ON THE FAMILY FOUNDATION ALONE IS NOT ENOUGH TO ACCOMPLISH YOUR
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Bruce Nauman, Sex and Death by Murder and Suicide, 1985
ART IS ONE OF THE MANY ways the Hoffmann-Oeri clan has been helping shape the culture of Basel. The family, whose $25.1 billion fortune is 22nd on Bloomberg’s ranking of the world’s richest dynasties, traces its wealth to Fritz Hoffmann-La Roche. The Swiss businessman set up a pharmaceutical company in Basel in 1896, producing an orange-flavored cough syrup called Sirolin. Now a global giant, Roche Holding AG is still headquartered in Swit- zerland’s third-largest city, just across the border from France and Germany. Family members have long been philanthropists in Basel. The late Maja Hoffmann-Stehlin, one of the scions, established in 1933 the Emanuel Hoffmann Foundation to collect, conserve, and pub- licly display works of art. Today the collec- tion is housed at the Schaulager center for Bruce Nauman, Leaping Foxes, 2018 contemporary art in Basel (the white build- ing to the left). The museum hosted an exhibition of the New Mexico-based artist Bruce Nauman from March 17 until Aug. 26 and featured the world premiere of one of his most recent works, Leaping Foxes, which the Emanuel Hoffmann Foundation acquired this year. (Leaping Foxes, along with the other works shown here, are owned by the foundation.) While the exhibit has now ended in Basel, it will be on view at the Museum of Modern Art in New York from Oct. 21 to February 2019. For more on Bloomberg’s billionaire rankings, turn to page 21. For updates on billionaires’ daily worth, go to {RICH
7 Credit Families Are Carving Their Initials Into This Hot Three-Letter Acronym Market By SALLY BAKEWELL
SOME OF THE WORLD’S WEALTHIEST CLANS have been throwing highest-yielding. The equity is last in line, making it the riskiest but their money into an esoteric piece of financial engineering that has also the most potentially lucrative piece. Wall Street in its thrall. It’s that last part, the equity chunk, that’s been of particular They’re called collateralized loan obligations, and they trans- interest to family offices, say CLO managers and investors including form riskier company loans into bonds of varying risk and reward. Tricadia Capital Management LLC and Investcorp Credit Management Buyers have included affiliates of the Pritzker family, Bill and Melinda US LLC. Returns on CLO equity can range from 12 percent to a Gates, and the family office of Seattle Seahawks owner Paul Allen, remarkable 20 percent, standing out in credit markets where cor- who co-founded Microsoft Corp. with Gates. The Huizenga family porate bonds have delivered little or negative returns this year. behind the Waste Management Inc. empire as well as Iconiq Capital Family offices “make an ideal investor in the less liquid part LLC, which invests on behalf of wealthy clients including Facebook of the CLO because of their ability to hold the investments through Inc. co-founder Mark Zuckerberg, have both had CLO exposure in maturity, as well as their ability to withstand volatility that public their portfolios at some point. The Anschutz family, led by Los companies or insurance companies may have a hard time dealing Angeles Lakers co-owner Philip Anschutz, is another player. with,” says Michael Barnes, co-chief investment officer at Tricadia. The presence of the hyperrich in deals underscores the wid- Their investment is helping fuel growth in the U.S. CLO market, which ening demand for CLOs, a three-letter acronym that’s inspired fear had some $540 billion in deals outstanding at midyear, up from and fervor in the debt markets this year. Proponents point to the about $250 billion in 2008. Demand accelerated because both the CLOs’ potential for double-digit returns, resilience to rising interest CLO bonds and underlying loans are “floating rate,” meaning they rates, and low defaults through last decade’s financial crisis. Others pay more yield as interest rates rise. Some banks lifted their sales such as KKR & Co.’s Jamie Weinstein, however, have raised questions forecasts to fresh highs after a rule that made CLOs more expensive about whether the frenetic pace of sales is spurring reckless to assemble was repealed this year. Known as the skin-in-the-game behavior just as the prospect of an economic downturn looms over rule, it had been credited with helping the market expand. It required an increasingly leveraged corporate America. CLO managers to buy pieces of their own deals to dissuade them “It’s attractive from a total return perspective. It’s a robust from selling bonds backed by shaky loans. Managers often borrowed structure,” says John Popp, global head and chief investment officer money to finance their own position in the deal, and the effort to of Credit Suisse Asset Management’s Credit Investments Group. win that financing amounted to a global marketing exercise that “You only have issues if you have a manager investing in a dispro- educated investors, including family offices, on CLOs. “It’s been portionately high number of credits that default and have losses.” quite dramatic,” says Maureen D’Alleva, head of performing credit The participation in CLOs by investors mentioned in this story at Angelo Gordon & Co., referring to the pickup in CLO demand. was revealed by people familiar with the investors’ finances who “CLOs have seen an increase in the overall pool of investors from asked not to be identified because the information is private. In pension funds to family offices.” some cases tax filings also disclosed the investments. The families’ For some, the fast growth has recalled the subprime crisis, wealth managers either declined to comment or didn’t respond to in which demand for high-yielding credit fueled the creation of debt requests for comment. structures stuffed with low-quality loans. Those in the industry say CLOs are typically assembled by managers such as Blackstone CLOs are different because the underlying loans to companies aren’t Group’s GSO Capital Partners, the Carlyle Group, and Ares as vulnerable to rising interest rates as subprime home borrowers Management, which buy loans that have been made to companies were a decade ago. Among the 1,500-plus U.S. CLOs rated by with a subinvestment-grade rating. The managers then package the S&P Global Ratings since 1994, only 36 tranches across 21 trans- loans into a structure that can be divided into interest-paying bonds actions had defaulted as of mid-2018. and a chunk of equity. The income from the loan payments is paid Of course, similar arguments were made before the subprime to the bondholders in the order of their ranking within the structure, debt collapse about the historical resilience of mortgage debt.
from the most senior and lowest-yielding to the most junior and “Securitization is not alchemy,” Boaz Weinstein, chief investment PREVIOUS SPREAD: CLOCKWISE FROM LEFT: COURTESY TOM BISIG/SCHAULAGER; COURTESY BISIG & BAYER/SCHAULAGER;COURTESY TOM BISIG/SCHAULAGER; COURTESY MARTIN BUHLER/KUNSTMUSEUM P. BASEL
8
$600b
300
2004 2018* 0
*Through 1Q Source: Securities Industry and Financial Markets Association
officer and founder of hedge fund Saba Capital Management LP, Hildene, BlueMountain, and BlackRock declined to comment. says in an interview with Bloomberg Markets. “People think credit “CLO equity has been a hot product,” says Sean Solis, a spreads are too low, yet they love CLOs. Hard to hate the pie and securitization attorney and partner in New York for Milbank, Tweed, love the pieces. The equity tranche offers a double-digit yield, but Hadley & McCloy LLP. “High net-worth investors through banks as a real pickup in defaults will bring losses.” well as family offices have shown up more and more in minority For family offices, investments in CLOs are part of an increase positions in CLO equity.” in allocations to alternative investments as they diversify holdings, Family offices tend to come in for smaller chunks, worth from according to David Scott Sloan, co-chairman for global private $5 million to $15 million, alongside bigger investors such as hedge wealth services at Holland & Knight LLP. Pioneered by John D. funds, Solis says. CLO equity starts producing cash flow within six Rockefeller, family offices have mushroomed in recent years as a months of a deal closing and makes “an ideal investment for those growing number of wealthy families seek more active involvement who understand the risks and are willing to commit their capital for in managing their fortunes. a long period,” says John Fraser, head of Investcorp Credit CLOs originated in the late 1980s, and family offices have Management U.S. LLC, which manages assets including CLOs. been investing in them for more than a decade. The Pritzkers, the Not everyone has overcome the trauma of the financial crisis, family behind the Hyatt hotel chain, were among the early investors which featured the collapse of credit products with initials such as in this space. Pritzker Foundation tax filings for 2015 and 2016 show SIVs and CDOs. “There are still a lot of investors that shy away from it invested in the equity of a Hildene Capital Management LLC CLO. CLOs,” Credit Suisse’s Popp says. “The acronym aversion is fading, The Bill & Melinda Gates Foundation Trust has invested in CLOs but it’s still there.” managed by BlueMountain Capital Management LLC, BlackRock Inc., and others, 2015 and 2016 filings show. Representatives for Bakewell is a corporate finance reporter at Bloomberg News in New York.
Run {FTW
FAMILY OFFICES LIKE ALTERNATIVE INVESTMENTS, but they still love fortunes, the family office industry took off. There are now at least stocks. Equities accounted for 27.1 percent of the average family 10,000 single-family offices around the world, and more than half office portfolio in 2017, according to a research report by UBS Group of them were set up in the past 15 years, according to Ernst & AG and Campden Wealth Ltd. That represented the biggest allocation Young’s 2016 Family Office Guide. of all asset classes. Yet competing with the new, sophisticated, As family offices proliferated, the hedge fund industry fundamental, and so-called quantamental investing techniques of flourished, bringing more-sophisticated approaches to alpha large asset managers and hedge funds can pose some challenges generation and risk management. From 2003 through 2007, the for family offices. market rose. Then the money-market crisis hit, followed by the During the technology revolution of the late 1990s, it appeared global financial crisis in 2008. that anyone could manage money and make a fortune. It seemed The wild market swings and wealth destruction made the easy then. case for robust diversification. Increasingly, large capital providers Everything you needed was available on the internet, and the such as the Yale endowment invested in “uncorrelated” alternative market tended to go in only one direction: up. Day trading became asset classes including hedge funds and timber. popular as people quit their jobs to devote their time to buying and In addition, computing power became more robust and less selling stocks online. Then, in 2000, the internet bubble burst. expensive, and professionals across all industries talked about Maybe it wasn’t so easy to manage your own money after all. using machine learning and artificial intelligence to help them make Meanwhile, many of the entrepreneurs who founded better data-driven decisions. bubble‑era technology companies came through the crash with Fundamental investing is thus transforming into quanta lots of money still in their pockets—some had even become bil- mental investing, which combines fundamental and quantitative lionaires. As they sought out dedicated personnel to manage their strategies to get the best performance. Many hedge funds and
10
Stocks of companies with the highest effective tax rates outperformed those with the lowest in September 2017.
asset managers, whose strategies are based on fundamentals, STOXX Europe 600 index, FTW buys the 20 percent of those are adding data scientists to their teams and seeking out and stocks with the highest value of a particular factor and sells short paying large sums of money for access to innovative data sources the 20 percent with the lowest value. The return is the net differ- such as corporate “exhaust data”—credit card receipts and ence between the long and short baskets. For shorter horizons consumer geolocation information. This has fueled the advent of such as one day or rolling week, FTW rebalances weekly. For longer an “alternative data” industry. These trends have created a horizons, it does so monthly. competitive advantage for larger asset managers and hedge funds Let’s take a look, for example, at the story told by the Effective that can afford the associated costs, leaving some smaller asset Tax Rate thematic factor, which is especially relevant given the managers, hedge funds, and family offices at a disadvantage. change in tax policy in the U.S. last year. In FTW, type “effective tax Bloomberg is working to level the playing field for public-market rate” in the amber box under Name and hit enter. At the bottom of investing in this increasingly quantamental world. To that end, the screen, click on the up arrows to the left of Factor Performance: some analyses that previously required teams of in-house quants Effective Tax Rate (LTM). to produce are now available on the terminal. One such function The tax debate began in Congress in September 2017. That is the recently released Factors to Watch. Run {FTW
Choose Movers from the drop-down box next to View.
Select an industry to focus on here.
AS OF THE END OF JUNE, FTW was sending multiple signals that the Meanwhile, here were the three worst-performing factors: bull market may be intact, even though U.S. stocks had generated PORT US Value a total return of only 2.5 percent in the first half. To view year-to- Stocks with the cheapest multiples underperformed those with date factor returns, first navigate back to the FTW home screen. the highest by 13 percentage points. Performance may indicate Click the drop-down menu to the right of View and select Movers. the market prefers higher-valued, growth-oriented companies. Change the Horizon to Year to Date. According to FTW, these were That suggests we were still in midcycle. the three best-performing factors during the first half: PORT US Size 3M Target Price Change % The largest companies underperformed the smallest by 11 per- The 20 percent of stocks with the greatest increase in analysts’ centage points, likely driven by fear of a trade war. Larger compa- consensus target price for the trailing three months outperformed nies tend to have greater international exposure. those in the lowest 20 percent by 5.8 percentage points. That PORT US Profit suggested positive investor sentiment. The most profitable companies underperformed the least, SI Days to Cover suggesting the market is willing to take risks. Stocks with the highest short interest relative to their trad- More recently, value continued to be the biggest underper- ing volume outperformed those with the lowest by 5.6 percentage former, down 12.37 percent in the year to Aug. 17. points. That’s also probably a bullish signal, suggesting hedge As markets move, FTW can help you piece together the funds were covering their short positions. narrative, informing your decisions about what types of stocks PORT US Momentum you should buy and sell. Momentum stocks, or those with the best trailing 52-week per- formance, topped those with the weakest performance in the first Greenberg is head of equity analysis and quantamental product at half by 3 percentage points. Yet momentum stocks lagged in June. Bloomberg in New York.
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STOCKS RULE ESG funds tracked by Bloomberg, by asset type
Mixed allocation 341
Other 62
Equity Fixed income 1,173 276
Money market 38
Source: {FSRC
WALL STREET’S DO-GOOD INVESTMENT boom is finally taking notice mental and social outcomes along with financial return. Fixed of the credit markets. Sustainable investment assets grew 37 per- income typically attracts investors with longer time horizons who cent last year, according to Bloomberg data, but the majority of might be more philosophically aligned with environmental and those funds focus on stocks. That’s leading to some awkward social issues, says Mike Amey, head of sterling portfolio manage- conversations on Wall Street, as wealthy investors and foundations ment and ESG strategies at Pimco Investment Management Co. increasingly want to align their entire portfolios with their social A World Bank report released in April details some initial evidence mission but are finding few opportunities to do so in fixed income. that ESG factors can help bond investors avoid default risk. “Most of the people who are interested in incorporating ESG To fill the gap, asset managers are looking at the existing debt are interested in doing so throughout their portfolio,” says Rui de market with fresh eyes, tapping into potentially overlooked asset Figueiredo, co-head and chief investment officer of the Solutions classes such as affordable housing and development bank debt to and Multi-Asset Group at Morgan Stanley Investment Management. find investable opportunities for sustainability-hungry clients. They’re Yet, with a dearth of available fixed-income products categorized also trying to build infrastructure, such as benchmarks, that will sup- as environmental, social, and governance, those investors haven’t port greater liquidity and investment levels in these products. looked at it much. “But that creates more demand on the part of Here’s what’s going into sustainable bond portfolios. asset managers to create those opportunities,” he says. Of almost 1,900 ESG funds tracked by Bloomberg, 15 percent DEVELOPMENT BANK DEBT. High-grade debt issued by the World invest in fixed income, vs. 62 percent in equity. On an asset basis, Bank and other development banks offers some of the best- that figure is even smaller, with fixed income representing about performing do-good credit on the market, according to UBS Group 3 percent of the $491 billion invested in such funds. AG, which found the debt delivered strong returns for its socially Bonds, though, have the potential to be a popular ESG asset conscious private bank clients. “We weren’t asking clients to forgo class for impact investors, those who look to generate environ- any expected returns,” says Simon Smiles, chief investment
0
-2%
12/29/17 8/16/18 -4%
Sources: {GBGLTREH Index}, {LEGATREH Index}, {LGDRTREH Index}
officer for ultra-high-net-worth clients at UBS’s wealth-management MUNI BONDS. The municipal bond market is an “abundant source of division. Development bank debt turned out to have “a very attractive potential investments,” says James Iselin, head of the municipal expected risk-return over a cycle for AAA-rated debt,” he says. That fixed-income team at Neuberger Berman Group LLC. The asset man- performance encouraged Solactive AG, a German provider of indexes, ager recently retooled the focus of an existing $56 million muni fund and UBS to create in April a development bank bond index family to to center on impact investing. Debt issued by local communities can make the debt more accessible for investors. have a positive effect, funding energy and water-treatment projects, schools, and public transportation; it can also help investors lower SUSTAINABLE BONDS. The market for environmentally friendly their tax liabilities. Eaton Vance’s Calvert Research and Management, bonds is expected to hit a record $170 billion in new issuance AllianceBernstein, and Columbia Threadneedle Investments have this year, but the bonds are in relatively short supply, according also launched municipal funds with similar do-good mandates. to Bloomberg NEF. Green bonds represent less than 0.5 percent of the global fixed-income market. Most deals are oversubscribed, ESG-RATED BOND PORTFOLIOS. Fund managers such as Pimco, and their environmental credentials appeal to long-term investors Fidelity Investments, and Brown Advisory Inc. are building their who buy and hold investments. If you can get your hands on a green sustainable fixed-income funds by selecting bonds issued by com- bond, you’ll find the sector has been dominated this year by sovereign, panies that perform well on ESG ratings maintained by third parties local government, and financial issuers, which use the proceeds to such as Sustainalytics and MSCI Inc. This essentially replicates the fund smaller projects focused on renewable energy, green buildings, most common ESG equity strategies in the debt market. sustainable water management, and the like. “It’s still fairly early days, but we thought this was an important Social and sustainability bonds, which concentrate on themes building block,” says Colby Penzone, head of investment product for such as responsible farming or housing finance, are also a budding Fidelity Investments, which launched a sustainability bond index fund area, with about 25 deals this year. But there are only about 110 bonds in June. For socially conscious investors, “the preference in the mar- on the market, representing a total issuance of about $47 billion, ketplace to date has been more concentrated in the equity space, according to data compiled by Bloomberg. but a diversified portfolio has to have fixed income,” he says.
14
0
-1%
12/29/17 8/16/18 -2%
Sources: {CTTLX US Equity}, {ABIMX US Equity}, {CONAX US Equity}, {NMIIX US Equity}, {LMBITR Index}
REAL ESTATE. When the Ford Foundation last year committed energy efficiency modifications made to the properties in those $1 billion from its endowment to impact investing, it said one of portfolios will likely reduce utility bills, according to Fannie Mae. its top initial investment targets would be affordable housing. That means those buildings will have “greater net operating income Community Capital Management Inc., an impact investing company and a greater ability to repay their loans,” says Chrissa Pagitsas, that oversees about $2.3 billion, slices up portfolios so investors director of green financing for Fannie Mae. can use their fixed-income strategies to support housing in a number of categories such as disaster recovery, minority neigh- CDFIS. Community development financial institutions, which pro- borhoods, arts and culture programs, and sustainable agriculture. vide affordable lending to low-income and underserved commu- The Florida-based company last year created a pool of mort- nities, are gaining traction with impact investors. Banks have been gage-backed loans, municipal debt, and other asset-backed debt the primary investor in the area for years, thanks to the 1977 Com- tied to affordable housing for women and girls. They built the munity Reinvestment Act, which encouraged commercial banks product in response to clients who asked about investing in gen- to meet the lending needs of their local communities. This has der-focused products. “We’re able to know we’re helping low- to given CDFIs a long performance history. Some are even large enough moderate-income women specifically get access to capital to buy to have credit ratings, which makes them appealing to retail inves- a home,” says Andy Kaufman, a senior portfolio manager at Com- tors, according to Louise Herrle, a managing director at Incapi- munity Capital Management Inc. tal LLC, an underwriter and distributor of fixed-income securities Environmentally friendly buildings are also presenting oppor- to broker-dealers and financial advisers. “They’ve been in the mar- tunities. Federal National Mortgage Association, for example, was ket for quite a long time, so people have a comfort level with them,” the largest issuer of green bonds in the world last year, selling more Herrle says. CDFIs are also courting impact investors, allowing them than $27.6 billion in green mortgage-backed securities in 2017, up to raise more capital so they can expand, she says. from $3.6 billion in 2016. The U.S. government-backed firm, which �With Amanda Albright, Julia Nikulski, and Dimitris Gogos guarantees housing-related debt, built the securities by pooling financing for green-certified apartment buildings. The water and Chasan is a sustainable finance editor at Bloomberg News in New York.
Load up SPY US Equity in the command bar and run {PORT
Click on the Attribution tab and change the time frame to YTD in the amber box to the right of Time, then hit
CTR shows a sector’s overall contribution to a portfolio’s return.
FAMILY OFFICES PUT A LOT OF FAITH in outside investment managers. SPDR S&P 500 ETF Trust in PORT. Click on the Attribution tab. To That includes, of course, those that run their public equity segment the portfolio by sectors, click on the arrow to the right allocations. Yet, seeing how much a manager adds to your of By and select GICS Sectors. Select YTD as the time frame using portfolio’s overall performance or risk may not always be easy. the drop-down menu to the right of Time. Then click on the arrow With a well-diversified portfolio, it may also be difficult to quantify to the right of Model, select Total Return, and hit
16
Exclude a sector here to see how it impacts the portfolio’s overall performance.
In the amber box on the right, choose Information Technology and Another element to consider is price-earnings ratio, which then click Select. Doing so shows that without IT, the portfolio you can view by clicking on the Characteristics tab. The overall would have returned 4.74 percent in the year through Aug. 16. The portfolio had a P/E of 20.61 as of Aug. 16. If you exclude Information biggest contribution to return would then come from Consumer Technology using the same process as before, the P/E drops Discretionary: 2.35 percentage points. to 19.89. Performance isn’t the whole story, though. To find out how This is just a simple example, but importing your own invest- much a sector contributes to risk, start by putting Information ment portfolio to the terminal will allow you to perform this type Technology back into the mix. Click Actions, choose Exclude Secu- of analysis, eliminating not only sectors but also particular man- rities, and in the Choose Action box select None from the amber agers. Asset owners and managers of managers can create port- drop-down menu on the left. Then click Select. folio aggregates to determine how much a given manager is con- Click on the Tracking Error/Volatility tab and then on the tributing to risk or return of the aggregate. To do that, you can Contribution (%) column. As of Aug. 16 it shows that 32.85 percent “tickerize” each manager’s portfolio to create a custom portfolios of the volatility, or risk, to the S&P 500 came from Information aggregate. For more info on custom aggregates, hit the Help key Technology. That’s interesting considering that, based on IT’s twice and ask for a portfolio specialist. positive contribution to performance, you might assume the sec- tor would contribute less in terms of risk. Cosereanu is a portfolio and risk specialist at Bloomberg in New York.
Breathe a ‘Sigh of Relief’: U.S. Tax Reform Kept a Key Strategy For Lowering Bills
By DEVON PENDLETON Photograph By M. SCOTT BRAUER
WHEN LISETTE COOPER FOUNDED ATHENA CAPITAL ADVISORS IN 1993 to manage the funds of large institutions, the firm’s investment strategies addressed two core concerns: risk and return. In 2002, Cooper refocused Athena, which has $5.5 billion in assets under management, to handle mostly the wealth of individuals and family offices. Based in Lincoln, Mass., the firm has since had to consider another factor for clients: taxes. In an interview, Cooper discusses the opportunities this creates for active strategies, the impact of the U.S.’s new tax bill on the wealthy, and the difference she sees in how generations prefer to invest.
18 BLOOMBERG MARKETS SPECIAL REPORT
DP: Tell me a bit about how Athena started. aren’t professional investors, they really are heavily relying on LC: Originally our clients were institutions. We actually ended our investment advice. up helping the executives of some of those institutions with DP: What about tax implications? That’s got to be a very big their personal portfolios as the concept of the multifamily office, issue when you’re thinking about allocation and strategies. It and the external CIO [chief investment officer], became more must be different from working with institutional clients. popular. And I was thinking, This is great, I’m going to modify LC: That’s one of the exciting things about working with pri- the business model of Athena to be a multifamily office and vate clients. We used to work with risk and return in the insti- external CIO, and we can bring the principles and best practices tutional world, and then suddenly there was this other variable: of working with institutions to substantial families that are just risk, return, and taxes. How could we make money for our clients as big as these institutional investors. That was in 2002, and by mitigating their taxes? It was a lot easier to add alpha that that is what we’ve done ever since, with only some slight mod- way than by trying to find the very tippy-top manager in some ifications. Now we’re mostly families, but we’ve added back in space. For example, we use a tax-managed equity strategy that’s some foundations and endowments on whose boards families, pretty core for most of our clients, and it can add, on average, like our clients, often serve. In some ways, it feels like we’ve 300 basis points [3 percentage points] of alpha over ETFs come full circle. [exchange-traded funds] or index funds per year. DP: How did you get into investment management in the DP: Can you tell me more about that strategy? first place? LC: Sure. Just imagine you can draw a little straight line on a piece LC: I grew up in a very academic family, so when I didn’t know of paper. Imagine that line represents a zero. There’s zero return what I wanted to do when I grew up, I went to get a Ph.D. And to the stock market. But now put some dots above that zero line I got a Ph.D. in geology. There was a lot of math in that, a lot of randomly up there and some dots below that zero line. Those are field trips, which were great, but being in the lab was very iso- individual stocks. In any market when the stock market’s returning lating and not so great. It turned out that at that time Wall Street zero, some stocks are making money and some stocks are losing was looking for people with a math background. And so I joined money. Let’s say you had a two-stock portfolio. One stock makes Wall Street as one of that generation of rocket scientists. Some- me money. One stock is losing money, and you net out to zero. Let’s times I say that I misheard. I thought they were looking for rock say you sell that stock that’s losing money, and you replace it with scientists. I went from Merrill Lynch working in capital markets something else that has very similar characteristics. It’s going to to a risk management firm called Barra Inc., which is now part perform very, very similarly on a going-forward basis. But since of MSCI Inc., and ran their consulting group. I founded Athena you’ve sold it, you’re able to capture the fact that you lost money, out of that. and you can deduct that loss against other gains that you have. DP: What can you tell me about the families? DP: This sounds like a really active portfolio that involves lots LC: We have families that are first-generation wealth and also of management. multigenerational wealth. One of the interesting key ingredients LC: It is. We understand that work very well, and we’ve out- is that someone was an investor or entrepreneur. So either they’re sourced it for a very, very, very small cost. It’s just about the first-generation wealth and they’re producing that wealth them- same cost as an ETF or passive fund. selves, or their parent or grandparent did that. We found our DP: Can you tell me a little bit about Trump’s tax reforms and initial set of customers were really professional investors them- how that’s shifted the landscape for your clients? selves, people who were partners with private equity, real estate, LC: We breathed a sigh of relief because it preserved the ability or investment firms. In the early days, we were really the inves- to do that particular [tax-managed equity] strategy. There was tor’s investor, and then it extended into working with people some thought that they would get rid of it, and we were so happy who founded companies—entrepreneurs and their families. they didn’t. The biggest thing for us in the Trump tax bill, beside DP: In terms of investment interests, what would you say are dodging that bullet, was the doubling of the lifetime exemption. the notable differences between generations? Also, how do multi Many clients are looking at ways to use up that additional lifetime generational family clients compare to entrepreneur clients? exemption. The other really interesting thing about the Trump LC: With first-generation [wealth], it’s very common that, tax bill was something it didn’t do. Many of our clients use since they made the money, they’ll take whatever risk they want planning vehicles like GRATs, grantor retained annuity trusts, to take with it. Future-generation wealth often is somewhat to mitigate their estate tax bill and pass on wealth to future gen- more conservative because they feel like they’re stewards of the erations. The Trump tax bill permitted that strategy to continue. money. They’re going to spend some of it, but it’s not “their” DP: Finally, and on a different topic, research suggests more money. It’s not universally true, but that’s a general rule of and more women are coming into wealth. Any tips for commu- thumb. With the folks in the investment business themselves, nicating with female clients? another important difference is that they have access to a lot of LC: I would boil that down to one word: respect. We have investment opportunities. They could do this themselves if they clients who came to us because their previous adviser only had the time and the patience. They really want someone they addressed their husbands or didn’t engage them in meetings can trust as their alter ego to keep track of all the crazy stuff they even when they’re both asset owners. They feel they’re not being invest in. We’ve got the full balance sheet for them, and we seen, and they just get fed up with that. monitor all the investments. They will take some of our ideas, but they’ll find a lot of investments themselves. The folks who Pendleton is a wealth reporter at Bloomberg in New York.
20 BLOOMBERG MARKETS SPECIAL REPORT Trillion- Dollar Inheritance
Walmart, Samsung, Koch Industries, and Hermès have built some of the biggest fortunes to ever be handed down
POWERED BY BLOOMBERG WEALTH
The saying, or at least the sentiment, sounds familiar in any language: “Shirtsleeves to shirtsleeves in three generations.” The adage is often attributed to Andrew Carnegie, but the notion that family wealth ends up squandered travels far. “Stable to stars to stable,” an Italian version goes. “From paddy to paddy in three generations,” runs the Chinese saying. But in an era of mind-boggling wealth and gaping inequality, there seems little danger of that happening anytime soon to the world’s 25 richest clans, who as of June 15 controlled $1.1 trillion of wealth, according to data compiled by the Bloomberg Billionaires Index.
FAMILY OFFICES 21 From Mars bars to Hermès scarves, supermarkets to hotels, and data firms to drugmakers, the source of this wealth is varied, but its scale is startling: more than the market cap of Apple Inc., all the deposits held by Citigroup Inc., or the entire gross domestic product of Indonesia. And any calculation is likely to be a lowball figure. The wealth of families such as the Rothschilds or Rockefellers is too diffuse to value. The nature of many dynastic fortunes—backed sometimes by decades or centuries of assets and dividends—can obfuscate their true size. Clans whose source of wealth is unverifiable or derives primarily from the state, such as the sprawling House of Saud, are absent from our list as well. Bloomberg’s categorization of family wealth also excludes first- generation fortunes and those in the hands of a single heir. That means just three Asian families make the list and none from China, reflecting the relatively recent wealth boom experienced by the region. That should soon change. Family offices are proliferating in the region, and tycoons such as Li Ka-shing are starting to hand over their empires to their sons and daughters. The dwindling of once-storied fortunes like those of the Pulitzers, Vanderbilts, and Woolworths illustrates how common it is for even the biggest fortunes to be squandered. “There are a host of hurdles families must tackle to ensure that their wealth is safeguarded through the generations,” said Rebecca Gooch of Campden Wealth Ltd. “Strategic planning, education, and communication is key.” Some billionaires are taking a different tack. Bill Gates and Mark Zuckerberg are among the entrepreneurs who have signed up for Warren Buffett’s Giving Pledge and committed to dedicating the majority of their wealth to philanthropy. This approach embodies another Carnegie dictum: “To spend the first third of one’s life getting all the education one can. To spend the next third making all the money one can. To spend the last third giving it all away to worthwhile causes.”
22 BLOOMBERG MARKETS SPECIAL REPORT 1. WALTON 4. VAN DAMME, 7. AMBANI Company: WALMART INC. Company: RELIANCE INDUSTRIES LTD. Wealth: $151.5B* DE SPOELBERCH, Wealth: $43.4B Industry: CONSUMER RETAIL DE MEVIUS Industry: INDUSTRIAL Base: BENTONVILLE, ARK. Company: ANHEUSER-BUSCH Base: MUMBAI INBEV SA/NV Walmart is the world’s largest retailer Wealth: $54.1B Dhirubhai Ambani, the father of Mukesh by revenue, with annual sales of Industry: BEVERAGES and Anil, started building the precursor to $500 billion from almost 12,000 stores Base: BELGIUM Reliance Industries in 1957. When worldwide. Holding companies Walton Dhirubhai died in 2002 without leaving a Enterprises LLC and the Walton Family The collective enterprise of these will, his widow brokered a settlement Holdings Trust own half the retailer, a three Belgian beermaking families has between her sons over control of the stake that’s the foundation of the world’s roots in the 14th century. The Van Damme fortune. Mukesh is now at the helm of the biggest family fortune. family joined the others when the 1987 conglomerate, which owns the world’s merger of Piedboeuf and Artois led to the largest oil refining complex. He lives in a creation of Interbrew, which merged with 27-story mansion that’s been called the Brazil’s AmBev in 2004. The company world’s most expensive private residence. 2. KOCH then combined with Anheuser-Busch in Company: KOCH INDUSTRIES INC. 2008. Verlinvest SA, an investment Wealth: $98.7B vehicle, manages more than $2 billion in Industry: INDUSTRIAL family assets. 8. QUANDT Base: WICHITA Company: BAYERISCHE MOTOREN WERKE AG Brothers Frederick, Charles, David, and Wealth: $42.7B William inherited father Fred’s oil refinery 5. DUMAS Industry: AUTOMOTIVE business. A feud over control of the Company: HERMES INTERNATIONAL SA Base: MUNICH company in the early 1980s led Frederick Wealth: $49.2B and William to leave the family business; Industry: LUXURY GOODS Herbert Quandt helped turn BMW from Charles and David stayed and have since Base: PARIS a struggling carmaker into one of the transformed it into Koch Industries, a world’s largest makers of luxury vehicles. conglomerate with annual revenue of Jean-Louis Dumas, who died in 2010, is Family matriarch Johanna Quandt died in about $100 billion. David and Charles credited with turning Hermès into a 2015; her children, Stefan Quandt and manage a portion of their wealth through a global giant in luxury fashion. Among the Susanne Klatten, retain control of the family office, 1888 Management LLC. family members who maintain senior company. Their other investments include positions at the company are Pierre- stakes in German logistics company Alexis Dumas, the artistic director, and Logwin AG and Dutch security software 3. MARS Axel Dumas, the chairman. company Gemalto NV. Company: MARS INC. Wealth: $89.7B Industry: CONFECTIONERY, PET CARE 6. WERTHEIMER 9. CARGILL, Base: McLEAN, VA. Company: CHANEL SA Wealth: $45.6B MacMILLAN Company: CARGILL INC. Frank Mars learned to hand-dip Industry: LUXURY GOODS Wealth: $42.3B chocolates as a schoolboy. The business Base: PARIS Industry: INDUSTRIAL he went on to found is best known for Base: MINNEAPOLIS M&M’s and Milky Way and Mars bars, Brothers Alain and Gérard Wertheimer though pet-care products make up are reaping the benefits of their Family members are majority owners almost half the company’s more than grandfather’s funding of designer Coco of the largest closely held U.S. company. It $35 billion in annual revenue. The closely Chanel in 1920s Paris. The siblings own was founded by W.W. Cargill, who started held business is entirely owned by the closely held fashion house, which a commodities business with a single members of the Mars family. introduced the “little black dress” to the grain-storage warehouse in Conover, world. It had revenue of $9.6 billion in 2017. Iowa, in 1865. His descendants maintain The Wertheimers also own racehorses control of the food, agriculture, and and vineyards. industrial giant.
FAMILY OFFICES 23 10. BOEHRINGER, 13. KWOK 16. LEE Company: SUN HUNG KAI Company: SAMSUNG GROUP VON BAUMBACH PROPERTIES LTD. Wealth: $30.9B Company: BOEHRINGER INGELHEIM Wealth: $34B Industry: MULTIPLE GMBH Industry: REAL ESTATE Base: SEOUL Wealth: $42.2B Base: HONG KONG Industry: PHARMACEUTICALS Chairman Lee Kun-hee’s father, Lee Base: INGELHEIM, GERMANY Kwok Tak-seng listed Sun Hung Kai Byung-chull, started Samsung as a trading Properties in 1972. The company has company in 1938. The conglomerate is German drugmaker Boehringer since become one of Hong Kong’s largest now known as the world’s largest Ingelheim was founded in 1885 by Albert developers and the basis of the Kwok producer of smartphones. Lee Kun-hee’s Boehringer, and more than 130 years later family fortune. His sons, Walter, Thomas, son, Jay Y. Lee, was released from jail in the Boehringer family, which includes a and Raymond, assumed control when he February following a reduction in a prison line of von Baumbachs, are still in charge. died in 1990. sentence related to bribery charges. Chairman Hubertus von Baumbach and his extended family are owners of the closely held company. 14. COX 17. RAUSING Company: COX ENTERPRISES INC. Company: TETRA LAVAL GROUP Wealth: $33.6B Wealth: $30.9B 11. ALBRECHT Industry: COMMUNICATIONS, Industry: PACKAGING Company: ALDI AUTOMOTIVE Base: LONDON Wealth: $38.8B Base: ATLANTA Industry: CONSUMER RETAIL The family’s wealth originated with Base: ESSEN AND MUELHEIM, The Cox family controls Cox Tetra Pak, the long-life drinks carton GERMANY Enterprises, a conglomerate with about pioneered by Ruben Rausing in Sweden in $20 billion in annual revenue. Its Cox the 1950s. Descendants of Ruben’s son Brothers Theo and Karl Albrecht took Communications division is the third- Gad now control all of closely held Tetra over their parents’ grocery store after largest cable company in the U.S. James Laval, one of the world’s biggest packaging returning home from World War II and Cox founded the company in 1898. His companies. Another son of Ruben’s, Hans, turned it into Aldi, a national chain of descendants, including James Kennedy sold his stake in the business to Gad in discount supermarkets. The brothers split and Blair Parry-Okeden, remain 1995 and has since invested in eco- the business in the 1960s after a dispute shareholders in the group. friendly packaging and equities through over the direction of the company. The two London-based Alta Advisers Ltd. branches—Aldi Nord and Aldi Süd—now have more than 10,000 stores combined. Theo’s side of the family also owns Trader 15. PRITZKER Joe’s, which they bought in 1979. Company: HYATT HOTELS CORP. 18. THOMSON Wealth: $33.5B Company: THOMSON REUTERS CORP. Industry: HOTELS Wealth: $30.9B Base: CHICAGO Industry: MEDIA 12. MULLIEZ Base: ONTARIO Company: AUCHAN HOLDING SA The son of a Ukrainian immigrant, A.N. Wealth: $37.5B Pritzker began investing in real estate and The wealth of Canada’s richest family Industry: CONSUMER RETAIL troubled companies while working for his originated in the early 1930s when Roy Base: LILLE, FRANCE father’s law firm. The investments seeded Thomson opened an Ontario radio the fortune of one of America’s oldest station. Within five years, he’d become The Mulliez family had already built a dynasties, whose shared assets include the country’s leading newspaper owner. retail empire by the time Gérard Mulliez Hyatt Hotels. The family are prominent The family now shares a 64 percent stake started Auchan, known as France’s supporters of the Democratic Party; in financial data and services provider Walmart, in 1961. Auchan has grown into Penny Pritzker served as U.S. secretary Thomson Reuters, which they hold one of Europe’s biggest supermarket of commerce under President Barack through investment firm Woodbridge Co. chains. The family holding company, Obama, and her younger brother J.B. is Association Familiale Mulliez, controls a running for governor of Illinois. diverse group of retail businesses, including home-improvement chain Leroy Merlin and sports and leisure group Decathlon.
24 BLOOMBERG MARKETS SPECIAL REPORT 19. JOHNSON 22. HOFFMANN, OERI 25. FERRERO Company: S.C. JOHNSON & SON INC. Company: ROCHE HOLDING AG Company: FERRERO SPA Wealth: $28.2B Wealth: $25.1B Wealth: $22.9B Industry: HOUSEHOLD GOODS Industry: PHARMACEUTICALS Industry: CONFECTIONERY Base: RACINE, WIS. Base: BASEL, SWITZERLAND Base: ALBA, ITALY
Samuel Johnson began selling parquet Drugmaker Roche was founded by Michele Ferrero built a global chocolate flooring in 1882. Five generations of the entrepreneur Fritz Hoffmann-La Roche in confectionery company from the small family have since built S.C. Johnson into a 1896. His descendants now control a Italian town of Alba. His son Giovanni took major household goods maker. H. Fisk 9 percent stake in the company, whose sole helm of the family business after Johnson is the company’s chairman and blockbuster oncology drugs helped it another son, Pietro, died in a cycling chief executive officer. Its brands include generate $54.1 billion in revenue in 2017. accident in 2011. Ferrero acquired Mr Muscle, Raid, and Windex. Family members have been prominent Nestlé SA’s U.S. candy business for supporters of nature conservation. $2.8 billion in 2018. Fourth-generation scion André Hoffmann founded and chairs multifamily office 20. DASSAULT Massellaz SA. Company: DASSAULT GROUP Wealth: $27.8B Industry: DIVERSIFIED Base: PARIS 23. HEARST Company: HEARST CORP. The Dassault Group empire includes Wealth: $24.5B military aircraft manufacturers, Industry: MEDIA, BUSINESS newspapers, and real estate and software INFORMATION businesses. Founder Marcel Bloch, a Base: NEW YORK Jewish aviation legend, was captured by Nazis in World War II and later changed his William Randolph Hearst laid the name to Dassault, an homage to his foundation for his family’s fortune when brother’s wartime pseudonym, which he took control of the San Francisco means “assault tank.” His son Serge Examiner from his father in 1887. Dassault, who took the helm of the William’s grandson William Randolph company in 1986, died in May. Hearst III is chairman of the company these days. Its stable of media assets includes stakes in television networks A&E and ESPN. Hearst is perhaps best 21. DUNCAN known as a media company but also Company: ENTERPRISE PRODUCTS owns Fitch Ratings, the credit- PARTNERS LP evaluating company. Wealth: $26B Industry: NATURAL GAS AND CRUDE OIL Base: HOUSTON 24. LAUDER Pipeline behemoth Enterprise Company: ESTEE LAUDER COS. Products Partners was started by Dan Wealth: $24.3B Duncan in 1968. Duncan lost his mother Industry: COSMETICS to tuberculosis, his brother to blood Base: NEW YORK poisoning, and his father to leukemia before the age of 18. He died in 2010. The Queens, N.Y., native Estée Lauder gas and oil company is still under founded a business selling skin-care family control. products in 1946 with her husband, Joseph. Today her eponymous company sells $12 billion in cosmetics and Edited by Shelly Hagan, Andrew fragrances annually. Leonard Lauder, a Heathcote, Tom Metcalf, Devon notable art collector and company Pendleton, Olivia Carville, Yoojung Lee chairman emeritus, has donated *See “Welcome to Waltonville” (p26). hundreds of his pieces, from vintage The Walton’s fortune has since risen— postcards to Picassos, to museums. it was $167 billion as of Aug. 23.
FAMILY OFFICES 25 Welcome to
Where the World’s Richest Family Reigns
By TOM METCALF
4
BENTONVILLE Arkansas
1
1
2 3 4 5 6
5
7
8
9
BENTONVILLE BUSINESSES LINKED TO THE WALTON FAMILY
1 Crystal Bridges Museum of American Art 4 Arvest Bank branch 7 Momentary (planned museum venue) 2 The Preacher’s Son (restaurant) 5 Walmart Museum 8 The Holler (food hall, community space) 3 Pressroom (restaurant) 6 Record (event space) 9 Planned Walmart corporate campus
26 BLOOMBERG MARKETS SPECIAL REPORT HE LARGEST VERIFIED FAMILY FORTUNE on earth is run out of and a new outpost of Crystal Bridges, called Momentary, slated two floors of unmarked suites in Bentonville, Ark. to open in 2020. T The building is a discreet nerve center for the Walton “Recent growth is due to the Walton grandchildren,” says family’s $167 billion hoard as of Aug. 23. There are plenty more local real estate agent Larry Horton, who says property prices overt signs of their success in the heart of the city. have tripled in the past few years. “They’ve put a lot of effort into The town square features the former five-and-dime getting younger people here.” store—now a museum—that family patriarch Sam Walton It seems to be working. The population is close to 50,000, opened in 1950, which was the launchpad for Walmart Inc. up from 35,000 in the 2010 census. On a May weeknight, a Across the square is a branch of Arvest Bank—also owned by steady stream of millennials threw back shots in a basement bar, the family—while a short walk south brings visitors to the Undercroft, that’s part of Tom’s Ropeswing Hospitality Group. grounds of Crystal Bridges, a $1.2 billion museum of American The bar is located under another Ropeswing establishment, the art built with Walton money on family-owned land in an Preacher’s Son, a restaurant housed inside a restored church. Ozark forest. Ropeswing’s other Bentonville joints include casual-dining Then there are the stores, warehouses, and low-slung head- restaurant Pressroom, food and game venue Holler, and events quarters of Walmart that dot the landscape for miles around and space Record. underscore the size of the $500 billion annual-sales behemoth “A few years ago you could have fired a scattershot down- that’s the bedrock of the family fortune. town and not hit anyone,” says Don Overstreet, whose family “Outside of monarchies, this is one of the greatest fortunes jewelry store has been on Bentonville’s town square since 1948. ever amassed,” says Andy Hart of Delegate Advisors, a multi “Now look at it.” family office with locations in San Francisco and Chapel Hill, Sam would approve. “Operate globally, give back locally” N.C. “Monarchies and kingdoms came by birthright. This was his mantra, according to the company museum. was earned.” As with other multigenerational fortunes, the family’s chal- Investment vehicle Walton Enterprises LLC owns 48 per- lenge is ensuring its wealth doesn’t dissipate between generations. cent of Walmart, worth about $135 billion as of Aug. 23. Walton It helps that many family members’ lifestyles aren’t lavish. The Family Holdings Trust owns an additional 2.4 percent. The Waltons in the area “live modestly,” according to Bentonville combined stake threw off $3.2 billion in dividends in 2017, the Mayor Bob McCaslin, who praised the family’s influence in same year the family sold about $4.1 billion in stock to fund Northwest Arkansas. They “call no attention to themselves.” philanthropy and other projects. They’re also implementing more complex tax strategies Their continued control reflects unusual prescience on the than in Sam’s day. part of Sam, who started preparing for succession in 1953, when Wyoming court filings obtained by Bloomberg in 2015 he passed 80 percent of the family business to his four children: showed that the will of Sam’s middle son, John, gave half of his Alice, Rob, Jim, and John. That minimized estate taxes and helped then-$17 billion estimated fortune to charitable trusts. the family retain control even as the company grew into the The trusts will make annual nontaxable payments under world’s largest retailer. IRS guidelines to the Walton Family Foundation charitable arm Six decades later, there are increasing signs that the third until 2036. If investments outperform certain benchmarks, what- generation is starting to hold greater sway. Steuart, 37, replaced ever is left at the end goes to Lukas without any tax bill. his father, Jim, on Walmart’s board in 2016. Wyoming court Such maneuvers—and the sheer size of their fortune— documents show Steuart’s cousin Lukas, 31, has the right to mean the Waltons are well-positioned to remain the world’s vote the estate’s general and limited partner units in Walton richest family for some time. Enterprises. A spokeswoman for the family declined to comment That’s good news for Bentonville, which will continue to for this story. benefit from the clan’s closeness to their hometown. About a mile The younger generation’s increasing influence is apparent south of the gleaming buildings of Crystal Bridges sits a largely in downtown Bentonville. An office and retail complex features empty tract of land. Not for long. Walmart said in September 2017 an eatery backed by Steuart’s 34-year-old brother, Tom, and, for it’s planning to build its new corporate campus there for an a few weeks, hosted a temporary outpost of Rapha, a high-end estimated $1 billion. British cycling brand that the pair bought in 2017. The siblings
CLOCKWISE FROM TOP LEFT: TOM METCALF/BLOOMBERG; ELIZABETH KEARLEY/GETTY W. IMAGES; JB REED/BLOOMBERG are also behind the bicycle trails that crisscross the town’s outskirts Metcalf is a wealth reporter at Bloomberg News in New York.
FAMILY OFFICES 27 By the Numbers Wealth is growing rapidly around the world, sometimes in surprising places. And affluent individuals, or those on track to be the millionaires of tomorrow, are the ones to watch.
$70tTotal global wealth of high-net-worth $100Capgemini expects global high-net-worth t individuals, those with investable assets of individual wealth to reach 15 digits by 2025 $1 million or more, in 2017 (DATA: CAPGEMINI WORLD WEALTH REPORT 2018)
(DATA: CAPGEMINI WORLD WEALTH REPORT 2018)
16.3%The wealth of Ireland's high-net-worth 665kAsia-Pacific added about this many people to individuals rose this much last year—the the global high-net-worth population in 2017 highest growth rate in Europe
(DATA: CAPGEMINI WORLD WEALTH REPORT 2018) (DATA: CAPGEMINI WORLD WEALTH REPORT 2018)
101mThe projected number of 72mThe number of people who qualify as those defined as affluent in 2022 affluent, with assets of $250,000 to (DATA: THE BOSTON CONSULTING GROUP GLOBAL WEALTH 2018 REPORT) $1 million, in 2017
(DATA: THE BOSTON CONSULTING GROUP GLOBAL WEALTH 2018 REPORT)
7.4%Projected growth in global investable assets held by affluent individuals from $17.The amount of global investable 3t assets— 2017 to 2022 equities, bonds, funds, currency, and (DATA: THE BOSTON CONSULTING GROUP GLOBAL WEALTH 2018 REPORT) deposits—held by affluent individuals in 2017
(DATA: THE BOSTON CONSULTING GROUP GLOBAL WEALTH 2018 REPORT)
DATA COMPILED BY SIOBHAN WAGNER
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