Amid the volatility and unpredictability of listed securities markets these days, Hong Kong-based multi-family office Grace Financial has been taking more concentrated exposure to real assets and businesses.
“In the short term, markets can become completely detached from fundamentals,” says Roy Chen, founder and chief executive of the firm, which runs money for several families, including his own.
“So we are focusing more on real assets, such as property and metals and businesses that are strongly cashflow-generative and not dependent on governments as their key clients.
“In many ways we are moving from a balanced, diversified portoflio we've had for many years to fairly concentrated exposures to real assets.”
Grace creates its own investment products by, for example, buying physical commodities direct from producers such as refiners and miners. The firm utilises the gold vault at Hong Kong airport where it stores the precious metal.
“We want to mimimise counterparty risk, so we buy gold from refiners rather than from banks, and put it directly under a client’s name,” says Chen. “Our clients can physically audit the gold. You can’t typically do that even with a Swiss bank; you have to trust them when they say it’s properly segregated. Clients can even take delivery if they want to.”
Perhaps recognising this trend, UBS said last week it had opened a gold vault in Singapore to store the metal in Asia for the first time. Deutsche Bank and JP Morgan are other banks to have done the same in recent years.
When it comes to real assets, Grace will consider frontier markets such as Africa, where Chen made a visit in May. “I saw an attractive business there, but you’ve got to have pretty strong conviction [to invest there], so we've stuck largely with infrastructure and property [in Africa].”
One deal he's working on there involves a “key player” in infrastructure and affordable housing. “The margins are not super-rich, but [the project] ticks the boxes – improving African infrastructure, catering to the needs of the poor etcetera which produces positive social impact. For us, it's not only about the financial return.”
Asked whether he has considered investing in Myanmar, Chen says: “Back in 2007 we started looking around – but it was not the right time. Whether it is now, I'm not entirely sure. There are certainly opportunities. We're offered deals from mining to plantation to property – the whole range.”
Grace also buys mutual funds. It depends on the market, however – in the US, for example, mutual funds tend offer more beta than alpha, says Chen. Yet in Europe, it makes sense to have an active manager than can be more selective about its picks.
Chen (pictured right) also sees exchange-traded funds as useful tools for quick and easy access to certain assets. “We're happy to see more sector-based ETFs – it's good to have more choice.
"But you have to ask whether they're provinding the exposure an investor wants. We often have very specific ideas about what we want in a sector. You can do a lot lot of customising, and tailoring mandates using ETFs, but I'm not sure that's worth doing, as markets change very quickly.”
Asked how Grace uses private banks, Chen says: “We speak to just a handful – fewer than five – for ideas, so that even if we're not in agreement, at least we know what others are thinking.” From time to time, Grace uses private banks to help it execute an idea or put together a deal.
“On pricing, we are very specific about what we want from a particular private bank,” notes Chen.
“We work with clients on portfolio allocation right down to specific deals. Sometimes they show us their whole portfolio,” he says, adding that the longer they've known Grace Financial, the more of their portfolio they tend to reveal.
The firm often makes co-investments and club deals – but they are more likely to be with families in Asia than outside. The MFO has received a lot of enquiries from families in Europe and the Middle East, but, as is often the case with Asian FOs, it does not feel ready to take on such partners or clients. The main reason is that it takes time to get to know clients, says Chen, “even if it's a very established family”.