Case Studies

Following are examples of how Mike has applied his strategies and expertise to help businesses and investors achieve success. Please check back as we add more case studies.

Case Study: Direct Investments in Basic Assets in a Family Investment Portfolio

Question: Can investing directly in basic assets (more commonly called “Hard Assets”) improve either portfolio returns or risk control?

I have long maintained that understanding the behavior of certain kinds of basic assets (hard assets) provides the insight necessary to make good investment decisions. Since 1988, our family investment group has directly invested 50% of our allocation in three types of basic assets: multitenant office buildings, oil and gas in the ground (and being produced), and micro corporate loans.

All of these investments were professionally diversified. A conservative approach was taken with a focus on cash flow and long-term capital preservation.

In the 2007 downturn, or “The Great Recession” as some call it, the correlation of financial assets of all types went to 1.0. This surprised many investors, but not us. The correlation of these assets is based on a common pool of investors, much more than the behavior of the underlying assets. A REIT (real estate investment trust) derives its correlation to other financial assets much more form the fact that it is a publicly traded equity investment than from the fact that it invests in office buildings, or malls or whatever.

Our portfolio as a whole, at the bottom of the market in March 2009, was only ever down 18% vs. far more for the S&P and tellingly for many if not most of the hedge funds. We also maintained our cash payouts without interruption. We had no office building investments, oil and gas investments or loans go bad. The observed correlation between these investments and the financial markets was low. For example, we had no tenants stop paying.

So the answer to our question, based on 25+ years of experience, is that if done properly, investing in basic assets can improve both portfolio returns and risk control.

Case Study: Next Generation Involvement

Problem: How to positively involve members of an upcoming generation, varying in age and interest levels, in the family office.

There is a big barrier to involving young people (or almost anyone, such as a spouse) in a family office or investment business. First, to be involved they must have a base of knowledge or experience. Second, people have different interests or desires as to the type of involvement. Third, it is off-putting to be “the new guy” or “the youngster.”

Strategy: We designed a multi-level approach to engage and inform people. First, we decided on our goal, which was to help people become involved so they could be the best possible “owners” of the family enterprise. Working there, managing it or any other potential involvement at any point in time were not the goal.

Second, we instituted an annual weekend of family meetings at the same time every year so people could plan to attend.

Third, we designed a series of purely informational meetings that started when the individual turned 15. These were to provide background and common knowledge on such topics as family history, family business history, etc.

Fourth, we hired professional educators to work with the various groups of family members, both separately and collaboratively, on team building exercises, education in financial topics, etc.

Finally, we hold annual meetings, which can be attended by all those who have participated in specific informational meetings for them to listen and ask questions of the management. The level of information communicated is patterned after a public company’s annual meeting, and is heavy on graphs and trend data, with very little specific financial data.

Result: Every year, the vast majority of family members and spouses attend these meetings. We place next-generation members on the investment company board of directors as both observers and Directors. The annual meeting weekend has become an appreciated and beneficial institution in our family.

Case Study: Hunt for Yield

Problem: We had an investor who needed principal protection and yield. Current yields on 10-year Treasuries were between 1.7% and 2.7%. With these T-bills, there is significant risk of loss of principal if interest rates rise.

We have experienced 30+ years of declining interest rates, and now yields on all kinds of fixed-income investments are very low. We had to design an investment strategy that could earn a meaningful yield within a limited time horizon and that had a very low risk of loss of principal.

Strategy: We invested directly in office building mortgages. With appropriate leases and tenants, a multi-tenant office building can be a very stable investment. There are many providers of mortgage capital in this space who report that the market can produce a current annual yield of between 4% and 6% for a 10-year mortgage, payable monthly or quarterly.