S&P’s downgrade isn’t the problem, say wealth management and family office executives; it’s worse than that. The problem is the nations’ underlying structure of political, economic and fiscal problems—they are a legitimate cause for long-term concern. To put it in computer-speak: the United States is hardwired for doom.
While Standard & Poor’s unprecedented downgrade of U.S. debt last week clearly sparked a steep market sell-off, top wealth management executives said government policies and the economy weighed on their minds much more than the ability of the U.S. to borrow in world markets.
“I wouldn’t confuse recent market behavior with the downgrade,” said Rex Macey, chief investment officer for Wilmington Trust. “The downgrade is not the issue. Normally if credit is downgraded, the issuer has to pay more, but Treasury yields are actually down. The downgrade reflects long-term fiscal and political problems that nobody seems equipped to resolve, as well as concerns about a worsening economy that may lead to a recession.”
Although debt servicing costs remain low for now, “The political posturing and infighting that contributed to the downgrade could result in higher borrowing costs down the road, which could be a structural problem for an economy that is dependent on consumption,” warned Matt Rubin, director of investment strategy at Neuberger Berman.
Wealth managers also expressed pessimism about the political process and future growth.
“The downgrade is more political than financial,” said Bartholomew Earley, director of investment research for the multifamily office Manchester Capital Management. “The U.S. has no problems paying its debts. We know how to restructure but the political will is not there.”
If the political stalemate continues, the consequences could be dire, said Tom Manning, chief investment officer for Silver Bridge Advisors. “The question posed by the downgrade is really one of how much of a crisis of confidence does it create in a fragile market?” Manning said. “The debt is a structural issue but it’s one we can get our arms around if politicians play nicely and stop pointing fingers. But if they don’t, it could spiral out of control.”
In fact, the current toxic combination of political gridlock and structural debt and unemployment problems makes it “very difficult to see high rates of growth on the horizon,” said David Hou, founding partner for California-based Luminous Capital.
Clients Staying Calm; Wealth Managers Reaching Out
While wealthy clients have not been panicking, say wealth managers and family office executives, they are nonetheless actively reaching out to clients to discuss strategy.
Ed Kohlhepp, president of Kohlhepp Investment Advisors, based in the Philadelphia suburb of Doylestown, said he is focusing on “more defensive positioning” for his clients, who have an average net worth of around $1.5 million. That means more emphasis on cash, short-term bonds, absolute return funds and using more alternatives, such as hedge fund of funds, managed futures, annuities and metals, Kohlhepp said. “If they’re really concerned about safety, we will take the chips off the table, but otherwise we’re advising them to stay the course,” he added.
At family office powerhouse Harris myCFO, clients have an average of $60 million to $70 million invested with the firm, said Craig Rawlins, president of investment advisory services. Harris is reviewing client portfolios and reminding clients that the recent market volatility, while rocky, was “not unexpected” and will have “little to no effect on their lifestyle.”
Long-term asset allocation remains the “primary tool” for managing clients’ portfolio risk in a family office, Rawling said, and the firm is currently engaging clients “in a process that balances their goals and objectives with their tolerance for risk.”
In fact, he noted, the recent sell-off left many clients under-weight their long-term risk targets. “We’re not in any immediate rush to re-balance those portfolios,” Rawling said, “but at the same time these market conditions do present opportunities and we are on the lookout for them.”
While Manchester Capital is also advising clients not to “make big changes right now,” and remain diversified, Earley said in the long-term he is bullish on U.S. stocks, which he described as “very cheap right now.”
Sliver Bridge is looking for opportunities to protect clients from losses by upgrading holdings, according to Manning. For example, cyclically sensitive stocks of companies focused on manufacturing, materials and technology may be sold and replaced by less cyclically sensitive stocks of companies in consumer staples, health care or telecommunications.
Because of a strong current yield component in most clients’ portfolios, Financial Management Partners is working on “small tweaks, no wholesale changes,” to portfolios, said Katherine Lintz, founder and chief executive of the Clayton, Mo.-based multi-family office. “Our allocation and intentional weightings to U.S. and non-U.S. fixed income have helped mitigate the downturn so far, “Lintz said. “Consequently, we believe that the natural rebalancing occurring over the past two weeks will likely result in us shifting to more equities if this downdraft deepens.”
Wealthy families who are clients of Pitcairn, the Jenkintown, Pa.-based multi-family office, have remained calm, said Chief Investment Officer Rick Pitcairn. The firm has raised cash for some clients, but is emphasizing a non-emotional approach, Pitcairn said. “In a time filled with fear and emotion,” he said, “we’re talking about thoughtful adherence to long-term plans that make sense. We’re in the advice business, and we’re telling clients to react to the changing nature of markets with thoughtfulness rather than emotion.”
