q3 2018 special report • family offices...the world, and affluent individuals— those on track to...

Good BondsSustainable fixed income is out there if you know where to look p13

CLO SavvyFamilies are among the investors piling into an esoteric credit market p8

Breaching the WallPrivate banks are starting to gain access to mainland China p3

The ProspectorAthena Capital’s Lisette Cooper explains how she finds alpha p18

Dynasty BuildingThe world’s 25 wealthiest families have maintained their fortunes over generations p21

Special Report • Family OfficesQ3 2018

THOUGHT LEADERSHIP PRESENTED BY ANCHIN PRIVATE CLIENT

WITH THE NEW federal tax law in mind, now is a good time to revisit estate plans and make sure they are working as intended. While it goes without saying that each person may have a different approach to making arrangements for his/her estate, it is especially important to keep estate plans up to date during times of change—such as when a family grows or laws are modified. Staying informed about tax law provisions helps individuals make smart decisions about the distribution of their assets.

The recently passed federal tax law contains reforms that may impact transfers. For 2018, the federal tax exemptions for estate, gift, and generation-skipping transfers increase from $5,490,000 in 2017 to $11,180,000 for individuals and from $10,980,000 in 2017 to $22,360,000 for married couples. Without intervention from Congress, these exemptions will revert back to the 2017 amounts (adjusted for inflation) on January 1, 2026. This means that individuals now have double the amount of tax-free wealth distribution available if the exemption has not yet been used. It also means that individuals who already have used their lifetime exemption, now have more opportunity to gift without tax consequences.

The annual gift tax exclusion increased for 2018. Individuals may gift $15,000, and married couples may gift $30,000 before utilizing the lifetime exemption or incurring gift tax if the exemption has been exhausted. Previously, the annual gift tax exclusion was $14,000 for individuals and $28,000 for married couples.

Estate plans may include many different types of transfers—from cash to interests in family-owned businesses to loan forgiveness. Since the tax law could change again, it might be beneficial to give complete gifts now rather than those that are gradual or incomplete. Examples of complete gifts include cash or securities, whereas an example of an incomplete gift may be a QPRT (qualified personal residence trust). With a QPRT, an individual gives away a primary residence in a trust. Yet if the individual dies during the term of the QPRT, the property is included in the estate, and the transaction has not been completed. Gifting outright is a surefire option for giving wealth that utilizes the increased exemption.

It is also worth considering the benefits of using Grantor Retained Annuity Trusts (GRATs). This type of trust allows for gifting with little or no transfer tax; this technique works in any regulatory environment. Non-grantor trusts may be a solution to the limitation of state tax deductions. Homes, businesses, and investment assets can be included in this kind of trust. Because non-grantor trusts have their own state and local tax deductions, they may be an effective way to maximize tax deductions.

Due to the fact that the new provisions to the tax law could impact estate planning, now is a good time to revisit your arrangements. For more information, please visit www.anchinprivateclient.com.

Estate Planning Under the New Tax Law

For more resources, please visit www.anchinprivateclient.com.

Jared Feldman, CPALeader - Anchin Private [email protected]

Ehud "Udi" Sadan, CPA, CGMALeader - Anchin Private [email protected] Client

Bloomberg-APC_082018.indd 1 8/16/2018 10:16:31 AM

3Forward Guidance

Wealth Behind the WallPrivate banks for years have tried to expand into mainland China—which has the second-biggest pool of ultrarich people in the world—but regulations haven’t made it easy. That’s starting to change

6<GO>

Swiss GiftsThe Roche family fortune, built on cough syrup, is helping mold Basel’s cultural life, including its art scene

8CLOs EncountersAn esoteric piece of financial engineering in the credit market has Wall Street in its thrall, and wealthy families are among the ready investors

10Factor It InBig hedge funds and asset managers are paying large sums to beef up their fundamental investing strategies. Here’s how family offices can compete

13Where Are the Good Bonds?The majority of environmental, social, and governance investing strategies are equity-focused, but asset managers are now looking to feed a growing hunger for sustainable fixed income

16With or Without YouSee how your stock portfolio would perform if you removed a single manager

18Taxing ConcernsAthena Capital Advisors’ Lisette Cooper says you can breathe a sigh of relief that tax reform in the U.S. has kept a key strategy for lowering bills

21Family FortunesFrom Mars Bars and Hermès scarves to supermarkets and data firms, the sources of wealth behind the 25 richest families in Bloomberg’s ranking are diverse

26Welcome to WaltonvilleBanks, bars, and bike trails are part of the Walmart heirs’ legacy in Bentonville, Ark.

28By the NumbersWealth is growing rapidly around the world, and affluent individuals—those on track to be the millionaires of tomorrow—are the ones to watch

Contents

BLOOMBERG MARKETS

SPECIAL REPORT • FAMILY OFFICES

Q3 2018

Editor, Bloomberg Markets Christine HarperSpecial Reports Editor Siobhan WagnerFeatures Editor Stryker McGuire<GO> Editor Jon AsmundssonArt DirectorsLee H. Wilson, Josef Reyes Graphics EditorMark Glassman

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Private Banks Are Starting To Breach China’s Wall Around Its WealthyBy CATHY CHAN and ALFRED LIUI L L U S T R AT I O N B Y M AT T C H A S E

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.

Forward Guidance

3FAMILY OFFICES

The collective fortunes of China’s uber-rich grew a staggering 65 percent, or $177 billion, last year, according to the Bloomberg Billionaires Index, a ranking of the world’s 500 wealthiest people.

The money is showing up all over the world, in condos in Sydney and Vancouver and art auctions in London. But capital controls keep the vast majority within the mainland’s borders, where a wealth management industry unlike any other has sprung up to grab a slice of the bounty.

China’s rich tend to be business owners from their 40s to their 60s who use multiple financial institutions as investment “supermarkets,” Boston Consulting Group and Fuzhou, China-based Industrial Bank Co. wrote in a December report. The most popular item on the shelves, wealth management products, typically provide a fixed rate of return, a set maturity date, and either an explicit or implicit guarantee from whoever raised the money. Proceeds end up in everything from corporate bonds to property to loans and, sometimes, in a layer cake of other products.

“China’s wealth management products are ones the foreign banks could hardly approve because of risk and compliance concerns,” says Joe Ngai, managing partner of greater China at McKinsey & Co. “The biggest problem foreign banks have is they don’t have a value proposition. There are a lot of products they can’t do.”

Enter the regulators. Since they pledged to ban banks from selling wealth management products with guaranteed yields or principal late last year, the breakneck pace of growth in that product line has gone into reverse. Officials are also opening China up to global finance brands, committing in April to allow foreign companies to own majority stakes in their securities, fund management, futures, and insurance joint ventures.

“The handicap for foreign banks’ wealth business is getting smaller,” Ngai says. “When the market starts to become rational, when the rules of the Chinese

wealth management business come closer to the international market, when the yuan is more liberalized with more products, the foreign banks will be more competitive in that scenario.”

Credit Suisse—which gets about two-thirds of its Asia-Pacific revenue from wealth management and investment banking—is looking to build its onshore Chinese business from scratch, with a focus on marketing asset-allocation services and structured products without the guarantees of wealth management products. If successful, that would pit Credit Suisse head-to-head against UBS, which has broken ranks with most global peers in the amount of capital it’s committed onshore.

UBS Group Chief Executive Officer Sergio Ermotti made waves in early 2016 when he pledged to double the number of staff in China over five years, adding 600 people across wealth management, investment banking, equities, fixed income, and asset management.

“China is a great opportunity, like it has been for the last 20 years,” Ermotti said at the time, a reference to how tantalizing yet elusive the market has been for non-Chinese banks.

Some two and a half years later, UBS is ahead of schedule: It has 170 people working in wealth management in China and expects to meet its overall hiring target by the end of 2018.

UBS’s local bank got a private-funds license last year. This means that rather than sell mutual funds to the mass market, it can tailor Chinese investment funds to local wealthy individuals for the first time through its wholly owned asset management company. In December the Swiss lender also unveiled a partnership with Qianhai Financial Holdings Co. that’s aimed at winning affluent young customers in a high-tech commercial zone just inside the southern Chinese border.

UBS reported in July that net new money in the Asia-Pacific region grew 2.3 percent in the second quarter, vs. a 0.1 percent drop across all regions,

without providing a China breakdown.Still, the barriers to entry haven’t all

disappeared. Recruiting experienced staff is difficult. So is marketing yourself against banks operating on a completely different scale: Bank of China Ltd. has 288,000 staff spread across the nation.

“We’re not trying to compete with the local banks,” says Amy Lo, greater China head of wealth management at UBS. “We want to be the dominant international player in the market, but we don’t need to be the biggest local player in terms of number of people and branches. That’s not our strategy.”

An obvious tactic for foreign banks is to market their access to global investment products, especially given how badly Chinese equities have done since their $5 trillion crash in 2015.

But money managers still can’t move funds out of China without obtaining an investment quota from the government, one of the nation’s safeguards against destabilizing capital outflows. Quota limits under the main outbound investment program were frozen for three years through April of this year. They totaled $103.2 billion as of July 30, enough to buy just 0.3 percent of the U.S. stock market.

That helps explain why most global banks, including Morgan Stanley, JPMorgan Chase & Co., and Citigroup Inc., are focusing for now on serving wealthy Chinese outside the mainland’s borders. Goldman Sachs Group Inc., too, has yet to make a major foray onshore; its Chinese joint-venture partner shut down an asset management business last year.

“You have to be patient, flexible, and diversified to crack the onshore China market. There is enormous potential once you have established an infrastructure, but it takes time,” Lo says. “The recent policy enhancements are a positive development that will help new entrants coming into the market.”

Chan is an investment banking and private equity reporter and Liu is a finance reporter at Bloomberg News in Hong Kong.

BLOOMBERG MARKETS SPECIAL REPORT4

“JCF gave us the flexibility to not only focus on today, but on the future. And, it gave us a tax structure and platform that’s helpful for any family.”

—CIO, Second-generation SFO

For information, please contact Ellen Israelson at 212.752.8277 or [email protected], or visit jcfny.org.

WHEN RELYING ON THE FAMILY FOUNDATION ALONE IS NOT ENOUGH TO ACCOMPLISH YOUR PHILANTHROPIC GOALS, OR TO PROTECT YOUR PRIVACY.

A donor advised fund can help engage the next generation.High Net Worth families are increasingly using a Donor Advised Fund alongside (or in lieu of ) a traditional family foundation to manage their charitable giving with ease, flexibility and confidentiality. Let Jewish Communal Fund (JCF) make your charitable giving efficient, and free of the administrative burden of the private foundation. Establishing multiple JCF funds can empower family members across the generations to make a positive impact on the issues they are passionate about.

Since 1972, JCF has managed donor advised funds that enable families to set aside money for charitable purposes when it is most advantageous and make grants to the charities of their choice.

<GO> INSIDE THE TERMINAL

Bruce Nauman, Sex and Death by Murder and Suicide, 1985

Bruce Nauman, Leaping Foxes, 2018

Bruce Nauman, Myself as a Marble Fountain, 1967

A R T I S O N E O F T H E M A N Y ways th e 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 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 <GO>}. �Katya Kazakina and Siobhan Wagner

Grand Designs

7

highest-yielding. The equity is last in line, making it the riskiest but also the most potentially lucrative piece.

It’s that last part, the equity chunk, that’s been of particular interest to family offices, say CLO managers and investors including Tricadia Capital Management LLC and Investcorp Credit Management US LLC. Returns on CLO equity can range from 12 percent to a remarkable 20 percent, standing out in credit markets where cor-porate bonds have delivered little or negative returns this year.

Family offices “make an ideal investor in the less liquid part of the CLO because of their ability to hold the investments through maturity, as well as their ability to withstand volatility that public companies or insurance companies may have a hard time dealing with,” says Michael Barnes, co-chief investment officer at Tricadia. Their investment is helping fuel growth in the U.S. CLO market, which had some $540 billion in deals outstanding at midyear, up from about $250 billion in 2008. Demand accelerated because both the CLO bonds and underlying loans are “floating rate,” meaning they pay more yield as interest rates rise. Some banks lifted their sales forecasts to fresh highs after a rule that made CLOs more expensive to assemble was repealed this year. Known as the skin-in-the-game rule, it had been credited with helping the market expand. It required CLO managers to buy pieces of their own deals to dissuade them from selling bonds backed by shaky loans. Managers often borrowed money to finance their own position in the deal, and the effort to win that financing amounted to a global marketing exercise that educated investors, including family offices, on CLOs. “It’s been quite dramatic,” says Maureen D’Alleva, head of performing credit at Angelo Gordon & Co., referring to the pickup in CLO demand. “CLOs have seen an increase in the overall pool of investors from pension funds to family offices.”

For some, the fast growth has recalled the subprime crisis, in which demand for high-yielding credit fueled the creation of debt structures stuffed with low-quality loans. Those in the industry say CLOs are different because the underlying loans to companies aren’t as vulnerable to rising interest rates as subprime home borrowers were a decade ago. Among the 1,500-plus U.S. CLOs rated by S&P Global Ratings since 1994, only 36 tranches across 21 trans-actions had defaulted as of mid-2018.

Of course, similar arguments were made before the subprime debt collapse about the historical resilience of mortgage debt. “Securitization is not alchemy,” Boaz Weinstein, chief investment

Families Are Carving Their Initials Into This Hot Three-Letter Acronym MarketBy SALLY BAKEWELL

SOME OF THE WORLD’S WEALTHIEST CLANS have been throwing their money into an esoteric piece of financial engineering that has Wall Street in its thrall.

They’re called collateralized loan obligations, and they trans-form riskier company loans into bonds of varying risk and reward. Buyers have included affiliates of the Pritzker family, Bill and Melinda Gates, and the family office of Seattle Seahawks owner Paul Allen, who co-founded Microsoft Corp. with Gates. The Huizenga family behind the Waste Management Inc. empire as well as Iconiq Capital LLC, which invests on behalf of wealthy clients including Facebook Inc. co-founder Mark Zuckerberg, have both had CLO exposure in their portfolios at some point. The Anschutz family, led by Los Angeles Lakers co-owner Philip Anschutz, is another player.

The presence of the hyperrich in deals underscores the wid-ening demand for CLOs, a three-letter acronym that’s inspired fear and fervor in the debt markets this year. Proponents point to the CLOs’ potential for double-digit returns, resilience to rising interest rates, and low defaults through last decade’s financial crisis. Others such as KKR & Co.’s Jamie Weinstein, however, have raised questions about whether the frenetic pace of sales is spurring reckless behavior just as the prospect of an economic downturn looms over an increasingly leveraged corporate America.

“It’s attractive from a total return perspective. It’s a robust structure,” says John Popp, global head and chief investment officer of Credit Suisse Asset Management’s Credit Investments Group. “You only have issues if you have a manager investing in a dispro-portionately high number of credits that default and have losses.”

The participation in CLOs by investors mentioned in this story was revealed by people familiar with the investors’ finances who asked not to be identified because the information is private. In some cases tax filings also disclosed the investments. The families’ wealth managers either declined to comment or didn’t respond to requests for comment.

CLOs are typically assembled by managers such as Blackstone Group’s GSO Capital Partners, the Carlyle Group, and Ares Management, which buy loans that have been made to companies with a subinvestment-grade rating. The managers then package the loans into a structure that can be divided into interest-paying bonds and a chunk of equity. The income from the loan payments is paid to the bondholders in the order of their ranking within the structure, from the most senior and lowest-yielding to the most junior and

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<GO> INSIDE THE TERMINAL8

BETTING ON DEBT

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Hildene, BlueMountain, and BlackRock declined to comment.“CLO equity has been a hot product,” says Sean Solis, a

securitization attorney and partner in New York for Milbank, Tweed, Hadley & McCloy LLP. “High net-worth investors through banks as well as family offices have shown up more and more in minority positions in CLO equity.”

Family offices tend to come in for smaller chunks, worth from $5 million to $15 million, alongside bigger investors such as hedge funds, Solis says. CLO equity starts producing cash flow within six months of a deal closing and makes “an ideal investment for those who understand the risks and are willing to commit their capital for a long period,” says John Fraser, head of Investcorp Credit Management U.S. LLC, which manages assets including CLOs.

Not everyone has overcome the trauma of the financial crisis, which featured the collapse of credit products with initials such as SIVs and CDOs. “There are still a lot of investors that shy away from CLOs,” Credit Suisse’s Popp says. “The acronym aversion is fading, but it’s still there.”

officer and founder of hedge fund Saba Capital Management LP, says in an interview with Bloomberg Markets. “People think credit spreads are too low, yet they love CLOs. Hard to hate the pie and love the pieces. The equity tranche offers a double-digit yield, but a real pickup in defaults will bring losses.”

For family offices, investments in CLOs are part of an increase in allocations to alternative investments as they diversify holdings, according to David Scott Sloan, co-chairman for global private wealth services at Holland & Knight LLP. Pioneered by John D. Rockefeller, family offices have mushroomed in recent years as a growing number of wealthy families seek more active involvement in managing their fortunes.

CLOs originated in the late 1980s, and family offices have been investing in them for more than a decade. The Pritzkers, the family behind the Hyatt hotel chain, were among the early investors in this space. Pritzker Foundation tax filings for 2015 and 2016 show it invested in the equity of a Hildene Capital Management LLC CLO. The Bill & Melinda Gates Foundation Trust has invested in CLOs 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.

<GO> INSIDE THE TERMINAL 9

fortunes, the family office industry took off. There are now at least 10,000 single-family offices around the world, and more than half of them were set up in the past 15 years, according to Ernst & Young’s 2016 Family Office Guide.

As family offices proliferated, the hedge fund industry flourished, bringing more-sophisticated approaches to alpha generation and risk management. From 2003 through 2007, the market rose. Then the money-market crisis hit, followed by the global financial crisis in 2008.

The wild market swings and wealth destruction made the case for robust diversification. Increasingly, large capital providers such as the Yale endowment invested in “ uncorrelated” alternative asset classes including hedge funds and timber.

In addition, computing power became more robust and less expensive, and professionals across all industries talked about using machine learning and artificial intelligence to help them make better data-driven decisions.

Fundamental investing is thus transforming into quanta-mental investing, which combines fundamental and quantitative strategies to get the best performance. Many hedge funds and

Keeping Up With the Quants: One Way Family Offices Can CompeteBy JONATHAN GREENBERG

FAMILY OFFICES LIKE ALTERNATIVE INVESTMENTS, but they still love stocks. Equities accounted for 27.1 percent of the average family office portfolio in 2017, according to a research report by UBS Group AG and Campden Wealth Ltd. That represented the biggest allocation of all asset classes. Yet competing with the new, sophisticated, fundamental, and so-called quantamental investing techniques of large asset managers and hedge funds can pose some challenges for family offices.

During the technology revolution of the late 1990s, it appeared that anyone could manage money and make a fortune. It seemed easy then.

Everything you needed was available on the internet, and the market tended to go in only one direction: up. Day trading became popular as people quit their jobs to devote their time to buying and selling stocks online. Then, in 2000, the internet bubble burst. Maybe it wasn’t so easy to manage your own money after all.

Meanwhile, many of the entrepreneurs who founded bubble-era technology companies came through the crash with lots of money still in their pockets—some had even become bil-lionaires. As they sought out dedicated personnel to manage their

Stocks

Run {FTW<GO>} to see which factors have historically or are currently moving equity returns.


STOXX Europe 600 index, FTW buys the 20 percent of those stocks with the highest value of a particular factor and sells short the 20 percent with the lowest value. The return is the net differ-ence between the long and short baskets. For shorter horizons such as one day or rolling week, FTW rebalances weekly. For longer horizons, it does so monthly.

Let’s take a look, for example, at the story told by the Effective Tax Rate thematic factor, which is especially relevant given the change in tax policy in the U.S. last year. In FTW, type “effective tax rate” in the amber box under Name and hit enter. At the bottom of the screen, click on the up arrows to the left of Factor Performance: Effective Tax Rate (LTM).

The tax debate began in Congress in September 2017. That month, stocks of companies with the highest effective tax rates outperformed those with the lowest in anticipation of a potential tax cut, FTW shows. The debate entered a lull in October, as did those stocks, but heated up again in November. The legislation passed in December and took effect in January. The stocks with high values of the factor sold off in March as investors took profits before earnings season.

asset managers, whose strategies are based on fundamentals, are adding data scientists to their teams and seeking out and paying large sums of money for access to innovative data sources such as corporate “exhaust data”—credit card receipts and consumer geolocation information. This has fueled the advent of an “alternative data” industry. These trends have created a competitive advantage for larger asset managers and hedge funds that can afford the associated costs, leaving some smaller asset managers, hedge funds, and family offices at a disadvantage. Bloomberg is working to level the playing field for public-market investing in this increasingly quantamental world. To that end, some analyses that previously required teams of in-house quants to produce are now available on the terminal. One such function is the recently released Factors to Watch. Run {FTW <GO>}, and you can see which themes or factors are driving performance in equity markets.

FTW shows what that can mean for you. The function tracks the net return of a long-short portfolio based on exposure to a particular thematic factor. The math is simple. Starting with a selected universe such as U.S. equities or the constituents of the

Track performance of factors, such as effective tax rate, over time.

Stocks of companies with the highest effective tax rates outperformed those with the lowest in September 2017.


Choose Movers from the drop-down box next to View.

Select an industry to focus on here.

Meanwhile, here were the three worst-performing factors:PORT US Value

Stocks with the cheapest multiples under performed those with the highest by 13 percentage points. Performance may indicate the market prefers higher-valued, growth-oriented companies. That suggests we were still in midcycle.

PORT US Size The largest companies underperformed the smallest by 11 per-centage points, likely driven by fear of a trade war. Larger compa-nies tend to have greater international exposure.

PORT US Profit The most profitable companies under performed the least, suggesting the market is willing to take risks.

More recently, value continued to be the biggest underper-former, down 12.37 percent in the year to Aug. 17.

As markets move, FTW can help you piece together the narrative, informing your decisions about what types of stocks you should buy and sell.

AS OF THE END OF JUNE, FTW was sending multiple signals that the bull market may be intact, even though U.S. stocks had generated a total return of only 2.5 percent in the first half. To view year-to-date factor returns, first navigate back to the FTW home screen. Click the drop-down menu to the right of View and select Movers. Change the Horizon to Year to Date. According to FTW, these were the three best-performing factors during the first half:

3M Target Price Change %The 20 percent of stocks with the greatest increase in analysts’ consensus target price for the trailing three months outperformed those in the lowest 20 percent by 5.8 percentage points. That suggested positive investor sentiment.

SI Days to CoverStocks with the highest short interest relative to their trad-

ing volume outperformed those with the lowest by 5.6 percentage points. That’s also probably a bullish signal, suggesting hedge funds were covering their short positions.

PORT US MomentumMomentum stocks, or those with the best trailing 52-week per-formance, topped those with the weakest performance in the first half by 3 percentage points. Yet momentum stocks lagged in June.

Greenberg is head of equity analysis and quantamental product at Bloomberg in New York.

See the best- and worst-performing factors in a given universe or sector.


mental and social outcomes along with financial return. Fixed income typically attracts investors with longer time horizons who might be more philosophically aligned with environmental and social issues, says Mike Amey, head of sterling portfolio manage-ment and ESG strategies at Pimco Investment Management Co. A World Bank report released in April details some initial evidence that ESG factors can help bond investors avoid default risk.

To fill the gap, asset managers are looking at the existing debt market with fresh eyes, tapping into potentially overlooked asset classes such as affordable housing and development bank debt to find investable opportunities for sustainability-hungry clients. They’re also trying to build infrastructure, such as benchmarks, that will sup-port greater liquidity and investment levels in these products.

Here’s what’s going into sustainable bond portfolios.

DEVELOPMENT BANK DEBT. High-grade debt issued by the World Bank and other development banks offers some of the best- performing do-good credit on the market, according to UBS Group AG, which found the debt delivered strong returns for its socially conscious private bank clients. “We weren’t asking clients to forgo any expected returns,” says Simon Smiles, chief investment

WALL STREET’S DO-GOOD INVESTMENT boom is finally taking notice of the credit markets. Sustainable investment assets grew 37 per-cent last year, according to Bloomberg data, but the majority of those funds focus on stocks. That’s leading to some awkward conversations on Wall Street, as wealthy investors and foundations increasingly want to align their entire portfolios with their social mission but are finding few opportunities to do so in fixed income.

“Most of the people who are interested in incorporating ESG are interested in doing so throughout their portfolio,” says Rui de Figueiredo, co-head and chief investment officer of the Solutions and Multi-Asset Group at Morgan Stanley Investment Management. Yet, with a dearth of available fixed-income products categorized as environmental, social, and governance, those investors haven’t looked at it much. “But that creates more demand on the part of asset managers to create those opportunities,” he says.

Of almost 1,900 ESG funds tracked by Bloomberg, 15 percent invest in fixed income, vs. 62 percent in equity. On an asset basis, that figure is even smaller, with fixed income representing about 3 percent of the $491 billion invested in such funds.

Bonds, though, have the potential to be a popular ESG asset class for impact investors, those who look to generate environ-

How to Build a Sustainable Bond PortfolioBy EMILY CHASAN

Fixed Income

STOCKS RULE

ESG funds tracked by Bloomberg, by asset type

Source: {FSRC <GO>}

Equity1,173

Other62

Money market 38

Mixed allocation341

Fixed income276


MUNI BONDS. The municipal bond market is an “abundant source of potential investments,” says James Iselin, head of the municipal fixed-income team at Neuberger Berman Group LLC. The asset man-ager recently retooled the focus of an existing $56 million muni fund to center on impact investing. Debt issued by local communities can have a positive effect, funding energy and water-treatment projects, schools, and public transportation; it can also help investors lower their tax liabilities. Eaton Vance’s Calvert Research and Management, AllianceBernstein, and Columbia Threadneedle Investments have also launched municipal funds with similar do-good mandates.

ESG-RATED BOND PORTFOLIOS. Fund managers such as Pimco, Fidelity Investments, and Brown Advisory Inc. are building their sustainable fixed-income funds by selecting bonds issued by com-panies that perform well on ESG ratings maintained by third parties such as Sustainalytics and MSCI Inc. This essentially replicates the most common ESG equity strategies in the debt market.

“It’s still fairly early days, but we thought this was an important building block,” says Colby Penzone, head of investment product for Fidelity Investments, which launched a sustainability bond index fund in June. For socially conscious investors, “the preference in the mar-ketplace to date has been more concentrated in the equity space, but a diversified portfolio has to have fixed income,” he says.

officer for ultra-high-net-worth clients at UBS’s wealth-management division. Development bank debt turned out to have “a very attractive expected risk-return over a cycle for AAA-rated debt,” he says. That performance encouraged Solactive AG, a German provider of indexes, and UBS to create in April a development bank bond index family to make the debt more accessible for investors.

SUSTAINABLE BONDS. The market for environmentally friendly bonds is expected to hit a record $170 billion in new issuance this year, but the bonds are in relatively short supply, according to Bloomberg NEF. Green bonds represent less than 0.5 percent of the global fixed-income market. Most deals are oversubscribed, and their environmental credentials appeal to long-term investors who buy and hold investments. If you can get your hands on a green bond, you’ll find the sector has been dominated this year by sovereign, local government, and financial issuers, which use the proceeds to fund smaller projects focused on renewable energy, green buildings, sustainable water management, and the like.

Social and sustainability bonds, which concentrate on themes such as responsible farming or housing finance, are also a budding area, with about 25 deals this year. But there are only about 110 bonds on the market, representing a total issuance of about $47 billion, according to data compiled by Bloomberg.

IN THE CREDIT MARKET, GREEN IS GOOD

Percentage change in value-hedged index since Dec. 29

Sources: {GBGLTREH Index}, {LEGATREH Index}, {LGDRTREH Index}

12/29/17 8/16/18

-2%

-4%

0

Bloomberg Barclays MSCI Global Green Bond Index Total Return Index Bloomberg Barclays Global-Aggregate Total Return Index Bloomberg Barclays Global Aggregate Credit Total Return Index


energy efficiency modifications made to the properties in those portfolios will likely reduce utility bills, according to Fannie Mae. That means those buildings will have “greater net operating income and a greater ability to repay their loans,” says Chrissa Pagitsas, director of green financing for Fannie Mae.

CDFIS. Community development financial institutions, which pro-vide affordable lending to low-income and underserved commu-nities, are gaining traction with impact investors. Banks have been the primary investor in the area for years, thanks to the 1977 Com-munity Reinvestment Act, which encouraged commercial banks to meet the lending needs of their local communities. This has given CDFIs a long performance history. Some are even large enough to have credit ratings, which makes them appealing to retail inves-tors, according to Louise Herrle, a managing director at Incapi-tal LLC, an underwriter and distributor of fixed-income securities to broker-dealers and financial advisers. “They’ve been in the mar-ket for quite a long time, so people have a comfort level with them,” Herrle says. CDFIs are also courting impact investors, allowing them to raise more capital so they can expand, she says. �With Amanda Albright, Julia Nikulski, and Dimitris Gogos

REAL ESTATE. When the Ford Foundation last year committed $1 billion from its endowment to impact investing, it said one of its top initial investment targets would be affordable housing. Community Capital Management Inc., an impact investing company that oversees about $2.3 billion, slices up portfolios so investors can use their fixed-income strategies to support housing in a number of categories such as disaster recovery, minority neigh-borhoods, arts and culture programs, and sustainable agriculture. The Florida-based company last year created a pool of mort-gage-backed loans, municipal debt, and other asset-backed debt tied to affordable housing for women and girls. They built the product in response to clients who asked about investing in gen-der-focused products. “We’re able to know we’re helping low- to moderate-income women specifically get access to capital to buy a home,” says Andy Kaufman, a senior portfolio manager at Com-munity Capital Management Inc.

Environmentally friendly buildings are also presenting oppor-tunities. Federal National Mortgage Association, for example, was the largest issuer of green bonds in the world last year, selling more than $27.6 billion in green mortgage-backed securities in 2017, up from $3.6 billion in 2016. The U.S. government-backed firm, which 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.

LOOKING UP

Total return since Dec. 29

AB Impact Municipal Income Fund Bloomberg Barclays Municipal Bond Index Total Return Index Value Unhedged

Columbia U.S. Social Bond Fund Calvert Responsible Municipal Income Fund Neuberger Berman Municipal Impact Fund

Sources: {CTTLX US Equity}, {ABIMX US Equity}, {CONAX US Equity}, {NMIIX US Equity}, {LMBITR Index}

12/29/17 8/16/18

-1%

-2%

0


SPDR S&P 500 ETF Trust in PORT. Click on the Attribution tab. To segment the portfolio by sectors, click on the arrow to the right of By and select GICS Sectors. Select YTD as the time frame using the drop-down menu to the right of Time. Then click on the arrow to the right of Model, select Total Return, and hit <GO>. The Tot Rtn column will display the portfolio’s performance. The ETF in our example returned 7.51 percent this year through Aug. 16. A more important column, labeled CTR, shows the weighted contribution to return. Click on the CTR column to order the sectors by how much they contributed to performance. As of Aug. 16, Information Technology was on top, contributing 3.98 percentage points to overall return.

To find out how a portfolio such as this ETF would perform without the IT sector, click on the Actions button on the red tool-bar and choose Exclude Securities from the drop-down menu. In the Choose Action box, select Exclude from the drop-down menu.

Find Out How Much a Manager, Sector, or Stock Is Really Adding To Your Portfolio By CONSTANTIN COSEREANU

FAMILY OFFICES PUT A LOT OF FAITH in outside investment managers. That includes, of course, those that run their public equity allocations. Yet, seeing how much a manager adds to your portfolio’s overall performance or risk may not always be easy. With a well-diversified portfolio, it may also be difficult to quantify how much a single sector or particular stock is contributing. Here’s one way to isolate a single manager, sector, or stock in your portfolio to help answer the question: Am I better or worse without them?

To find out, you can upload your portfolio to the terminal using the Portfolio Administration (PRTU) function and then ana-lyze it in the Portfolio & Risk Analytics (PORT) function. To show how it works, let’s use an exchange-traded fund that tracks the S&P 500 as an example portfolio. For the sake of simplicity, let’s focus on excluding certain sectors and see how that affects per-formance and other characteristics.

To start, go to {SPY US Equity PORT /P <GO>} to load the

Asset Management

Click on the Attribution tab and change the time frame to YTD in the amber box to the right of Time, then hit <GO>.

CTR shows a sector’s overall contribution to a portfolio’s return.

Load up SPY US Equity in the command bar and run {PORT <GO>}.


Exclude a sector here to see how it impacts the portfolio’s overall performance.

Another element to consider is price-earnings ratio, which you can view by clicking on the Characteristics tab. The overall portfolio had a P/E of 20.61 as of Aug. 16. If you exclude Information Technology using the same process as before, the P/E drops to 19.89.

This is just a simple example, but importing your own invest-ment portfolio to the terminal will allow you to perform this type of analysis, eliminating not only sectors but also particular man-agers. Asset owners and managers of managers can create port-folio aggregates to determine how much a given manager is con-tributing to risk or return of the aggregate. To do that, you can “tickerize” each manager’s portfolio to create a custom portfolios aggregate. For more info on custom aggregates, hit the Help key twice and ask for a portfolio specialist.

In the amber box on the right, choose Information Technology and then click Select. Doing so shows that without IT, the portfolio would have returned 4.74 percent in the year through Aug. 16. The biggest contribution to return would then come from Consumer Discretionary: 2.35 percentage points.

Performance isn’t the whole story, though. To find out how much a sector contributes to risk, start by putting Information Technology back into the mix. Click Actions, choose Exclude Secu-rities, and in the Choose Action box select None from the amber drop-down menu on the left. Then click Select.

Click on the Tracking Error/Volatility tab and then on the Contribution (%) column. As of Aug. 16 it shows that 32.85 percent of the volatility, or risk, to the S&P 500 came from Information Technology. That’s interesting considering that, based on IT’s positive contribution to performance, you might assume the sec-tor would contribute less in terms of risk.

Click on the Characteristics tab to evaluate the portfolio’s price-earnings ratio.

Cosereanu is a portfolio and risk specialist at Bloomberg in New York.


Spotlight

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.


DP: Tell me a bit about how Athena started.LC: Originally our clients were institutions. We actually ended up helping the executives of some of those institutions with their personal portfolios as the concept of the multifamily office, and the external CIO [chief investment officer], became more popular. And I was thinking, This is great, I’m going to modify the business model of Athena to be a multifamily office and external CIO, and we can bring the principles and best practices of working with institutions to substantial families that are just as big as these institutional investors. That was in 2002, and that is what we’ve done ever since, with only some slight mod-ifications. Now we’re mostly families, but we’ve added back in some foundations and endowments on whose boards families, like our clients, often serve. In some ways, it feels like we’ve come full circle. DP: How did you get into investment management in the first place? LC: I grew up in a very academic family, so when I didn’t know what I wanted to do when I grew up, I went to get a Ph.D. And I got a Ph.D. in geology. There was a lot of math in that, a lot of field trips, which were great, but being in the lab was very iso-lating and not so great. It turned out that at that time Wall Street was looking for people with a math background. And so I joined Wall Street as one of that generation of rocket scientists. Some-times I say that I misheard. I thought they were looking for rock scientists. I went from Merrill Lynch working in capital markets to a risk management firm called Barra Inc., which is now part of MSCI Inc., and ran their consulting group. I founded Athena out of that.DP: What can you tell me about the families? LC: We have families that are first-generation wealth and also multigenerational wealth. One of the interesting key ingredients is that someone was an investor or entrepreneur. So either they’re first-generation wealth and they’re producing that wealth them-selves, or their parent or grandparent did that. We found our initial set of customers were really professional investors them-selves, people who were partners with private equity, real estate, or investment firms. In the early days, we were really the inves-tor’s investor, and then it extended into working with people who founded companies—entrepreneurs and their families. DP: In terms of investment interests, what would you say are the notable differences between generations? Also, how do multi-generational family clients compare to entrepreneur clients? LC: With first-generation [wealth], it’s very common that, since they made the money, they’ll take whatever risk they want to take with it. Future-generation wealth often is somewhat more conservative because they feel like they’re stewards of the money. They’re going to spend some of it, but it’s not “their” money. It’s not universally true, but that’s a general rule of thumb. With the folks in the investment business themselves, another important difference is that they have access to a lot of investment opportunities. They could do this themselves if they had the time and the patience. They really want someone they can trust as their alter ego to keep track of all the crazy stuff they invest in. We’ve got the full balance sheet for them, and we monitor all the investments. They will take some of our ideas, but they’ll find a lot of investments themselves. The folks who

aren’t professional investors, they really are heavily relying on our investment advice. DP: What about tax implications? That’s got to be a very big issue when you’re thinking about allocation and strategies. It must be different from working with institutional clients. LC: That’s one of the exciting things about working with pri-vate clients. We used to work with risk and return in the insti-tutional world, and then suddenly there was this other variable: risk, return, and taxes. How could we make money for our clients by mitigating their taxes? It was a lot easier to add alpha that way than by trying to find the very tippy-top manager in some space. For example, we use a tax-managed equity strategy that’s pretty core for most of our clients, and it can add, on average, 300 basis points [3 percentage points] of alpha over ETFs [exchange- traded funds] or index funds per year.DP: Can you tell me more about that strategy? LC: Sure. Just imagine you can draw a little straight line on a piece of paper. Imagine that line represents a zero. There’s zero return to the stock market. But now put some dots above that zero line randomly up there and some dots below that zero line. Those are individual stocks. In any market when the stock market’s returning zero, some stocks are making money and some stocks are losing money. Let’s say you had a two-stock portfolio. One stock makes me money. One stock is losing money, and you net out to zero. Let’s say you sell that stock that’s losing money, and you replace it with something else that has very similar characteristics. It’s going to perform very, very similarly on a going-forward basis. But since you’ve sold it, you’re able to capture the fact that you lost money, and you can deduct that loss against other gains that you have. DP: This sounds like a really active portfolio that involves lots of management. LC: It is. We understand that work very well, and we’ve out-sourced it for a very, very, very small cost. It’s just about the same cost as an ETF or passive fund. DP: Can you tell me a little bit about Trump’s tax reforms and how that’s shifted the landscape for your clients?LC: We breathed a sigh of relief because it preserved the ability to do that particular [tax-managed equity] strategy. There was some thought that they would get rid of it, and we were so happy they didn’t. The biggest thing for us in the Trump tax bill, beside dodging that bullet, was the doubling of the lifetime exemption. Many clients are looking at ways to use up that additional lifetime exemption. The other really interesting thing about the Trump tax bill was something it didn’t do. Many of our clients use planning vehicles like GRATs, grantor retained annuity trusts, to mitigate their estate tax bill and pass on wealth to future gen-erations. The Trump tax bill permitted that strategy to continue. DP: Finally, and on a different topic, research suggests more and more women are coming into wealth. Any tips for commu-nicating with female clients? LC: I would boil that down to one word: respect. We have clients who came to us because their previous adviser only addressed their husbands or didn’t engage them in meetings even when they’re both asset owners. They feel they’re not being seen, and they just get fed up with that.

Pendleton is a wealth reporter at Bloomberg in New York.

20 BLOOMBERG MARKETS SPECIAL REPORT

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.

Walmart, Samsung, Koch Industries, and Hermès have built some of the biggest

fortunes to ever be handed downPOWERED BY BLOOMBERG WEALTH

Trillion-Dollar Inheritance

21FAMILY OFFICES

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.”


1. WALTONCompany: WALMART INC.Wealth: $151.5B*Industry: CONSUMER RETAILBase: BENTONVILLE, ARK.

Walmart is the world’s largest retailer by revenue, with annual sales of $500 billion from almost 12,000 stores worldwide. Holding companies Walton Enterprises LLC and the Walton Family Holdings Trust own half the retailer, a stake that’s the foundation of the world’s biggest family fortune.

2. KOCHCompany: KOCH INDUSTRIES INC.Wealth: $98.7BIndustry: INDUSTRIALBase: WICHITA

Brothers Frederick, Charles, David, and William inherited father Fred’s oil refinery business. A feud over control of the company in the early 1980s led Frederick and William to leave the family business; Charles and David stayed and have since transformed it into Koch Industries, a conglomerate with annual revenue of about $100 billion. David and Charles manage a portion of their wealth through a family office, 1888 Management LLC.

3. MARSCompany: MARS INC.Wealth: $89.7BIndustry: CONFECTIONERY, PET CAREBase: McLEAN, VA.

Frank Mars learned to hand-dip chocolates as a schoolboy. The business he went on to found is best known for M&M’s and Milky Way and Mars bars, though pet-care products make up almost half the company’s more than $35 billion in annual revenue. The closely held business is entirely owned by members of the Mars family.

4. VAN DAMME,DE SPOELBERCH, DE MEVIUSCompany: ANHEUSER-BUSCH INBEV SA/NVWealth: $54.1BIndustry: BEVERAGESBase: BELGIUM

The collective enterprise of these three Belgian beermaking families has roots in the 14th century. The Van Damme family joined the others when the 1987 merger of Piedboeuf and Artois led to the creation of Interbrew, which merged with Brazil’s AmBev in 2004. The company then combined with Anheuser-Busch in 2008. Verlinvest SA, an investment vehicle, manages more than $2 billion in family assets.

5. DUMASCompany: HERMES INTERNATIONAL SAWealth: $49.2BIndustry: LUXURY GOODSBase: PARIS

Jean-Louis Dumas, who died in 2010, is credited with turning Hermès into a global giant in luxury fashion. Among the family members who maintain senior positions at the company are Pierre-Alexis Dumas, the artistic director, and Axel Dumas, the chairman.

6. WERTHEIMERCompany: CHANEL SAWealth: $45.6BIndustry: LUXURY GOODSBase: PARIS

Brothers Alain and Gérard Wertheimer are reaping the benefits of their grandfather’s funding of designer Coco Chanel in 1920s Paris. The siblings own the closely held fashion house, which introduced the “little black dress” to the world. It had revenue of $9.6 billion in 2017. The Wertheimers also own racehorses and vineyards.

7. AMBANICompany: RELIANCE INDUSTRIES LTD.Wealth: $43.4BIndustry: INDUSTRIALBase: MUMBAI

Dhirubhai Ambani, the father of Mukesh and Anil, started building the precursor to Reliance Industries in 1957. When Dhirubhai died in 2002 without leaving a will, his widow brokered a settlement between her sons over control of the fortune. Mukesh is now at the helm of the conglomerate, which owns the world’s largest oil refining complex. He lives in a 27-story mansion that’s been called the world’s most expensive private residence.

8. QUANDTCompany: BAYERISCHE MOTOREN WERKE AGWealth: $42.7BIndustry: AUTOMOTIVEBase: MUNICH

Herbert Quandt helped turn BMW from a struggling carmaker into one of the world’s largest makers of luxury vehicles. Family matriarch Johanna Quandt died in 2015; her children, Stefan Quandt and Susanne Klatten, retain control of the company. Their other investments include stakes in German logistics company Logwin AG and Dutch security software company Gemalto NV.

9. CARGILL, MacMILLANCompany: CARGILL INC.Wealth: $42.3BIndustry: INDUSTRIALBase: MINNEAPOLIS

Family members are majority owners of the largest closely held U.S. company. It was founded by W.W. Cargill, who started a commodities business with a single grain-storage warehouse in Conover, Iowa, in 1865. His descendants maintain control of the food, agriculture, and industrial giant.

23FAMILY OFFICES

10. BOEHRINGER, VON BAUMBACHCompany: BOEHRINGER INGELHEIM GMBHWealth: $42.2BIndustry: PHARMACEUTICALSBase: INGELHEIM, GERMANY

German drugmaker Boehringer Ingelheim was founded in 1885 by Albert Boehringer, and more than 130 years later the Boehringer family, which includes a line of von Baumbachs, are still in charge. Chairman Hubertus von Baumbach and his extended family are owners of the closely held company.

11. ALBRECHTCompany: ALDIWealth: $38.8BIndustry: CONSUMER RETAILBase: ESSEN AND MUELHEIM, GERMANY

Brothers Theo and Karl Albrecht took over their parents’ grocery store after returning home from World War II and turned it into Aldi, a national chain of discount supermarkets. The brothers split the business in the 1960s after a dispute over the direction of the company. The two branches—Aldi Nord and Aldi Süd—now have more than 10,000 stores combined. Theo’s side of the family also owns Trader Joe’s, which they bought in 1979.

12. MULLIEZCompany: AUCHAN HOLDING SAWealth: $37.5BIndustry: CONSUMER RETAILBase: LILLE, FRANCE

The Mulliez family had already built a retail empire by the time Gérard Mulliez started Auchan, known as France’s Walmart, in 1961. Auchan has grown into one of Europe’s biggest supermarket chains. The family holding company, Association Familiale Mulliez, controls a diverse group of retail businesses, including home-improvement chain Leroy Merlin and sports and leisure group Decathlon.

13. KWOKCompany: SUN HUNG KAI PROPERTIES LTD.Wealth: $34BIndustry: REAL ESTATEBase: HONG KONG

Kwok Tak-seng listed Sun Hung Kai Properties in 1972. The company has since become one of Hong Kong’s largest developers and the basis of the Kwok family fortune. His sons, Walter, Thomas, and Raymond, assumed control when he died in 1990.

14. COXCompany: COX ENTERPRISES INC.Wealth: $33.6BIndustry: COMMUNICATIONS, AUTOMOTIVEBase: ATLANTA

The Cox family controls Cox Enterprises, a conglomerate with about $20 billion in annual revenue. Its Cox Communications division is the third-largest cable company in the U.S. James Cox founded the company in 1898. His descendants, including James Kennedy and Blair Parry-Okeden, remain shareholders in the group.

15. PRITZKERCompany: HYATT HOTELS CORP.Wealth: $33.5BIndustry: HOTELSBase: CHICAGO

The son of a Ukrainian immigrant, A.N. Pritzker began investing in real estate and troubled companies while working for his father’s law firm. The investments seeded the fortune of one of America’s oldest dynasties, whose shared assets include Hyatt Hotels. The family are prominent supporters of the Democratic Party; Penny Pritzker served as U.S. secretary of commerce under President Barack Obama, and her younger brother J.B. is running for governor of Illinois.

16. LEECompany: SAMSUNG GROUPWealth: $30.9BIndustry: MULTIPLEBase: SEOUL

Chairman Lee Kun-hee’s father, Lee Byung-chull, started Samsung as a trading company in 1938. The conglomerate is now known as the world’s largest producer of smartphones. Lee Kun-hee’s son, Jay Y. Lee, was released from jail in February following a reduction in a prison sentence related to bribery charges.

17. RAUSINGCompany: TETRA LAVAL GROUPWealth: $30.9B Industry: PACKAGINGBase: LONDON

The family’s wealth originated with Tetra Pak, the long-life drinks carton pioneered by Ruben Rausing in Sweden in the 1950s. Descendants of Ruben’s son Gad now control all of closely held Tetra Laval, one of the world’s biggest packaging companies. Another son of Ruben’s, Hans, sold his stake in the business to Gad in 1995 and has since invested in eco-friendly packaging and equities through London-based Alta Advisers Ltd.

18. THOMSONCompany: THOMSON REUTERS CORP.Wealth: $30.9BIndustry: MEDIABase: ONTARIO

The wealth of Canada’s richest family originated in the early 1930s when Roy Thomson opened an Ontario radio station. Within five years, he’d become the country’s leading newspaper owner. The family now shares a 64 percent stake in financial data and services provider Thomson Reuters, which they hold through investment firm Woodbridge Co.


19. JOHNSONCompany: S.C. JOHNSON & SON INC.Wealth: $28.2BIndustry: HOUSEHOLD GOODSBase: RACINE, WIS.

Samuel Johnson began selling parquet flooring in 1882. Five generations of the family have since built S.C. Johnson into a major household goods maker. H. Fisk Johnson is the company’s chairman and chief executive officer. Its brands include Mr Muscle, Raid, and Windex.

20. DASSAULTCompany: DASSAULT GROUPWealth: $27.8BIndustry: DIVERSIFIEDBase: PARIS

The Dassault Group empire includes military aircraft manufacturers, newspapers, and real estate and software businesses. Founder Marcel Bloch, a Jewish aviation legend, was captured by Nazis in World War II and later changed his name to Dassault, an homage to his brother’s wartime pseudonym, which means “assault tank.” His son Serge Dassault, who took the helm of the company in 1986, died in May.

21. DUNCANCompany: ENTERPRISE PRODUCTS PARTNERS LPWealth: $26BIndustry: NATURAL GAS AND CRUDE OILBase: HOUSTON

Pipeline behemoth Enterprise Products Partners was started by Dan Duncan in 1968. Duncan lost his mother to tuberculosis, his brother to blood poisoning, and his father to leukemia before the age of 18. He died in 2010. The gas and oil company is still under family control.

22. HOFFMANN, OERICompany: ROCHE HOLDING AGWealth: $25.1BIndustry: PHARMACEUTICALSBase: BASEL, SWITZERLAND

Drugmaker Roche was founded by entrepreneur Fritz Hoffmann-La Roche in 1896. His descendants now control a 9 percent stake in the company, whose blockbuster oncology drugs helped it generate $54.1 billion in revenue in 2017. Family members have been prominent supporters of nature conservation. Fourth-generation scion André Hoffmann founded and chairs multifamily office Massellaz SA.

23. HEARSTCompany: HEARST CORP.Wealth: $24.5BIndustry: MEDIA, BUSINESS INFORMATIONBase: NEW YORK

William Randolph Hearst laid the foundation for his family’s fortune when he took control of the San Francisco Examiner from his father in 1887. William’s grandson William Randolph 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 known as a media company but also owns Fitch Ratings, the credit-evaluating company.

24. LAUDERCompany: ESTEE LAUDER COS.Wealth: $24.3BIndustry: COSMETICSBase: NEW YORK

Queens, N.Y., native Estée Lauder founded a business selling skin-care products in 1946 with her husband, Joseph. Today her eponymous company sells $12 billion in cosmetics and fragrances annually. Leonard Lauder, a notable art collector and company chairman emeritus, has donated hundreds of his pieces, from vintage postcards to Picassos, to museums.

25. FERREROCompany: FERRERO SPAWealth: $22.9BIndustry: CONFECTIONERYBase: ALBA, ITALY

Michele Ferrero built a global chocolate confectionery company from the small Italian town of Alba. His son Giovanni took sole helm of the family business after another son, Pietro, died in a cycling accident in 2011. Ferrero acquired Nestlé SA’s U.S. candy business for $2.8 billion in 2018.

Edited by Shelly Hagan, Andrew Heathcote, Tom Metcalf, Devon Pendleton, Olivia Carville, Yoojung Lee *See “Welcome to Waltonville” (p26). The Walton’s fortune has since risen— it was $167 billion as of Aug. 23.

25FAMILY OFFICES

26

BENTONVILLE BUSINESSES LINKED TO THE WALTON FAMILY

Arkansas

1

2 3 45

6

7

8

9

BENTONVILLE

5

Welcome to

Where the World’s

Richest Family ReignsBy TOM METCALF

7 Momentary (planned museum venue)

8 The Holler (food hall, community space)

9 Planned Walmart corporate campus

1

4

6 Record (event space)

5 Walmart Museum

4 Arvest Bank branch1 Crystal Bridges Museum of American Art

2 The Preacher’s Son (restaurant)

3 Pressroom (restaurant)


and a new outpost of Crystal Bridges, called Momentary, slated to open in 2020.

“Recent growth is due to the Walton grandchildren,” says local real estate agent Larry Horton, who says property prices have tripled in the past few years. “They’ve put a lot of effort into getting younger people here.”

It seems to be working. The population is close to 50,000, up from 35,000 in the 2010 census. On a May weeknight, a steady stream of millennials threw back shots in a basement bar, Undercroft, that’s part of Tom’s Ropeswing Hospitality Group. The bar is located under another Ropeswing establishment, the Preacher’s Son, a restaurant housed inside a restored church. Ropeswing’s other Bentonville joints include casual- dining restaurant Pressroom, food and game venue Holler, and events space Record.

“A few years ago you could have fired a scattershot down-town and not hit anyone,” says Don Overstreet, whose family jewelry store has been on Bentonville’s town square since 1948. “Now look at it.”

Sam would approve. “Operate globally, give back locally” was his mantra, according to the company museum.

As with other multigenerational fortunes, the family’s chal-lenge is ensuring its wealth doesn’t dissipate between generations. It helps that many family members’ lifestyles aren’t lavish. The Waltons in the area “live modestly,” according to Bentonville Mayor Bob McCaslin, who praised the family’s influence in Northwest Arkansas. They “call no attention to themselves.”

They’re also implementing more complex tax strategies than in Sam’s day.

Wyoming court filings obtained by Bloomberg in 2015 showed that the will of Sam’s middle son, John, gave half of his then-$17 billion estimated fortune to charitable trusts.

The trusts will make annual nontaxable payments under IRS guidelines to the Walton Family Foundation charitable arm until 2036. If investments outperform certain benchmarks, what-ever is left at the end goes to Lukas without any tax bill.

Such maneuvers—and the sheer size of their fortune—mean the Waltons are well-positioned to remain the world’s richest family for some time.

That’s good news for Bentonville, which will continue to benefit from the clan’s closeness to their hometown. About a mile south of the gleaming buildings of Crystal Bridges sits a largely empty tract of land. Not for long. Walmart said in September 2017 it’s planning to build its new corporate campus there for an estimated $1 billion.

Metcalf is a wealth reporter at Bloomberg News in New York.

THE LARGEST VERIFIED FAMILY FORTUNE on earth is run out of two floors of unmarked suites in Bentonville, Ark.

The building is a discreet nerve center for the Walton family’s $167 billion hoard as of Aug. 23. There are plenty more overt signs of their success in the heart of the city.

The town square features the former five-and-dime store—now a museum—that family patriarch Sam Walton opened in 1950, which was the launchpad for Walmart Inc. Across the square is a branch of Arvest Bank—also owned by the family—while a short walk south brings visitors to the grounds of Crystal Bridges, a $1.2 billion museum of American art built with Walton money on family-owned land in an Ozark forest.

Then there are the stores, warehouses, and low-slung head-quarters of Walmart that dot the landscape for miles around and underscore the size of the $500 billion annual-sales behemoth that’s the bedrock of the family fortune.

“Outside of monarchies, this is one of the greatest fortunes ever amassed,” says Andy Hart of Delegate Advisors, a multi-family office with locations in San Francisco and Chapel Hill, N.C. “Monarchies and kingdoms came by birthright. This was earned.”

Investment vehicle Walton Enterprises LLC owns 48 per-cent of Walmart, worth about $135 billion as of Aug. 23. Walton Family Holdings Trust owns an additional 2.4 percent. The combined stake threw off $3.2 billion in dividends in 2017, the same year the family sold about $4.1 billion in stock to fund philanthropy and other projects.

Their continued control reflects unusual prescience on the part of Sam, who started preparing for succession in 1953, when he passed 80 percent of the family business to his four children: Alice, Rob, Jim, and John. That minimized estate taxes and helped the family retain control even as the company grew into the world’s largest retailer.

Six decades later, there are increasing signs that the third generation is starting to hold greater sway. Steuart, 37, replaced his father, Jim, on Walmart’s board in 2016. Wyoming court documents show Steuart’s cousin Lukas, 31, has the right to vote the estate’s general and limited partner units in Walton Enterprises. A spokeswoman for the family declined to comment for this story.

The younger generation’s increasing influence is apparent in downtown Bentonville. An office and retail complex features an eatery backed by Steuart’s 34-year-old brother, Tom, and, for a few weeks, hosted a temporary outpost of Rapha, a high-end British cycling brand that the pair bought in 2017. The siblings are also behind the bicycle trails that crisscross the town’s outskirts C

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2727FAMILY OFFICES

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.

By the Numbers

$70tTotal global wealth of high-net-worth individuals, those with investable assets of $1 million or more, in 2017(DATA: CAPGEMINI WORLD WEALTH REPORT 2018)

665kAsia-Pacific added about this many people to the global high-net-worth population in 2017(DATA: CAPGEMINI WORLD WEALTH REPORT 2018)

72mThe number of people who qualify as affluent, with assets of $250,000 to $1 million, in 2017 (DATA: THE BOSTON CONSULTING GROUP GLOBAL WEALTH 2018 REPORT)

$17.3tThe amount of global investable assets—equities, bonds, funds, currency, and deposits—held by affluent individuals in 2017(DATA: THE BOSTON CONSULTING GROUP GLOBAL WEALTH 2018 REPORT)

$100tCapgemini expects global high-net-worth individual wealth to reach 15 digits by 2025(DATA: CAPGEMINI WORLD WEALTH REPORT 2018)

16.3%The wealth of Ireland's high-net-worth individuals rose this much last year—the highest growth rate in Europe(DATA: CAPGEMINI WORLD WEALTH REPORT 2018)

101mThe projected number of those defined as affluent in 2022 (DATA: THE BOSTON CONSULTING GROUP GLOBAL WEALTH 2018 REPORT)

7.4%Projected growth in global investable assets held by affluent individuals from 2017 to 2022(DATA: THE BOSTON CONSULTING GROUP GLOBAL WEALTH 2018 REPORT)


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q3 2018 special report • family offices...the world, and affluent individuals— those on track to...

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