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Diversifying for the Future
A Portfolio Management Study

Fiduciary had served as a family’s custodian and corporate trustee for almost two decades. The family used an outside manager for their investments until the early 2000s, when they decided to ask Fiduciary to play that additional role. We were happy to oblige.

We inherited an interesting management challenge. The total pool of assets is approximately $50 million, in more than 25 separate accounts. The portfolio had been very conservatively invested, with very low turnover, over the years. It was approximately 70 percent invested in stocks—mainly large-cap U.S. equities—and the remainder in bonds. There was a significant amount of unrealized gains in the portfolio, adding up to approximately $15 million.

We explained to the family that it was important to diversify the portfolio—first to limit the potential damage should one of their main holdings collapse, and second, to maximize returns. Even though we were “only” authorizing a 4 percent payout in our trustee role, inflation, our management fee and the capital-gains “drag” that results from investment activity collectively meant that we needed to make that portfolio earn between 7 and 8 percent just to hold its own. This meant that we had to move the portfolio into a broader range of assets with higher earning potential, including—for example—real estate, private equity, commodities and managed futures, and many others.

It also meant that the family would have to pay more than $2 million in capital-gains taxes. This came as an unwelcome surprise, but we explained why it was a relatively small price to pay to achieve the needed level of diversification.

Once we had consensus, we worked with a family member who is also an attorney to set up a Delaware-based LLC as a dedicated investment vehicle. It is a so-called “tiered partnership,” meaning that members of the family can choose to invest or not invest in specific opportunities offered to the family by the LLC. Interestingly, the LLC has also been a way for members of the family to come forward with investment recommendations of their own—some of which we have endorsed and have proven successful.

Perhaps the best measure of our success in managing the family’s shared pool of assets is that a dozen members of the family have also asked us to manage their personal assets. We have earned their trust: as financial planners, portfolio managers and tax advisors.

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