Cluster Family Office Blog

This phrase could well sum up the global situation we are currently facing. If we were to engage in a sort of soul-searching, but instead of taking stock of our sins, we were to take stock of the value of our heritage, few, very few will rise above the mediocre benchmark not to lose. Just a few Chosen for Glory.

Many have already seen a significant drop in the value of their pre-crisis assets over the last 6, 12 or 18 months. But those who have so far escaped the fallout will find it very difficult to avoid losses in the bleak outlook that lies ahead of us all. And when we refer to impairment We use net asset value as a commonly used valuation method, the optimism of which has now given way to a more realistic approach.

So let’s have a a sound and clear-sighted assessment of our entire heritage at the end of 2008. Let’s make a note of this and compare it with the figure we calculated for the end of 2006 and 2007. And once we have regained our composure and stabilised our vital signs, let us do the same in the future, at the end of 2009 and 2010, to name but a few examples.

Before we begin, I recommend that you familiarise yourselves with a key concept for this exercise: Rigor. As for the final result, everyone can add whatever dose of wishful thinking, distortion, optimism and spin they feel is necessary. Here is a simple guide to classifying the assets:

1. Movable assets: They are easy to assess, as financial institutions are required to provide daily figures on losses or exceptional circumstances.
2. Corporate assets: These are more complex to value. This category includes family-owned and non-family-owned businesses, where applicable. But we also include holdings in various companies and partners in the form of shares that are generally unlisted (we will exclude the purchase of listed shares, as these must already be accounted for as marketable assets and will form part of the balances and valuations of the financial institutions with which we work).
3. Real estate assets: They are also relatively easy to value, although in the current climate we should be more precise and, above all, apply rigorous market criteria to these valuations.
4. Miscellaneous assets: This category covers all our tangible assets that cannot be included in the three categories mentioned above. For example, works of art, vehicles or machinery that do not appear on the balance sheets of corporate assets, and various other assets of significant value that are liquid.

From here on, it’s a simple calculation. We take a deep breath and compare it with the same assessment criteria used a year or two ago. Even if our memory fails us, we will manage (if we really want to) to obtain approximate figures, which must always adhere to criteria of rigour and moderation, steering clear of a very dangerous optimism in difficult times.

Please note that we are talking about the valuation of assets, not the quantification of income or expenditure. In this exercise, we are looking at the loss, maintenance or increase in value in our heritage. As we have already said, everyone should add to this final assessment whatever measure of enthusiasm, bias, optimism and embellishment they feel they need, whether for practical or emotional reasons.

Many – indeed, the majority – will already be worse off by the end of 2008 than in previous years. But if we carry out this analysis in 12 to 24 months’ time, I fear the results will be largely dramatic. The question many will be asking is whether it is possible to grow one’s wealth in an environment where property prices are falling, stock markets are crashing, and company turnover and profits hang in the balance due to redundancies and unprecedented levels of current and future debt.

Well, the answer lies in the question itself. The strategy to adopt must be to temporarily steer clear of underperforming assets. But this obvious solution is very difficult to implement in a sufficiently comprehensive and agile manner. What’s more, the main problem is not even the agility required to implement an investment strategy that must completely overturn the one followed during many years of prosperity. Rather, the main hurdle is coming to terms with the fact that we are not facing a familiar cyclical crisis that we can weather without radically altering our original strategy, the only one which many people have come to know and use.

This time we are facing what is likely to be a prolonged depression, characterised by multifaceted crises, rather than a mere bear market in shares or property, or a rise in unemployment or a temporary economic downturn. And therefore, maintaining a strategy that is compatible with or suited to an era of global growth is, to say the least, highly reckless. If we hold on to the same properties in a scenario of sharp depreciation, reduce corporate profits (whether or not there are liquidity, debt or default issues) and fail to eliminate financial risks in our investment assets, this global and macroeconomic downturn will wipe out a very significant portion of our wealth in the coming years. In fact, it is already doing so for most people, although many prefer to focus on valuations and scenarios for the immediate future that suit their own optimistic or pessimistic outlook.

But bear in mind that even if we make the right decisions to steer our wealth in the right direction in this scenario, our agility and room for manoeuvre will depend on numerous factors, both foreseeable and unforeseeable. Some portfolios will be like a speedboat, where a turn of the wheel changes course immediately, enabling them to navigate dangers with enviable agility. But others, even when well-captained, suffer from the inertia inherent in their tonnage. And even if the decisions are correct and swift, they will not avoid certain impacts, simply because their structures and/or size make a change of strategy somewhat slow and complex, with multiple economic and social ramifications.

Just a few Chosen for Glory will reap the rewards of having been able to adapt to the new situation we have found ourselves in—whether we realise it or not—for over a year and a half now. The rest will pay, and are paying, the price. From 2007 until, predictably, 2012, 2017 or 2022 (who knows?), do not lose value in our assets will be the key difference between one group and another. And amongst those who will not only retain their value but actually increase it, we will, of course, find those who have been able to capitalise on the opportunities that arise in any crisis scenario. These will truly be «The Right Stuff», whilst the rest will have to fight tooth and nail to preserve the value of their assets and/or to try to recoup the value lost over the past year and a half.

If we try to extrapolate these calculations to the net worth we know or suspect of people in our social circle, family members or simply acquaintances, we will see that the current and future loss of net worth is, and will be, very widespread. Perhaps this will make some people realise the scale and significance of what is happening to the world, for as we lower the bar for wealth and apply these calculations to the upper-middle and middle classes, the devastation begins to be—but above all will be—dramatic. Let’s change course and, within the financial means of each of us, set a course for the unknown, avoiding the perfect storm as far as possible.

The world has changed, and the value, just like cheese, they’ve taken it away. A wise little book, and more relevant than ever at a time when traditional value creation has, as was to be expected, disappeared for many years to come.