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  • Christian Armbruester

Diversifying Investment Risk, Rather Than Trying to Predict the Future


Christian Armbruester, CEO, explains why we eschew traditional strategic asset allocation approaches, focusing instead on diversifying across four key types of investment risk.

What is Blu Family Office’s history, and how does it stand now in terms of its UK presence and client base?

Blu Family Office was founded in 2010 to manage the assets and affairs of a single family and has since expanded its mandate to help others to invest, grow, protect and pass on wealth to the next generation.

Today, Blu is a multi-family office, with expertise in investment and wealth management, operating out of the UK, Germany and Holland. Our UK office is based in Richmond, London, and our client base is comprised of both families and high net worth individuals across the UK and Europe.

We offer our clients investment and bespoke advisory (wealth management) solutions.

Who is the ‘typical’ client of Blu Family Office in the UK? What is their stage of life and what are they trying to achieve with their wealth?

A typical client will either invest directly into our investment strategies and products, or benefit from our bespoke advisory services.

We do not pigeon-hole clients according to their account size: we provide all clients the same access and exposure to our investments strategies, which many would not be able to get anywhere else. Our investment strategies only require a minimum account size of £75,000.

Our advisory clients are typically larger and have many complex needs that require a full suite of investment, wealth management and advisory services – this requires a higher minimum account size of £2m due to the cost of implementing certain structures.

Given that we are a family office, our clients and their family members are in many different stages of their lives. Therefore, we aim to assist our clients with finding solutions that fit their current and future needs in terms of the investment risk and the costs of implementing the desired strategy as optimally as possible.

How would you describe Blu Family Office’s investment ethos and risk management approach? Does the firm have expertise in any particular areas of investment?

When investing, in order to make returns you have to take risk.

​Most of the investment world revolves around equities and bonds. They are by far the largest asset classes with more than $100 trillion in market capitalisation and $200 trillion in issued global debt. They are also very different from one another and therefore offer good portfolio diversification if invested in combination.

However, as we have seen in the financial crisis, sometimes even equities and bonds can behave similarly. Consequently, it would be good to have alternatives for diversification.

The prevailing methodology used by many investment professionals is to try to predict which of these asset classes will do well, then strategically allocate amongst any combination of all three.

Our problem with this approach is twofold. For one, we don’t believe anyone can predict the future development of asset prices. Two, the term alternatives is much too broad as it can include many different things, if not equities or bonds, such as a piece of art, a hedge fund or even venture capital.

Therefore, we broke down our entire investment universe according to the core drivers of risk:

1. If you are lending, then your risk is that the other party can’t pay you back. You are taking Credit Risk.

2. If you own something, then your risk is that the price of the asset can go down. You are taking Equity Risk.

3. If you speculate on the way prices move relative to one another, by simultaneously buying one asset and selling (shorting) another, then your risk is that they become uncorrelated.

You are taking Arbitrage Risk.

4. If you speculate on a specific situation, such as on a future price, viewpoint or event, then your risk is outsized and/or concentrated.

You are taking Convex Risk.

This makes it very clear as to what is different, what is lower and what is higher risk.

As long as you invest in any combination of all four core risks you can truly be diversified and manage your investment positioning very precisely. There is no need to make predictions or try to time the markets. This allows us to focus on the things that really matter: what it costs to actually implement your investment strategy.

This is known as the Total Cost of Exposure (TCE) and it includes everything from commissions, to management & performance fees, taxes, administration and monitoring expenses that are incurred when making an investment. The TCE greatly affects where you are on the risk curve and highlights any unwanted or, worse, unrewarded risk.

We ensure a strong alignment of interests by investing alongside our clients. Our goal is not to beat a benchmark, but to provide exposure to the different risks in the most efficient way.

How does Blu Family Office go about devising investment strategies and building portfolios which suit each individual client’s risk-profile and financial goals?

Everything starts with a thorough assessment of our clients’ unique situation, needs and financial goals. We place a lot of emphasis on making sure that any investment strategy foremost covers the short and long-term liabilities, as only then can you take further financial risks to grow the assets.

From there, we try to get an understanding of the client’s risk tolerance, expectations and desires to build the appropriate investment strategy. Our approach is actually quite simple in that we don’t take views or make return promises as we think the future – and therefore also the development of future asset prices – is impossible to call. Rather, we make sure that we get rewarded efficiently for the risk we take, and that includes making sure that the costs and fees don’t adversely affect the performance too much.

As people’s lives often change, we ensure regular contact with clients to allow us to monitor any significant changes that might result in a change in their preference to taking risk and call for a portfolio rebalancing.

At a strategy and portfolio level, all clients receive regular, monthly updates on their investments. Quarterly, we provide a more in-depth report of performance over the last quarter.

How do you help those looking for financial planning as well as investment advice?

Having just a good investment strategy is not enough to ensure one’s wealth is managed efficiently and effectively. Taxes, costs and fees matter, particularly as regards succession planning.

We don’t subscribe to complex schemes to avoid paying taxes as the risks of changes in the tax law can have retroactive repercussions if one tries to be too clever (and as we have seen in recent high-profile cases). We do however believe very strongly in tax deferment vehicles. Using the experience in the management of our families’ wealth, we are able to provide guidance, perspective and practical solutions with regards to financial planning and access to our tried and trusted network of specialised service providers who can help implement the chosen strategy.

It is also very important to bear in mind the cost of setting up and running particular schemes or strategies and which is why we only offer these services to our larger clients that have a minimum account size of £2m.

How would you describe Blu Family Office’s approach to servicing and communicating with clients?

The short answer is: we service each client in how they want to be serviced. Some of our clients have a very hands-off approach, which means that beyond the initial strategy inception and regular reporting, they don’t want us to bother them. Whereas, other clients like to meet on a regular basis and be kept updated on their portfolio and new strategies.

Beyond regular meetings with the principals or the relationship manager, we offer monthly seminars and webinars, and we send out interesting articles or thoughts on relevant financial or geopolitical topics.

Everything we do is meant to make our clients feel that they are part of ‘the family’ and as we are invested in the same products and services as our clients, it is easy to find common ground.

How does Blu Family Office help clients engage more effectively with the management of their wealth?

From the outset, we make sure that every client understands the risks of their chosen investment strategy; we also make sure that we manage expectations, which is why we place such a great deal of emphasis on education.

We offer individual workshops – including for other family members and the next generation – along with the aforementioned seminars in which we explore typical and topical aspects of wealth management.

We love to discuss investment-related subjects and of course encourage investment education and research – whether it is through our seminars, insights or standing around the Bloomberg terminal and discussing the markets.

We also encourage our clients to send us articles or questions on topics they have come across, and we absolutely want our clients to feel that by being with Blu Family Office they are able to relax and not stress out about managing their wealth.

What else is distinctive about Blu Family Office?

I think the most distinctive aspect of our approach is that we do not adhere to the same model and fallacy that everyone else seems to be relying on in trying to predict the future. We focus on understanding the underlying risks of each of our investments and we make sure we keep the costs and fees to implement our strategies as low as possible.

We are transparent, we are open to new ideas, we are constantly looking for ways to improve our service offering and most of all we manage our clients’ money exactly the same as our own.

All clients have direct access to the principals and their expertise and can benefit from institutional-quality investments and services with a family office ethos.

We welcome like-minded families and individuals as we believe we can achieve greater things by operating together.

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