SummaryFamily offices should take a long-term perspective towards asset allocation and should never be dependent on the short-term performance of one market. Shifting perspective to longer time frames will increase the likelihood of achieving multi-generation investment goals.
The S&P 500 Index's lost decade, from January 2000 through December 2010, resulted in disappointing returns for anyone who was invested solely in that equity index. The S&P 500 Index delivered more than 10% per year before 2000, but returned a very disappointing -0.95% per year (for a cumulative loss of 9.1%) during the first decade of the 21st century.
The Standard and Poor's 500, or simply the S&P 500, is a capitalisation-weighted market index that was introduced in 1957 and measures the investment performance of the 500 largest companies listed in the US. The index is considered a bellwether of US equity markets.
The internet that we have become accustomed to was invented in 1989 at the European Council for Nuclear Research by English computer scientist Tim Berners-Lee. The world wide web was opened to the public in January 1991 and the network grew exponentially to 14 million online users by 1993, then to 281 million by 1999. During this period hundreds of technology companies listed in the US. The value of technology company initial public offerings peaked in 1999 and 2000, reaching a total of $450bn and $517bn respectively. During this technology boom, the S&P 500 Index reached an all-time intraday high of 1,552.87 on 24 March 2000.
Following the excess investor enthusiasm and accompanying speculation in that sector, the dot-com bubble burst, causing the S&P 500 Index to fall 40% and the technology-centric NASDAQ Composite Index to fall almost 90%. Investors in the S&P 500 Index had to wait patiently until 9 October 2007 for the index to breach the high reached on 24 March 2000.
Although the US large market capitalisation centric S&P 500 Index is an important global asset class, it represents only one of many building blocks of a well-constructed family office investment portfolio.
The US accounts for only 18% of global gross domestic product and there are very many other economies available to invest in. It is estimated that China will replace the US as the largest contributor to global production in 2030. During the S&P 500 Index's lost decade, emerging markets delivered a cumulative return of 437.36%.
Investors could also invest in alternative growth categories outside of US large capitalisation companies, such as small capitalisation companies, real estate investment trusts, etc. During the S&P 500 Index's lost decade US small capitalisation companies delivered a cumulative return of 78.76% and US property companies delivered a cumulative return of 175.73%.
Investment returns are unpredictable over shorter investment periods. Investing for the benefit of multiple generations requires family offices to maintain a well-diversified portfolio that includes the required mix of developed and emerging market equity exposure. Consideration should also be given to an allocation to alternative growth categories, such as property and smaller capitalisation shares.