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Why holistic asset organisation is even more important in times of inflation

family office general wealth May 07, 2022

Inflation is a good prism for making the importance of holistic wealth organization and management visible.

Just imagine Miss Jane Smith, a woman in her 40ies, she lives in a country of the western world and has some wealth she inherited from her family plus some very good money she earned as manager in the pharma sector.

Jane reads a lot about inflation in the newspaper and in investment blogs in early 2022. She is well educated and used to sorting things out herself. She spots her huge pile of cash after a bonus payment and her mortgage as the crucial elements of her financial portfolio and wants to tackle them.

She turns to her banker with the intention to fix the mortgage for a long maturity of 15 years. He makes her pay three times the interest she used to pay and she loses the option to pay back early on. A deal is always lousy, when your counterpart knows exactly what his future financial profile will be whereas you do not. Jane does not know how inflation and interest rates will move in the next 15 years. The bank knows exactly its future earnings, as the refinancing of the mortgage is fixed today.

Is there something she could have done better? Yes:

She might have arranged for an option to fix the mortgage interest rate, if inflation consistently stays above a certain level. She might have used interest rate derivatives that produce a gain, when higher rates make her mortgage more expansive. And she might have looked at income streams like the family company dividends or her remuneration as a manager. If one of these is inflation linked, it may partially offset the risk of a more expansive mortgage. So, no action may be required or just a delta needs to be fixed.

Now Jane turns to her broker to talk about cash. He argues that real assets are an inflation hedge and suggest to put everything in the stock market. Jane is not convinced, as she has a huge stock portfolio already, so she puts half of the money in stocks and buys inflation linked notes with the other half.

Is there something she could have done better? Yes:

When a period of rising inflation has just started, there is usually a phase of price/earnings compression, as the market sees a more difficult business environment and higher financing cost ahead. Once this phase ends, investors look for companies which are low in fixed assets and short in production cycles and own pricing power in their markets, so they can just pass own higher costs to their customers. These stocks usually benefit, those of companies with huge fixed assets, long production cycles and little pricing power should suffer. So, Jane should have stayed in cash and waited for the expected correction to come. In the meantime, she should have screened her existing portfolio for inflation hedging stocks. The cash should not only be put in inflation linked bonds, as real inflation might differ from the indices, these linkers refer to. Floating rate notes would therefore be a good second leg to stand on. And she might have sold put options at base prices much lower than the present market quotes on stocks with a good inflation hedge profile. By the way: what about the family business? Is it inflation proof or not? If not, a change in business model may make sense. If this is not possible, try to find a way to balance out with your personal wealth portfolio. Maybe you can buy a put option on the sector your family business belongs to.

As of today, stagflation is on the screen also. This refers to a combination of inflation and no or little growth. This combination sucks: If your family business and your stock portfolio companies suffer from low growth all together, the classic inflation hedge may not work. So, think about business models with above average growth, no matter what price levels we are heading for. This may skip some typical consumer good producers that may come to your mind as inflation hedge at first sight. And it may make you focus on some promising sectors from the tech space. So, one thing seems to be different this time: it is not a choice between value and growth, you need both.

No matter what your advisers have in mind or neglect: it is ultimately YOUR responsibility to take educated and effective decisions. If you still lack knowledge or tools to do this – BeeWyzer can be the right source of training. A holistic approach to looking at and managing wealth is always essential if you want to get it right. In times of paradigm shift as with rising inflation today it is crucial. That is why the BeeWyzer method no only looks at company value and private wealth. It factors in human capital, social capital and family value. Make sure you do not miss out on these.







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