Star Magnolia Capital
Preserving Legacy for Families
Brandywine Trust Group, LLC, a multifamily office, which manages over $10 bn, is located within a few minute from the Brandywine Creek, where General George Washington lost a critical battle against the British Army. This defeat resulted in the fall of Philadelphia, then the American capital. Today’s Brandywine Creek is a picturesque national park as shown in the picture above. Most of you have never heard of Brandywine because it was secretive and selective. It was established in 1992 by David C. Patterson, Matthew Davidson and Richard Carlson to manage wealth of 4 founding families under one umbrella. Brandywine believes that, by managing wealth of a limited number of families, it can deliver better fiduciary solutions and investment returns. Compared to a single family office, Brandywine has much more resources and can hire more talents as it can offer its employees a carrier at Brandywine as well as more attractive compensation package. Single family offices struggle to maintain good talents because the chance to become a leader in a single family office is limited. By limiting the number of families it serves, Brandywine also avoids the risk of becoming too institutionalized. In the United States, there are multifamily offices which manage much larger assets for more than 100 families, such as Bessemer Trust ($86 bn for more than 2,500 families), however, the economy of scale does not work well for families as alignment of interests between the family officer manager and clients will be diluted.
Private Banks vs. Brandywine
You may wonder if there is any difference between private banks and Brandywine as both businesses provide wealth management services to multiple families. Besides Brandywine’s investment philosophy and solution, there are three critical structural differences we have to understand. Firstly, Brandywine is not actively looking for new clients: it has enough capital to manage and does not want to compromise investment returns for clients for larger assets. According to the US SEC filing, Brandywine’s management team invests at least $100 mm of their own capital. Lower investment return means the management team will also make less money on their own capital. This is a good way to align interests between the management team and families they work for. If you have a private banking relationship, you should ask the bank’s management how much money they invest in the same investment opportunities with you. You are lucky if they tell you honestly.
Secondly, Brandywine does not charge fee on transaction, but charges clients performance fee (the typical performance allocation is 10% of profits up to 0.5% of the average quarterly capital per annum) and all capital is managed on a discretionary-basis. The transaction based fee, or commission, encourages private bankers to recommend clients to buy and sell more than they should because bankers make money based on how many transactions their clients make, not how much money their clients make. Higher turnover of assets is not very suitable to capture the long time investment opportunities and investment decisions tend to be more reactive rather than proactive. Why do you want to make your bankers rich when you lose money?
Thirdly, Brandywine’s families share the same investment philosophy and participate in the same investment opportunities. The structure is similar to a fund-of-funds model, but its philosophy is different. Most fund of funds are created so that many small investors can participate with a small amount of money. Brandywine only invites families very selectively to make sure all families’ interests are aligned. Brandywine does not treat its clients as clients; it treats its clients as its families.
Following the Endowment Approach
We, Capital Allocators, feel quite privileged to have an interview with Brandywine’s CIO, Jennifer Heller. Brandywine is well-respected among institutional investor industry, however, it never shared its investment philosophy and approach with public as it was not necessary. It was the first time for the public to learn Brandywine’s investment philosophy and process in depth. Jennifer Heller joined Brandywine in 2012 as President and CIO. She manages 11-person investment office and allocate capital across many asset classes. She started her investment career at Stanford Management Company, one of the largest university endowment funds in the United States, where she was Senior Investment Associate. After spending a year in India to help a non-profit organization, she joined The Alfred P. Sloan Foundation, which manages $1.7 bn endowment, in New York City from 2007 to 2011. At Sloan, she met her mentor, Bill Peterson, who built the endowment over 16 years.
Jennifer Heller (Source: SumZero)
Brandywine allocate capital through a so-called endowment approach, a commonsensical process developed by Yale University’s David Swensen and adapted by most of endowments and foundations in the United States and Europe. Although Brandywine has a portfolio of direct stock investments, the vast majority of their capital is invested in the funds managed by external managers, including private strategy (buyout, growth equity, venture capital), public strategy (long only, long/short, absolute return), real asset strategy (real estate, natural resources) and fixed income strategy. Brandywine invests globally, including developed, emerging and frontier markets.
Long Time Investment Horizon
What differentiates Brandywine from other family offices is its long time investment horizon. Many family offices claim they have long time investment horizon because their capital is permanent, but they behave differently amid volatile markets (such as one we just experienced in 2020). Brandywine structurally has a long time mindset as Heller said:
“We manage money for a handful of families, a smaller group of them own the management company and are still the bulk of the assets. So in many ways we feel more like a Single Family Office. They all have a very, very long time horizon. They're all able to take a high degree of illiquidity, risk, take a 10 or 20 year view or even longer in many cases when they think about the markets and I think the, you know, we sort of view ourselves as having a fiduciary and an investment challenge that need to be married together. So the reason that Brandywine started as a trust company and it was a very deliberate action by the four founding families 25 years ago is they thought it would be the best way to manage their assets long term to ensure that they had a multigenerational approach to managing their wealth.”
Everybody is On the Same Page
Why Brandywine wants to keep itself small compared to other platforms? It is because they understand the importance of having everybody on the same page. It makes very easy for the professional investment team manages the portfolio without customizing each family’s different need. As a result, they can have better access to attractive investment opportunities as well.
“[Brandywine’s long time mindset] gives us very clear fiduciary goals and make sure that everyone is on the same page. And then on the investment side, for the most part, we manage our assets through pooling and that again means that everyone is getting access to the same opportunities and it allows my team and I to spend all of our time focusing on optimizing these pools. It does not mean that families do not have some assets sitting outside of the pools because that is the nature of families. There's always going to be stuff that they, that they have that is unique to them, but we're spending a lot of our time and energy on thinking about the best way to invest a global equity portfolio broadly for taxable investors or a, we'll call it a hedge fund portfolio. I know that is a silly thing because hedge funds are not really an asset class, but a diversifying portfolio in the marketable space.”
How to Pick an Investment Manager?
For the endowment approach, investment manager selection plays a critical role. Brandywine essentially delegates almost all security-level risk taking responsibilities to the external managers so that it can focus more on the long-term asset allocation. Heller makes sure that all investment managers have similar investment mindset that she and her team can understand and trust for the next 10-20 years.
“We have a framework that we use that actually permeates everything we do in many respects that where we really focus first on what a manager's processes, what their strategy is, and then what their team and culture is. And those are really, you know, in many ways sort of. There is a lot of touchy feeling, qualitative stuff to figure out whether a manager has a competitive advantage and what they do relative to what is often a very efficient market. And then thinking about the complexity of what they do. Is it something that we can really understand? Is it something that they understand? Shockingly, sometimes managers use a lot of jargon when they talk about what they do and when you ask really basic questions they have a hard time explaining it. And then, it is important to understand whether they've built a firm and a team that marries with their process.”
Beyond Quantitative Analysis
While many allocators focus on quantitative analysis of the investment managers’ track record, Brandywine tries to do more. The investment adage says “past return is not indicative of the future returns.” It is premature to believe that the past few years track record will ensure the returns over the next 15-20 years, which Brandywine is considering. It is even more challenging to analyze private strategy’s track record quantitatively.
“Rather than just saying how they performed well, we are trying to really desegregate their returns and understand how they have made money. Has that changed over time? Is the way they have made they money? Does it marry with what they say their processes and what they say they are doing and do we think that it is repeatable? You know, there are point in time strategies. We tend to be less drawn to those than strategies that we think are durable over multi decades.”
Relationship That Goes Back 20 Years
Brandywine is really trying to build a long time relationship with its investment managers. Great managers, who can adapt with changing market environment and still outperform, are rare to find. If you keep switching managers, the transaction and opportunity cost will eat up all returns.
“We have some managers in our portfolio for sure that has been in existence a really long time. Interestingly, in some cases, we put those managers in business in one case over 20 years ago, we put a manager in business and it is still the largest part of our global equity portfolio. I think that there can be less business risk earlier in a funds life now. It really depends on the strategy. I think that can be really true in private equity where we tend to invest well. We love investing with folks that do not ever want to sell their businesses to large players and we can have another conversation about that. It is hard to find those folks within the fund model. We would like to be there for at least three funds and we would prefer to be there for five, six, seven funds.”
Judgment Managers’ Judgment Skills Before Allocation
One of the biggest challenges for the endowment approach is you never have enough time to fully understand the manager before allocating capital. Typically, you will spend 4-5 hours with the investment team unless the manager is willing to spend more. You need to make a judgment for the next 20 years in 4-5 hours. Among many skillsets of investment managers you want to understand, assessing investment judgement skill is the most difficult.
“I think a lot of it is just spending time with the manager and the team and asking, I mean really, really diving into, especially if it is a younger manager, how do you think about constructing your portfolio? Let's run some scenarios by you. This is what's happening in the markets right now and sometimes you can use history. Let's talk exactly about what you did then or what you would do and really see how much they have thought through those decision points. It is much easier. Of course, if a manager has a track record and you can look at their exposure management, you can look at the companies that they bought at their position sizing and understand how much thought was put into all of those decisions and walk them back through time and say, you know, when, when you move to x or y one way or another, why were you doing it? And I think you do it enough and you get a sense for who's deliberate in their actions and for whose kind of putting a finger up in the air and. And it has more of a fly by the seat of their pants; I guess approach to managing money. But I also think that, and I, this is sort of relating back to a very specific mistake that I made. There was a very bright manager who did really good work on the credits actually that he or she purchased, but he had, he was completely off the reservation when it came to sizing his portfolio and it should have been a red flag. And I think it was just like concentrated as better, you know, I, I really want to sort of push the envelope here because I don't think, you know, at my last organization we didn't take enough concentration and that was a really big problem. And I think it, you know, it led this person to not be able to manage the risk in their portfolio properly. And in hindsight, it was a very obvious thing. But I think especially when you are dealing with young managers, they need to put risk first. And I do not think, I think it sounds sexier to just say I am going to put the pedal to the metal in terms of wanting to eat, earn the highest returns. So that is something that we try to probe for.”
Brandywine is not for everyone. This secretive family office serves a small group of very wealthy families with patient capital. As Heller described, its endowment approach is not a magic but very rational way of managing the families’ wealth. Its real advantage is not chasing the near term returns and, instead, focusing on finding superior investment managers. By allocating capital to external managers, it is giving up control of the assets, but they can instead focus on the long-term opportunities. It is also very careful about selecting investment managers. The investment team has its own resource to identify the managers. Sometimes it provides the start-up capital so that it can build a relationship that last many years to come. Through the endowment approach, Brandywine preserves family’s legacy over many years.