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Rate Risks Weigh on Family Offices As Fed Becomes Less Predictable

Martin Pelletier, CFA, Family Chief Investment Officer at TriVest Wealth Counsel

Aug 28. 2019 A decade after interest rates hit a historic low and a week after President Donald Trump referred to Federal Reserve Chairman Jerome Powell as an “enemy,” family offices and institutional investors may have to reconsider their portfolios’ sensitivity to unpredictable rate fluctuations.

The Fed’s benchmark interest rate is currently set at 2.25%, less than half of its average of 5.66% from 1971 until 2019. Wall Street analysts now expect a rate cut at the Fed’s next official meeting as economic tensions flare over the trade war and inflation remains below expectations.

Martin Pelletier, CFA, Family Chief Investment Officer at TriVest Wealth Counsel, says the benchmark rate decision “has an enormous impact [on family offices] as interest rate policies influence capital allocations and risk. For example, declining rates has caused a shift in the risk curve resulting in an increase in demand for sectors such as private real estate and debt.”
Pelletier says this extended period of low interest rates may have made leverage too easily available for people to “torque up one’s returns,” and magnified risks for investors. He recommends stress testing portfolios to see if certain asset classes are more exposed to a sudden spike up or down on the benchmark rate.
Last year, hedge fund legend Stan Druckenmiller, who runs family-office Duquesne Capital, compared the Fed’s rate hikes to a risky game of Jenga. “It doesn’t matter until it matters,” he said at a conference last year.
Diversification, according to Pelletier, is an obvious solution for investors looking to mitigate the risks. However, he says his team has tackled the interest rate risk by adopting creative strategies. “We use fixed income as a risk tool rather than an income component. This is useful in today’s environment where more tax-efficient sources of income can be achieved elsewhere.”

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