, provides Arbion's Investment Viewpoints for October 2023 - 'Reaching the Powell High Plains'

- This year’s sharp rebound in growth stocks was an aberration within a trend of slowing growth.


- Stimulative effects post the March banking crisis are waning, giving way to the tightening forces of dollar, oil, bond yields and QT.

- As expected, a bear-steepening of the yield curve is underway which is likely to be followed by rate cuts next year.


- Leading indicators consistently suggest a recession within six to twelve months.


- Broader equity valuations are beginning to look increasingly attractive while bonds are close to a generational buying opportunity.

Arbion CIO Viewpoints for October 2023

, discusses some potentially influential points of interest.


Last week, US 10-year government bond yields hit a peak of 4.88%, the highest level since 2007. Prices for corporate bonds dropped and yields rose accordingly to 6.56% for the ICE BofA BBB US Corporate Index, the highest level since 2009. Credit spreads also started widening more meaningfully for the first time since early 2023.

Furthermore, the US 10-year real yield is now at 2.5%, the highest level since 2008. This appears extraordinarily tight for an economy where leading indicators are slowing dramatically, spot inflation is declining quickly and financial stresses caused by the high-rate regime are becoming more visible.


US10-year real yields and bond market volatility.


The market’s reaction to Friday’s strong payroll data of +336k jobs (170k forecast) was telling as equities rebounded 2.7% from their intra-day lows, driven by high-beta sectors. There are several reasons why the headline picture looks stronger than the underlying reality. Firstly, month-on-month average hourly wage growth came in below expectations at +0.2% (versus a 0.3% consensus forecast). Secondly, the unemployment rate was higher than expected and, thirdly, we find an increasing deterioration in the composition of jobs. As per the BLS population survey, over the last three months, the US economy has lost full-time jobs each month and only added part-time jobs per the BLS population survey – the weakest streak of such dynamics since the outbreak of COVID.

These dynamics would imply that we are getting nearer a peak in bond market yields and as evidence of weakness becomes more tangible, we would also expect central banks to turn more dovish, signaling easier monetary policies going forward. This scenario is very similar to the way the yield curve un-inverted twice during the twin recessions in 1970 and 1974, as outlined in the October Viewpoints. The first move was driven by long-bond yields rising whilst the second leg was provided by policy rates being cut as the recessions already unfolded.

As a result, the risk/reward for fixed income has improved dramatically over the last few months. The total return in US BBB credit given a 100bps decline in rates is now over 10% whilst the expected loss given a further 100bps increase in yields is only 2% - the lowest downside risk since 2016. Should yields increase further, this positive risk/reward will improve accordingly and could possibly return to the pre-2010 situation where the expected total return from an investment would be positive even under a scenario of a 100bps increase in yields.

Whilst investors have to respect the strength of trends, and bonds are still in a bear market, there is also the reality of a certain yield ceiling where, once reached, central banks may begin to intervene. The Fed’s operation Twist in 2011/12 or the continued yield curve management of the Bank of Japan are a case in point.

Long-dated bonds are now in their worst drawdown from peak, in-line with the sharpest corrections in other asset classes. Therefore, the entry level for bonds is now very favorable to investors, notwithstanding some further volatility.

Drawdowns from peak for major asset classes since 1992.

Arbion Observations - October 2023

Please click here for a downloadable version of our article titled: 

• Broadly speaking, the purpose of a family office is to manage the wealth and interests of families so that they can be successfully transferred to the next generation.


• Family offices typically provide a range of services, including investment management, legal services, tax planning, treasury functions, through to operational and cyber security functions. Family-owned businesses may also fall within the office’s scope, depending on the degree of involvement.


• Whilst single family offices (or “SFOs”) cater to clients with a significant amount of liquid assets ($100mn plus), multi-family offices can be an economical option for smaller families and perform a similar function.

Family offices are ubiquitous in the financial world. According to Mordor Intelligence, there are currently over 8,000 single family offices globally, with the number expected to increase in the forthcoming years (

). Considering the staggering scale of wealth creation globally over the past decades, it’s not surprising that their numbers have increased commensurably.


Oftentimes the establishment of a family office is precipitated by a large liquidity event, such as the sale of a family business or investment exit. It can be driven by the desire to consolidate and professionalise the management of a family’s assets and structures. The biggest reason, and this is highlighted in the UBS Global Family Office Report 2023, is that “most (63% [of family offices surveyed] say that they consider supporting the generational transfer of wealth their main purpose.”


In addition to investment management, they can also address governance issues, philanthropic endeavours, tax advice, legacy planning amidst other services. This can become increasingly complex especially when family members have different domiciles – the underlying structure and investments need to be appropriate for all members.

The strategic asset allocation of family office tends to have a greater flexibility than that of individual investors, particularly with respect to alternative investments and private markets (

If a family decides to engage in high-risk transactions, either on a direct or passive basis, due diligence will need to be conducted, along with ensuring the suitability and appropriateness for the family. Unless they had the knowledge or inclination to undertake this directly, families will often rely on the appropriate professional to conduct the requisite due diligence on their behalf. Bringing such experience in-house can be costly, as we see below.

The cost of running a family office, as a percentage of AUM, can vary significantly. According to the UBS Global Family Office 2023 survey, running costs for smaller family offices (ca. $100-250 million) can run at ca. 47bps per annum. For larger families ($251 million plus) the cost is slightly less at ca. 36-37bps per annum (

), this excludes extraneous costs for custody and asset management fees. Staff costs are expected to increase, commensurate with industry wage growth and the increasingly competitive nature of the industry as the number of family offices grows.

Ultimately, the total cost is subjective, relying on factors such as the size of the family, domicile, structures, types of investments, the number of custodians, staff, compliance functions (where applicable) etc. To properly determine risk, it is 

to have a holistic view of a family’s assets. This can require investments in portfolio management systems and can cost hundreds of thousands a year to implement, not to mention any servicing or back-office support staff, if required. 

To that end, it can be an exorbitantly expensive enterprise for families that require support but have less than $100 million, regardless of whether their investments, interests, and structures require additional support and oversight that may not be provided by a single-custodian model.

People often assume a causal link between asset size and complexity. Ultimately, the underlying structure will be determined by the complexity and breadth of a family’s financial and business interests. As such, smaller families (

 face can face similar challenges to those with a significantly larger quantity of assets – albeit costs will bear greater consideration.

Smaller families can benefit from outsourcing key functions to a set of trusted advisors. This is to help achieve a balance between present financial needs and establishing a basis for transferring whatever further capital is accumulated to the next generation.

Independent multi-family offices, like single family offices, can provide invaluable assistance managing the investments of a family. Moreover, they can provide a family with a holistic view of their assets and risks across multiple custodians. The overall strategic asset allocation can be tailored accordingly. Risks can be assessed and, importantly, concentration risks can be mitigated – certainly a consideration for those with family-owned businesses.

They can also source best of breed investments for their clients – tapping into a valuable network of banks, asset managers, and private transactions (

Multi-family offices can significantly reduce costs and overheads on multiple fronts, such as custody, if they have a negotiated fee arrangement, allowing clients to diversify assets across whatever jurisdictions best suit the circumstances and family structures without necessarily requiring the quantum to negotiate with banks directly.

A trusted advisor can also call upon their network of lawyers, accountants, fiduciary service providers and tax advisors to help ensure that the family meets their required objectives and ensure that the structures and portfolios are optimised according to their needs and domicile. They can also support a family’s philanthropic endeavours should they choose to establish a foundation or charity.

Whatever the solution or structure, clarity of purpose, alignment of interest and a solution-orientated focus are key to delivering successful outcomes.

https://www.mordorintelligence.com/industry-reports/global-family-offices-industry

 Given the private nature of the industry, many family offices are unlisted. As such, the true number may be higher.


2. By this we mean hedge funds, private equity, private debt, infrastructure, venture capital, Hedge Fund or something that has long lock-up periods and a high risk-tolerance.


3. UBS Global Family Office Report 2023, pg. 50 

https://www.ubs.com/global/en/family-office-uhnw/reports/global-family-office-report-2023/download.html

4. By smaller, it is relative to the ‘typical’ family office client (around $100 million plus). This would be for clients with investible assets between approximately $20-$100 million.

Family Office Services

We cannot stress enough the importance of choosing ‘value creators’ – optimal drivers of compounding returns that should help increase the purchasing power of your investment portfolio.

However, long term real growth has two natural detractors. The first is inflation, the second is one of life’s two certainties: taxes[1]. This article focuses on the latter.

This summary looks to highlight some areas where investors can avoid inefficiencies that can negatively impact investment returns. Given the breadth of the subject matter and its nuances, our aim is to approach the topic in broad strokes.

Investors often use funds[2] for their convenience, efficiency, and breadth of investment range. However, the taxation of funds can differ markedly depending on the nature of the underlying holdings, the vehicle type, and jurisdiction.

For example, a US taxpayer investing in a non-US collective investment fund may be subject to the Passive Foreign Investment Company (“PFIC”) rule. Given the tax treatment of PFICs, particularly with respect to gains and dividends, holding the non-US investment fund can erode a portfolio’s purchasing power. The negative impact can also rise disproportionately over time.

Similarly, UK investors face a similar issue. A UK taxpayer buying an offshore fund should seek clarification from HMRC that the fund itself is an 

, as the tax treatment of gains on offshore reporting funds differs from those that have reporting fund status.

In some instances, holding instruments directly versus in a fund vehicle can be more advantageous for investors. For example, a UK taxpayer may use a fund for exposure to Sterling-denominated fixed income instruments. However, if a UK taxpayer were to, for example, invest in a portfolio Qualifying Corporate Bonds, the investor can benefit from more favourable tax treatment given the capital gain exemption.

For example, let’s take a Sterling-denominated bond, which is bought at 95, maturing at 100. The bond pays a 6% annual coupon, pre-tax.

Assuming you are an additional rate taxpayer, the post-tax annual income of the coupon is around 3.3%. On top of that you pay 20% capital gains tax upon maturity upon maturity. The total yield to maturity will be severely reduced on a post-tax basis. Investors need to consider the type of instrument, and the pre- and post-tax income of the 

What holds true in both cases, is that the real return required by an inefficient investment would need to be 

 than had the investor chosen a more efficient vehicle in the first place, due to the difference in tax treatment.

Continuing with the theme of fixed income instruments, one key element which is sometimes not considered is withholding tax. Whilst double-tax treaties do exist between nations, being cognisant of exactly how countries implement withholding tax at source is an important consideration given the impact it can have on an instrument’s yield and overall return.

For example, if a bond pays an annual coupon of 3%, and a 26% withholding tax[3] applies, the net coupon received is ca. 2.2%. This is 

 that you then pay on the coupon, thereby severely reducing the income element. Some banks do offer tax reclaim services, but this can be costly and time consuming. It may seem like a negligible point, but when Eurobonds typically trade in minimum denominations of 100-200,000 nominal, the overall impact to returns can add up over time.

Understanding the impact of other countries’ rules, depending on the type of investments held in the portfolio, means that investors can look to re-allocate capital to instruments where this is non sequitur.

We have seen a couple of examples where the tax treatment ascribed by country’s respective agencies can disproportionately impact returns. On the flipside, an investor’s domicile can be a factor for different tax treatment by a security’s issuing country.

If investments are undertaken through an investment vehicle which appears on a list such as the 

European Union’s list of non-cooperative jurisdictions for tax purposes

or that of an individual country’s ‘blacklist’, then specific restrictions may apply which can detrimentally impact returns. For example, France places a 75% level on gains made if the domicile of the holder appears on the country’s blacklist[4]. This includes individuals or companies domiciled in countries such as the BVI.

In Portugal, Cayman Islands is one of the countries where income derived from this location does not benefit from the favourable income tax treatment of the non-habitual resident scheme. Therefore, any issuer domiciled in the Cayman Islands would be inefficient for those looking to optimise their portfolios under this regime. As a point of comparison, France does not include the Cayman Islands on their list.

Being aware of the domicile and the impact it can have on returns can lead to a smarter allocation of capital by investors.

All in all, there are myriad of factors to consider in terms of efficient allocation. The compounding effect can see inefficiencies detract a significant portion from a portfolio’s performance over time. The effects can be mitigated provided are aware of how their individual circumstances should be taken into consideration or seek professional advice where possible.

As a caveat, this article is not intended to give advice on any specific issues nor is it exhaustive or should be construed as giving advice. Please seek professional advice before action is either taken or refrained from because of information contained in this article.

1) A reference to an extract from a letter written by Benjamin Franklin to Jean-Baptiste Le Roy, November 13th, 1789: “…in this world nothing can be said to be certain, except death and taxes.” Sparks, Jared, 1856

2) This is a generic reference to Exchange Traded Funds, UCITS vehicles, OEICs, Mutual Funds etc. Each vehicle and their suitability should be considered individually. Investors should refer to the relevant regulatory documentation or speak with a qualified financial advisor before purchasing.

https://taxsummaries.pwc.com/italy/corporate/withholding-taxes#:~:text=A%2026%25%20base%20standard%20withholding,and%20non%2DItalian%20resident%20investors

https://www.bdo.gg/en-gb/insights/french-tax-insights/french-blacklist-and-tax-impact