35 sessions with the VIX closing below 10.
Another way to look at the lack of volatility is to tally the
number of trading sessions when the S&P 500 Index had
a daily change of more than 1% in either direction. There
were only 8 such sessions so far in 2017, compared to 48
and 72 such occasions in 2016 and 2015, respectively.
It seems ironic that the market should be this steady with
arguably the most mercurial and unconventional
president in modern history at the helm atop the free
world. Perhaps investors have grown numb to all the
chaos and controversies. It is as if Washington’s
dysfunction and a divided America were just fodder for
the hyperventilating media, and markets were behaving
as if all will be fine when the Republicans pass the tax
reform to prime the pump for the 2018 mid-term
elections. Time will tell if this period of eerie calm is
prescient or misguided.
Unintended Consequences
The decline in market volatility has made shorting against
the VIX futures and various VIX ETPs (exchange-traded
products) quite popular and profitable in recent years.
The net short position on VIX futures has progressively
climbed to new highs over the last couple of years.
Another phenomenon was the rise of “volatility control”
investment strategies, supposedly favored by many hedge
funds and insurance companies. These strategies in
essence adjust a portfolio’s allocation between equity and
cash to maintain a targeted level of volatility at the
portfolio level. In an environment of declining volatility,
more assets would be allocated to equities – the equity
allocation would even exceed 100% when the market’s
realized volatility is below the targeted volatility. On the
other hand, as volatility ticks up, the equity allocation
would be scaled back.
While these strategies have enjoyed strong returns during
this stretch of progressively lower equity volatility, they
may be planting the seeds of a market correction. Market
makers and dealers on the other side of the growing short
VIX trades would need to employ various S&P 500 option
strategies to hedge their long VIX positions. There is the
concern that a decline in the S&P 500 Index could trigger
adjustments to these hedging positions that would
exacerbate the market decline. Similarly, should volatility
suddenly spike up, the aforementioned volatility control
strategies would be cutting equity exposures
concurrently, which could amplify the market decline
similar to the downward selling pressure that the socalled
portfolio insurance products generated during the
crash of 1987. We wonder if any investors and regulators
truly appreciate how these strategies, in concert with
various rapid fire trades generated by machine-learning
based algorithms, could impact market movement and
liquidity should there be an exogenous shock. Only time
will tell.
Fear vs. Greed
There is an adage that one should be fearful when others
are greedy and greedy when others are fearful. Judging by
the depressed levels of the VIX Index, the enthusiastic
speculation over bitcoin as well as other variants of
cryptocurrencies, and surveys that indicated strong
investment sentiment, it is clear that greed has been on
the rise. Can this euphoria continue for a while longer? Of
course. However, in our opinion, the combination of
elevated investor complacency and a tightening Fed
makes the market vulnerable to a pullback, though the
timing of it is hard to predict. The aforementioned issues
with various trading strategies could further add fuel to
fire in the event of a market decline. That said, with the
macro and earnings backdrop remaining positive, we
would view potential selloffs as a buying opportunity
rather than the start of a protracted market downturn. •
M O N T H L Y M A R K E T R E V I E W N O V E M B E R 2017 3
For More Information on Rockefeller & Co:
insights@rockco.co
New York, NY
10 Rockefeller Plaza
3rd Floor
New York, NY 10020
212-549-5100
Washington, DC
900 17th Street NW
Suite 603
Washington, DC
20006
202-719-3000
Boston, MA
99 High Street
17th Floor
Boston, MA
02110
617-375-3300
Rockefeller Trust Company, N.A.
10 Rockefeller Plaza
3rd Floor
New York, NY 10020
212-549-5100
The Rockefeller
Trust Company (Delaware)
1201 N Market Street
Suite 1401
Wilmington, DE 19801
302-498-6000
This paper is provided for informational purposes only. The views expressed by Rockefeller & Co.’s Chief Investment Strategist
are as of a particular point in time and are subject to change without notice. The information and opinions presented herein have
been obtained from, or are based on, sources believed by Rockefeller & Co. to be reliable, but Rockefeller & Co. makes no
representation as to their accuracy or completeness. Actual events or results may differ materially from those reflected or
contemplated herein. Although the information provided is carefully reviewed, Rockefeller & Co. cannot be held responsible for
any direct or incidental loss resulting from applying any of the information provided. Company references are provided for
illustrative purposes only and should not be construed as investment advice or a recommendation to purchase, sell or hold any
security. Past performance is no guarantee of future results and no investment strategy can guarantee profit or protection against
losses. These materials may not be reproduced or distributed without Rockefeller & Co.’s prior written consent.
1
Index pricing information does not reflect dividend income, withholding taxes, commissions, or fees that would be incurred by an
investor pursuing the index return.
2
The Russell 2000 ® Index is a registered trademark of the Russell Investment Group. Russell Investment Group is the owner of
the copyright relating to this index and is the source of its performance value.
Copyright 2017 © Rockefeller & Co., Inc. All Rights Reserved.
M O N T H L Y M A R K E T R E V I E W N O V E M B E R 2017 4
11/14/2017 An Inside Look at Rockefeller & Co. - Barron's
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BARRON'S PENTA
Rock of Ages
Family-wealth advisor Rockefeller & Co. was hit by both the financial crisis and the death of its CEO. Not only did it survive, it thrived.
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By RICHARD C. MORAIS
September 15, 2012
>
John D. Rockefeller's family office, Rockefeller & Co., was founded in 1882. It began
selling its expertise to other families in 1980, and by mid-2008 it had $28 billion of
clients' assets under its hood. Then came a tragic event that could have brought the
firm to its knees. In September 2009, as the financial crisis raged, Rockefeller's chief
executive, James S. McDonald, shot himself behind a car dealership in Dartmouth,
Mass.
While world markets continued their downward spiral, it took a year for the Rockefeller
Family Trust, which owns 100% of the multifamily office's voting rights, to get
McDonald's successor in place.
It's hard to imagine a more dangerous situation for a financial-services firm to be in.
Destabilized from within and without, most wealth managers in such circumstances
would have been unable to contain the stampede of clients heading out the door. And
yet, Rockefeller's assets under advisement and administration actually rose 52%, to
$35 billion, in the three years through this past June. Client retention since the 2008
recession has been 97%, 1% higher than in the entire past decade.
"Despite the turbulence of the period when I stepped in, it was a remarkably strong
franchise and business," says Reuben Jeffery III, Rockefeller's CEO for the past two
years. "It was a real testament to what had been created by generations long before
me, including most of the people who are still here today."
Penta's rare peak inside Rockefeller reveals that, for all the outward signs of serenity,
the firm is hardly on autopilot. Jeffery, looking every bit the Wall Street incarnation of
Cary Grant, is a former Goldman Sachs partner who in 2007 went to work as George
Bush's undersecretary of state for economic, energy, and agricultural affairs, after first
serving as the president's post-9/11 special advisor for Lower Manhattan development.
In June 2008, Société Générale Private Banking closed on its purchase of a 37%
economic share in Rockefeller & Co. Needing to strengthen its balance sheet during the
recent euro crisis, the French bank has been under pressure to shed noncore assets.
Therein lay an opportunity. This summer Jeffery quietly midwifed the sale of Société
Générale's stake to Lord Jacob Rothschild's RIT Capital Partners. That closed-end fund
is the investment vehicle for the London branch of the Rothschild family, and has 1.9
billion pounds ($3 billion) under management. The deal is expected to close at the end
of this month. It's a union that should provide some valuable marketing opportunities. In
these unsettled times, it's easy to imagine rattled new wealth wanting to tap the joint
expertise of these experienced families that have managed to keep their heads down
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11/14/2017 An Inside Look at Rockefeller & Co. - Barron's
Reuben Jeffery III, Rockefeller
Financial's CEO Evan Kafka for
Barron's
and their assets intact over several
generations and right through the
upheavals of history.
Any new clients will be dealing with
Rockefeller Financial Services, the trade
name of Rockefeller & Co. Some $7 billion
of Rockefeller Financial's $35 billion pile
are "assets under management"; the rest
are assets under advisement or
administration. Rockefeller provides its
298 clients either financial, trust, and tax
advice, and the like, or service through its
portfolio-tracking product for wealthy
families, Rockit Solutions.
Rockefeller offers financial products from
other firms but still believes in running its
own funds in 10 core areas, such as
global equities and fixed income. David
Harris, Rockefeller's chief investment
officer, says large multinationals with their
triple-A ratings and mountains of cash
need to be viewed as "the new sovereigns" during a period when government finances
are deteriorating. The firm claims that its global funds are stars, but it keeps a lid on
details. Prodded by Penta, Rockefeller reluctantly produced a "confidential"
performance sheet on its 10 core funds but barred us from publishing the results. We
can confirm that out of 10 offerings, seven global-equity and small-cap funds have
consistently outperformed indexes over long periods of time.
One area of Rockefeller & Co. know-how has been built out of the Rockefeller family's
50-year record of integrating environmental, social, and governance concerns into its
portfolio and investment decisions. Last fall, for example, Rockefeller hooked up with
the Ocean Foundation, a nonprofit focused on marine conservation, to find "profitable
investment opportunities that restore and support the health and sustainability of the
world's oceans."
Through such distinctive offerings, Jeffery hopes to reel in new money, both family and
institutional. "We're talking to sovereign entities," he says. "They have pools of capital
that need to be deployed, and they need to find competent, trustworthy managers in
[relevant] areas of investment activity."
Fees for managed assets invested in house funds typically run from 1% (for up to $25
million in assets) to 0.5% (over $50 million). Rockefeller targets families with $30
million; new clients are generally subject to a minimum $100,000 annual fee. Pure
investment advice on a $50 million to $100 million portfolio typically costs 40 to 60 basis
points, says the firm's president, Austin V. Shapard. Rockefeller has priced its services,
he says, for "a fair profit margin, not a crazy one."
Portfolio-tracking service Rockit deftly handles exotics like intrafamily loans and the
fluctuating price of ranch cattle. Its 23 clients typically pay 3 to 7 basis points on the $13
billion that runs through the Rockit platform. This, too, is a hidden asset that Jeffery is
leveraging into a boutique powerhouse.
E-mail: editors@barrons.com
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