Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Family Offices Are Outperforming Endowments
Transcript
- Lucas: There's this number that's been rattling around in my head — family offices generated an average annualized return of 12.4 percent over the past decade, while university endowments came in at 8.8 percent. Luna: And that gap is getting wider, or it's been pretty stable? Lucas: It's actually widened in the last five years. Part of it is structural — family offices can hold assets for decades. They don't have to report quarterly. They don't have spending rules or tuition bills. Luna: Right — endowments have that 4-to-5 percent payout requirement. That forces a certain liquidity posture. Lucas: Exactly. So you've got two pools of capital that are both long-term in theory, but endowments have a real cash-flow need each year. Family offices can just sit on an illiquid asset for fifteen years and wait for the exit. Luna: Is that fully responsible, or does it sometimes lead to complacency? No one poking them to rebalance. Lucas: It can. But the data suggests the best family offices have tight governance — they just don't have the same forced-seller risk. Let's use a concrete example. The Baupost Group, which is technically a hedge fund but operates more like a family office, managed by Seth Klarman. They've returned about 15 percent annualized since 1983. Their edge? They hold cash for years waiting for dislocations, and they buy assets that are so cheap the downside is minimal. Luna: And they can do that because their investors are mostly wealthy families and endowments that gave them permanent capital. No redemption risk. Lucas: Right. So the family office structure is essentially a permanent capital vehicle. Now, the broader shift we're seeing is that ultra-high-net-worth families are pulling money from traditional asset managers and building internal teams. A 2025 study from Global Family Office Group found that 62 percent of family offices now manage over half of their assets internally, up from 44 percent in 2020. Luna: That's a meaningful insourcing trend. And it's not just about cost — it's about control over the time horizon. Lucas: Control is the word. When you outsource to a fund manager, they have a three-year track record to hit for their marketing. The family office can hire a team and say, 'We don't care if it takes a decade.' That's a massive competitive advantage in private equity, venture, and distressed. Luna: But not every family can afford that. The typical single-family office costs about one-point-five million dollars a year to run. You need a billion dollars or more for it to make economic sense. Lucas: That's right. And that's part of why we're seeing more multi-family offices — families pooling resources to get that same structural edge at a lower cost. The Cambridge Associates multi-family office index shows returns comparable to the top single-family offices. Luna: I want to push back a little on the endowment comparison. Yale and Harvard still have incredible track records — Yale returned 10.6 percent annualized over the last twenty years. That's not far off family office averages. Lucas: True, but Yale is the outlier. The median endowment is around 7 percent. The family office median is closer to 10. And the dispersion is tighter — there are fewer bad family offices than bad endowments. Luna: What's the biggest mistake family offices make that drags down returns? Lucas: Over-concentration in the family's operating business. If you made your money in real estate development, it's tempting to just pile into more real estate. The best family offices force diversification. They'll cap any single sector at 20 percent. Luna: That sounds simple, but behavioral finance tells us it's incredibly hard. The wealth creator often has a strong conviction about the industry they know. Lucas: And the next generation might not share that conviction, which creates conflict. So governance is actually the biggest determinant of long-term performance — not stock picking. Luna: If today's episode was useful to you and you want to keep it ad-free, buy me a coffee dot com slash fexingo helps. Lucas: Yeah, that's what keeps these conversations going. Appreciate everyone who chips in. Luna: So back to the governance point — what does a well-structured family office actually look like? Lucas: It typically has a family council, an investment committee that includes independent outsiders, and a clear investment policy statement. The really disciplined ones have a meeting cadence — quarterly reviews, annual strategic reassessments. Luna: And the investment committee — do they vote on every deal? Lucas: Not every deal, but any allocation above a certain threshold — say two million dollars — goes to committee. Below that, the CIO has discretion. It's about balancing speed with oversight. Luna: I want to talk about fees, because that's a huge advantage for family offices. They're not paying the typical 2-and-20 to external managers on most of their capital. Lucas: That's a massive edge. A study by the Investment Company Institute found that the average actively managed equity fund charges about 70 basis points. A family office that insources can get that down to 20 or 30 basis points. Over thirty years, that fee differential compounds to tens of millions of dollars on a billion-dollar portfolio. Luna: And they avoid the hidden costs — trading commissions, soft dollars, wrap fees. Lucas: Exactly. So the fee advantage alone explains maybe one to two percentage points of the outperformance gap. The rest comes from the liquidity premium they can capture. Luna: Define that for a listener who might not know. Lucas: If you buy an asset that you can't sell for ten years — like a private equity fund, a timberland partnership, or a direct loan to a growing company — you should earn a higher return for tying up your capital. Family offices can harvest that premium because they don't need the money back soon. Luna: So what's the takeaway for someone who isn't a billionaire? Are there portable lessons? Lucas: Absolutely. First, be fee-sensitive. Every basis point matters. Second, extend your time horizon as far as your life allows. If you're investing for retirement in thirty years, you can afford to hold illiquid assets — like a small business or real estate — that offer a liquidity premium. Third, build a simple governance structure for your own portfolio: an investment policy statement, rebalancing rules, and a check on your own biases. Luna: And the fourth might be: don't over-concentrate in what you know. That's the family office mistake that applies to everyone. Lucas: Right. The paradox is that the wealth you've built often comes from deep expertise in one area. But preserving and growing that wealth usually requires branching out. Luna: So the family office model isn't just about rich people problems — it's a case study in patient, disciplined capital allocation. Lucas: And the data is clear that it works. I think we'll see more endowments and foundations adopt family office style structures — longer time horizons, lower fees, more internal management. Luna: That's already happening. The University of Texas endowment and the Wellcome Trust in the UK have been moving that direction. Lucas: Good examples. The Wellcome Trust has a twenty-year investment horizon and a heavy allocation to venture capital and private equity. Their returns over the last decade are actually above the family office average. Luna: So maybe the real story isn't family offices versus endowments — it's that the best investors in any category share those same principles: patience, low fees, and discipline. Lucas: I think that's exactly right. The structure just makes it easier to stick to the plan.