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Highmount Capital: Using Technology
to Service Ultra High Net Worth Families
With some of the world's wealthiest families as its clients, Highmount Capital understands the importance of
sound investment advice, financial planning, and inter-generational management.
But as a $1.3 billion multi-family office, Highmount operates in a highly competitive market where innovation
and creativity are almost as valuable as the superior investment returns it produces. By emphasizing its
investment in technology, Highmount (www.highmountcapital.com) can offer leading-edge services to its elite clients, whose average relationship is $20 million. We had a chance to speak with Highmount co-founder Maarten van Hengel about Highmount's success and strategy, its current challenges and those it expects to face in the future.
Application Suite
Van Hengel and his partner, Steven Hoch. were childhood friends and ski buddies who embarked on separate careers before reuniting in 2002 to found Highmount, naming it after a ski resort that they frequented as teenagers.
The firm made a strategic commitment to leverage technology as a competitive advantage, investing over $1 million in software and infrastructure over the last 5 years. There are almost as many servers as employees at Highmount, and computers outnumber employees 2-to-1. Highmount relies on Advent Axys as its core portfolio management system and Advent Partner for partnership accounting. Because it also manages funds directly, it uses Advent Moxy as a trading system and Advent Custodial Data for reconciliation. Financial planning tools are used according to the nature of the client relationship. Databases such as PerTrac and Baseline are used for risk management and asset allocation, and Investment Scorecard is being deployed for performance measurement. Highmount has outgrown its current CRM system and is seeking a replacement.
Highmount is planning to add a full-time systems administrator to its staff. Student interns, typically paid, have played a key role in Highmount's growth. Van Hengel and his team have tapped into many of the leading local undergraduate institutions to place high-caliber talent in many aspects of the operation, all the while contributing to the education of the students involved.
Portfolio Construction
For Highmount, asset allocation begins with a careful examination of the client's risk/return tolerances and objectives. Portfolio construction then follows one of two paths. For clients that come in mostly with cash, outside managers (either separate accounts or hedge funds) are chosen in an open architecture process, giving Highmount and the client the freedom to choose any manager. When a client brings an existing portfolio, Highmount will either engage outside managers or manage part of the portfolio internally. Highmount offers three areas of expertise for internal management: fixed income (including global fixed income), core U.S. equities, and single-stock management. Typically, Highmount has full discretion over the client's assets. But for very large clients, a separate service (with its own fee structure) is offered where Highmount offers non-discretionary advice and reporting.
Investment Research
Account managers are segmented by style (growth, value, and core) and capitalization (small, mid, and large). Highmount seeks out managers that might have been overlooked, to exploit market inefficiencies. For example, Highmount has recently invested with "all cap" managers, which aren't easily defined as growth, value or core and thus are often overlooked by traditional institutions. In addition, Highmount looks for managers with solid track records and investment strategies compatible with its forecasts. Highmount also retains an outside consultant to help evaluate managers.
Multiple databases are used to identify and evaluate hedge funds. Highmount looks at the manager's track record, strategy and cyclicality. By setting a risk tolerance -- an acceptable level of standard deviation of returns -- the universe of funds is winnowed. Highmount then incorporates its own market analysis and forecasts, and identifies funds that offer compatible strategies. Value is added through the interplay between the fund's cyclicality and Highmount's internal forecasts. Highmount will select funds geared to volatility, Asian markets, long/short, or global macro, depending on where it sees the direction of the market and the global economy.
The Regulatory Environment
Highmount subcontracts the details of its regulatory reporting to specialists. But it must still be able to deliver data with increasingly diverse specifications. To meet this challenge, it is looking at migrating its investment platform to Advent's new SQL database, or using a data warehouse system, such as Cognos, to handle reporting requirements.
"Every day we are faced with new regulatory challenges," van Hengel says. "Our primary duty is to be a good fiduciary and we will not compromise that goal. But over-regulation, and the cost of conforming to that regulation, is running the risk of making the US uncompetitive."
Delivering Value to Clients
Highmount has an exceptionally strong record of delivering returns that beat benchmark indices, but its mission and its competitive advantage go far beyond investment results.
"Our clients want simplification," van Hengel explains. "They want complete transparency with the ability to drill down to details. We deliver a one page summary that shows where the client is today, incorporating not just liquid assets but the very complex instruments that many of our clients own."
Highmount deals with wealth accumulation and generational transfer, which need to be continually managed -- not just as assets but as a complete balance sheet. "We need to show the complete financial picture, including boats, planes, castles, and where and how leverage is being used," he says.
Automation is necessary, not just to reduce expenses but to stay ahead of the larger private banks, which are not as nimble as independent firms such as Highmount. Highmount has already invested heavily in technology to make information available on-line to its clients, and plans to dramatically expand these capabilities over the next year. Highmount has added staff as part of a substantial investment to deliver a robust data management service that will be introduced to allow internally managed content to be shared on-line with clients. Van Hengel calls this a "Facebook-type" of application, targeted to specific client groups, which will assist with individual money management, service, and family governance. Van Hengel speaks in guarded terms about this, because the unique endeavor is expected to result in a significant competitive advantage. He did disclose that intranet support technology, provided by Google, is being used as a means for organizing and indexing relevant content.
Highmount emphasizes four key areas in the periodic reports and communication delivered to clients:
- Performance: Although clients want to see performance measured against relevant metrics, this is a challenge for Highmount because of the diversity of investment vehicles (including hedge funds) and the fact that 13 primary custodians are employed. Not all of these custodians are supported through Advent's ACD network, and Highmount also uses ByAllAccount's Custodial Integrator to obtain reconcilable data that can be used in performance measurement.
- Risk: Clients are concerned with the downside - particularly the potential loss of principal - and Highmount carefully measures the standard deviation of returns to capture this information.
- Income and yield: Standard measures are used.
- Tax ramifications: Because Highmount's client base has a distinctly international demographic, the firm uses its expertise in the tax codes of different countries to minimize adverse tax consequences of its investments.
Marketing and Client Acquisition
Although Highmount has relied mostly on referrals for new clients, the firm has upgraded its brochure and website as part of a strategy to become more visible. Many of Highmount's partners serve on charitable and public boards, commitments it would like to highlight.
Highmount has considered expanding its client base through the acquisition of smaller investment firms. Typically, it finds that smaller firms spend considerable amounts on technology without the economies of scale that Highmount enjoys. Opportunities arise to consolidate the technology of a smaller firm while leveraging its client base with Highmount's investment expertise.
The Future
While being sanguine about overcoming the challenges posed by the regulatory environment and by the cost of maintaining a complex array of software and hardware systems, van Hengel believes in Highmount's plan to accelerate growth and deliver increased value to clients. To build on its innovative and customized on-line investment reports, Highmount will expand this service to deliver content related to family governance, wealth and personal financial management.
"Our role is to help families with communication, goal setting, succession planning and continued investment performance," he says. "We see our clients demanding timelier and more comprehensive investment information, coupled with greater access to historical data.
Our goal is to be the primary web portal for our clients' financial needs."
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