Compass Vol3 12

The Global Search for Yield .............................. p14

European Country Strategy ............................. p23George Will on the Upcoming U.S. Elections ........................................ p20Wealth Planning – Family Governance ................................................. p27

Compass Volu

me

Thre

e Navigating the Investment Landscape

PrivaTE BankinG amEriCaS FEbrUary 2012

ForwordForewordForewordForeword

This publication is not complete without the “Important Legal Information” at the back of this publication.

Please contact your relationship Manager if you do not receive it. The Private banking USa business

in Credit Suisse Securities (USa) LLC is a regulated broker dealer and investment advisor. It is not a

chartered bank, trust company or depository institution. It is not authorized to accept deposits or provide

corporate trust services and it is not licensed or regulated by any state or federal banking authority.

The issuers, securities, investment products, and companies referenced herein are not intended as a

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strategy. Contact your relationship Manager for Credit Suisse investment research or marketing mate-

rials that contain the investment thesis, risks and potential rewards of particular securities or investment

products. any potential investment decision should be based on research and analysis and not on the

limited information set forth herein.

Private banking americasInvestment Strategy and advisory Group:

Barbara reinhard, CFa Chief Investment Strategist, Managing Director [email protected]

Samuel Baumann assistant Vice President [email protected]

Jimmy [email protected]

Philipp Lisibach, CFa [email protected]

Scott rosenblattassistant Vice [email protected]

ryan Sullivanassistant Vice [email protected]

Compass 3

ForwordForewordForewordForeword2011 was a challenging year for investors. Natural disasters in asia, seismic changes in

leadership in the Middle East, Europe in crisis, and the U.S. at the crossroads of an

economic slowdown created a meaningful dispersion among investment returns in many

global equity and fixed income markets. While the financial markets are off to a good start

in 2012, this is likely to be another year of contrasting challenges and opportunities.

In this issue of Compass, our Credit Suisse investment thought leaders weigh in on the

progress made on the European debt crisis and take a country-by-country look at the

prospects for Europe. The developed market debt overhang has led to excessively low

interest rates, and our Chief Investment Strategist for the americas explains why the

search for yield may be an enduring investment theme of the decade ahead.

Politics will play an important role in the world financial markets this year. Seven of the

G20 countries, which collectively account for over one third of global GDP, will have

presidential elections during 2012. To shed light on the implications of the U.S. elections,

we have featured an exclusive interview with political expert George Will, who was

recently a guest speaker at our Los angeles Wealth Management Conference.

Leveraging our global intellectual capabilities and expertise is at the center of meeting

our clients’ investment needs and helping them achieve their financial goals. We hope

you find our insights in this edition of Compass enlightening and helpful as we navigate

the financial markets together.

With warmest regards,

anthony DeChellis

CEO, Private banking americas

Page 14

One asset class investors have not traditionally looked to for dividends has been emerging market equities, where companies have been growing their dividends at five times the pace of developed market equities over the last five years.

Page 20

it’s hard to get the american people to stop creating wealth. We’re good at it; we like to do it. We’re an industrious, educated population. it took perverse government policies to get us here. – George Will

Page 23

To ensure that investor and business confidence improves sustainably, politicians must deliver ongoing fiscal consoli-dation and reform progress at the national level, as well as furthering European integration.

4

Inside this issue:

Compass 5

Contents:

Portfolio Strategies Where to from Here?

Outlook Summary

Strategic asset allocation

Is the Search a One Hit Wonder?

Seek and Yi(eld) Shall FindThe Global Search for yield

Conversations with Thought Leaders: George Will

European Country Strategy

Panorama Shifting Dynamics

on the World Stage

key Forecasts

Wealth Planning Family Governance

6

7

8

11

12

14

15

20

23

27

6 Portfolio Strategies

Portfolio StrategiesWhErE TO FrOm hErE?

WrITTEN by barbara rEINHarD, CFa,

PrIVaTE baNkING aMErICaS INVESTMENT

STraTEGy aND aDVISOry GrOUP

Figure 1Eurozone Fixed investment remains at Subdued Levels as of 1/25/2012 Source: Eurostat

500

480

460

440

420

EUR m

Q3.07 Q3.08 Q3.09 Q3.10 Q3.11

Several consecutive releases of better-than-expected economic data have underpinned a broad-based rally in risk assets. Equities in particular have rebounded, with the S&P 500 Index close to levels seen in July of last year. The question now is, “Where to from here?” a clear assessment of the risks helps to answer that question.

The financial shock of the European debt crisis has been the driving force behind most of the volatility in the financial markets. While the details of how to deal with Greece’s debt are still being worked out, we think there has been meaningful progress on the European debt crisis. The European Central bank’s (ECb) loan facility to the European banks – Long-Term refinancing Operation (“LTrO”) – has reduced financial stress and the risk of a systemic panic in the financial markets. The operation provided 3-year loans, and over 500 banks borrowed over EUr 489 billion in December. The LTrO in February may add another EUr 600 billion to 1 trillion in liquidity, now that the many credit-worthy banks have tapped the facility, which has removed the stigma of borrowing from the ECb. The move by the ECb to provide loans to banks has helped trigger a decline in the Italian and Spanish bond yields and reduced the risk that banks will have difficulty rolling over their debt this year. ECb lending also has the potential to weaken the euro, which could spur exports. recent economic data in Europe have surprised to the upside, with readings on German and belgian business confidence showing improvement. although a recession in Europe remains our base case scenario, a severe, self-reinforcing collapse in output is not a likely outcome, in our opinion. We note that Eurozone fixed investment, one of the most cyclical components to economic growth, is still at relatively low levels (see Figure 1) as there are not as many excesses that need to be worked off, which may curtail some of the con-traction in growth.

While the details of how to deal with Greece’s debt are still being worked out, we think there has been meaningful progress on the European debt crisis. The European Central bank’s loan facility to the European banks has reduced financial stress and the risk of a systemic panic in the financial markets.

Continued on page 10 >

Compass 7

Equities: U.S. Sector Outlook

Health Care

Consumer Staples

Telecomm Services

Utilities

Information Technology

Energy

Industrials

Consumer Discretionary

Financials

Materials

Currency Outlook

USD vs. CHF

USD vs. CaD

USD vs. MXN

USD vs. brL

GbP vs. USD

EUr vs. USD

NZD vs. USD

aUD vs. USD

USD vs. JPy

Fixed income Outlook

U.S. Investment Grade Corporate

Emerging Markets

U.S. High yield

U.S. Municipal

U.S. Treasury Inflation Protected

U.S. Securitized

U.S. Treasury

Commodities Outlook

Precious Metals

Industrial Metals

Livestock

agriculture

Energy

key

Positive Neutral Negative

Source: Private banking americas Investment Strategy and advisory Group

Outlook Summary(as of February 1, 2012)

arrows represent the current Private banking americas Investment Strategy and advisory Group absolute market view for 6-12 months.

Equities: regional Outlook

Developed markets

asia Pacific ex-Japan

Uk

USa

Canada

Japan

Europe ex-Uk

Emerging markets

asia

Latin america

Europe, Mid East, africa

or Indicates a strong investment conviction in over/underweight position.

or Indicates a modest investment conviction in over/underweight position.

Indicates a neutral investment conviction.

Overview The Credit Suisse Global asset allocation Framework (GaaF) is a dynamic process that sets recommended benchmark weightings to each of the asset classes we believe should be incorporated in a balanced asset allocation. It is comprised of a long-term benchmark asset allocation (baa) and a shorter-term Strategic asset allocation (Saa).

The Benchmark asset allocation (Baa) is based on the Credit Suisse Capital Market assumptions and is expected to remain relatively static for a full market cycle. It is developed from the ideas and forecasts of the most accom-plished senior strategists at Credit Suisse and incorporates all of the fundamental concepts of asset allocation.

The Strategic asset allocation (Saa) based on market behavior and recom-mendations from Credit Suisse’s global strategists, the Saa seeks to establish strategic over- and underweights relative to the baa. It utilizes a 6-12 month time horizon. The primary goal of the Saa is to generate excess return and/or reduce risk relative to the baa.

4

5

1516

80

80

3

5

2022

55

54

2120

risk Budget 1: Low risk Budget 2: Low-medium

Baa Saa +/-

Cash 5.0% 4.0% -1.0%

USD 5.0% 4.0% -1.0%

Equities 0.0% 0.0%

United States 0.0% 0.0%

Dev. Equities ex-U.S. 0.0% 0.0%

Emerging Markets 0.0% 0.0%

Fixed Income 80.0% 80.0%

USD, Tax-Exempt 56.0% 56.0%

USD, Taxable 24.0% 22.0% -2.0%

Non-USD, Taxable 0.0% 2.0% 2.0%

alternative Investments 15.0% 16.0% 1.0%

Commodities 2.5% 3.0% 0.5%

Gold 2.5% 3.0% 0.5%

Hedge Funds 5.0% 5.0%

Private Equity 0.0% 0.0%

real Estate (Property) 5.0% 5.0%

Baa Saa +/-

Cash 5.0% 3.0% -2.0%

USD 5.0% 3.0% -2.0%

Equities 20.0% 22.0% 2.0%

United States 10.0% 11.0% 1.0%

Dev. Equities ex-U.S. 6.0% 6.0%

Emerging Markets 4.0% 5.0% 1.0%

Fixed Income 55.0% 54.0% -1.0%

USD, Tax-Exempt 38.5% 38.0% -0.5%

USD, Taxable 16.5% 14.5% -2.0%




Gold 2.5% 3.0% 0.5%





important information: The proposed benchmark and Strategic asset allocations for each of the risk budgets referenced above are created by the Private banking americas Investments Strategy and advisory group. The benchmark asset allocation (baa), for a 3-7 year time horizon, is the neutral position reflecting the predefined risk budgets and meets investment objectives over a full market cycle.

recommended (Saa) Neutral (baa)kEY

Source: Private banking americas Investment Strategy and advisory Group

Strategic asset allocationFor U.S. Ultra High Net Worth Individuals

(as of February 1, 2012)

55

5

58

2

109

31302

5

4043

30

29

2625

2

5

656730

31

risk Budget 3: medium risk Budget 5: high

Baa Saa +/-

Cash 5.0% 2.0% -3.0%

USD 5.0% 2.0% -3.0%

Equities 40.0% 43.0% 3.0%


Dev. Equities ex-U.S. 12.0% 11.5% -0.5%


Fixed Income 30.0% 29.0% -1.0%

USD, Tax-Exempt 21.0% 20.0% -1.0%

USD, Taxable 9.0% 8.0% -1.0%




Gold 2.5% 3.0% 0.5%




Baa Saa +/-

Cash 5.0% 2.0% -3.0%

USD 5.0% 2.0% -3.0%

Equities 55.0% 58.0% 3.0%




Fixed Income 10.0% 9.0% -1.0%

USD, Tax-Exempt 7.0% 6.0% -1.0%

USD, Taxable 3.0% 1.5% -1.5%




Gold 2.5% 3.0% 0.5%




Baa Saa +/-

Cash 5.0% 2.0% -3.0%

USD 5.0% 2.0% -3.0%

Equities 65.0% 67.0% 2.0%




Fixed Income 0.0% 0.0%

USD, Tax-Exempt 0.0% 0.0%

USD, Taxable 0.0% 0.0%

Non-USD, Taxable 0.0% 0.0%



Gold 2.5% 3.0% 0.5%




risk Budget 4: medium-high

Compass 9 Compass 9

The Strategic asset allocation (Saa), for a 6-12+ month time horizon, expresses views resulting in temporary deviations from the baa to generate expect-ed excess returns or reduce risk. alternative investments are typically high-risk investment vehicles which are available only to qualified individuals or entities that are willing to assume above average risk and sustain limited liquidity with a portion of their net worth. Please refer to the attached “Important Legal Information” for important disclosure relating to alternative investments.


Figure 2Credit Suisse Daily risk appetite index

as of 1/31/2012 Source: Credit Suisse Fixed Income research

10

8

6

4

2

0

-2

-4

-6

-8

01.81 01.86 01.91 01.96

Credit Suisse Daily Global Risk Appetite Average

01.01 01.06 01.12

Oil falls from $30 to $10, equities and bonds surge

1987 Crash Japanese

Bubble Peak

Secular BullMarket Begins

EquitiesBottom

1st GulfWar Exchange Rate

Mechanism Crisis,Nikkei Low Enron,

Worldcom,MCI

FinancialCrisis

Greece, U.S. CreditDowngrade

MexicanCrisis

AsianCrisis

RussianCrisis

HousingBubble

Since China is the second largest economy in the world after the U.S. and accounts for almost 10% of Global GDP, its growth tra-jectory is keenly watched by the financial markets. Concerns have been focused on whether China should be able to engineer a soft economic landing after implementing a tightening of credit to slow inflation expectations for almost two years now. The news out of China has been encouraging. Money supply growth and bank lend-ing are growing and the purchasing managers index has improved to a level consistent with approximately 8.5% economic growth, which is right in line with our forecast for 2012.

The legacy of the U.S. housing boom continues to shape the economic recovery. While expectations are depressed for future home price appreciation, there has been an improvement in the housing data over the past few months. Existing home sales have been perking up and are at the highest level in a year, while the months supply of existing homes on the market declined from 7.2 months to 6.2 months in December. While housing will not likely contribute much to growth this year, we think housing is in a long bottoming process and that the worst is over.

There are other risks in the markets that are more challenging to quantify. The oil price is at the top of that list. Iran’s nuclear

ambitions could spark a proverbial fire in the region quickly. a meaningful rise in prices could hurt an already slowly growing U.S. economy.

We note that risk appetite remains at low levels. after reaching panic territory in May, our Credit Suisse Global risk appetite Index is moving higher slowly (see Figure 2). We think this slow grind higher, rather than a sharp move higher, is indicative of deep skepticism among investors about the current rally. From our perspective, the question about the durability of the move up in risk assets is what can actually propel prices higher, as under-invested participants are drawn into the markets. Therefore, we have maintained our slight overweight to equities in our Global asset allocation Frameworks. a broad improvement in economic data generally is supportive for equities. We focus our regional equity allocation on the emerging markets. Easing monetary policy and the cyclical characteristics of these markets should help emerging markets to catch up further from the underperfor-mance versus developed markets last year. We would not quan-tify our strategy as “all in” overly bullish, but we are sufficiently optimistic to have a slight tilt toward riskier assets. read on to learn more about some of our equity strategies in “Seek and yi(eld) Shall Find – The Global Search for yield” on page 14.

Compass 11 Compass 11

Global Equity indices 1/31/11 12m

U.S. (S&P 500) 1,312 1,343

Euro area (Euro Stoxx 50) 2,417 2,571

Uk (FTSE 100) 5,682 6,031

Japan (Nikkei 225) 8,803 9,800

asia Ex-Japan (MSCI asia aC ex-Japan) 508 542

brazil (bovespa) 63,072 63,000

Mexico (IPC) 37,423 35,000

real GDP (in %) 2011E 2012E inflation 12E

Global 3.80 3.50 3.00

U.S. 1.80 2.10 1.40

Euro area 1.70 -0.10 1.50

Japan -0.80 1.70 0.00

Non-Japan asia 7.40 6.90 4.40

Latin america 4.50 3.60 6.50

interest rates (10-Year Government) 1/31/12 3m 12m

U.S. 1.80 2.1 – 2.3% 2.2 – 2.4%

Euro area 1.79 1.8 – 2.0% 2.2 – 2.4%

Uk 1.97 2.0 – 2.2% 2.3 – 2.5%

Japan 0.98 0.9 – 1.1% 1.1 – 1.3%

Commodities 1/31/12 3m 12m

Energy

WTI Crude Oil (USD/barrel) 99.48 105.00 100.00

US Natural Gas (USD/mmbtu) 2.50 2.50 3.00

Precious Metals (Spot, USD/ounce)

Gold 1,737.60 1,750.00 1,900.00

Silver 33.18 33.00 31.00

Platinum 1,588.75 1,550.00 1,700.00

base Metals (Spot, USD/pound)

aluminum 1.02 1.00 1.04

Copper 3.77 3.85 4.15

agriculture (USD/bushel)

Wheat 6.66 5.90 5.30

Corn 6.39 6.20 5.10

Currencies (USD vs.) 1/31/11 3m 12m

Euro** 1.31 1.26 1.26

Japanese yen 76.27 75.00 72.00

british Pound** 1.58 1.52 1.53

Swiss Franc 0.92 0.97 0.98

Canadian Dollar 1.00 1.00 1.00

australian Dollar** 1.06 1.01 0.95

New Zealand Dollar** 0.83 0.78 0.74

Mexican Peso 13.05 12.40 12.20

brazilian real 1.75 1.70 1.66

key Forecasts* (as of February 1, 2012)

Source: Private banking Global research, bloomberg, Thompson reuters DataStream

* 3-month or 12-month forecasts as indicated ** Level with USD as counter currency,

price change with USD as base currency

01.06.2011 The annual inflation rate in South Sudan eased to 66% in December from 79% in November,

as housing and water costs fell but food prices remained high.

12.22.2011In October, Facebook reached

more than half of the world’s global internet audience and accounted for approximately three in every four minutes

spent on social networking sites and one in every seven minutes spent online around the world.

12.27.2011Investments in Chile, which produces

nearly a third of the world’s copper, reached a record high of USD 13.8 bn

in 2011, placing it among the world’s top 20 recipients of foreign direct

investment for the first time.

New government led by Mario Monti raises the retirement age to 66 from

60 for women in Italy.12.20.2011

01.02.2012Following two years of

strong economic growth, Germany’s employed

population reached 41.0 m, up 1.3% in 2011,

surpassing the 41 m mark for the first time in recorded history.

12.16.2011Unemployment in the U.k. soars, hitting a

17-year high with 2.6 m unemployed britons.

Panorama is a 10,000-foot view of notable events and milestones reported around the world. Each event contributes in some way to the accelerating pace of global change, as inde-pendent events collectively shift our global perspective.

Sources: comScore (12.22.2011), The Daily Telegraph (10.31.2011), The korea Herald (12.22.2011), reuters (01.06.11, 12.27.2011, 01.02.2012), U.S. Census bureau (12.21.2011), The Wall Street Journal (10.31.2011, 12.16.2011, 12.20.2011), World Intellectual Property Organization (12.20.2011)

12.21.2011The population of the United States grew at its slowest rate in seven decades, climbing only 0.9% to reach 311.6 m. Texas, California, Florida, Georgia, and North Carolina accounted for more than half of the total U.S. population growth.

Pano

ram

a12.21.2011In a ranking of countries based on time spent on social net-working as a percentage of total time online, the Philippines emerges as the most socially active country. In October, the typical Filipino spent an average 8.7 hours on social networks versus an average of 5.7 hours worldwide.

12.22.2011South korea intends to spend a record USD 12 bn in overseas natural resources development in 2012, in an effort to bolster its access to energy and rare earth mineral resources – with an eye on foreign mines and exploration in australia, Mozambique, and bolivia.

12.22.2011 Internet retail has grown 18% over the past year, as nearly three of every five internet users in India now shop online. Coupon sites in particular are rapidly gaining in popularity with 7.6 m visitors, an increase of 629% from the previous year.

Compass 13

v3.2012

Shifting Dynamics on the World Stage

China overtook Japan in patent filings in 2010 for the first time ever, coming second after the United States in a glob-al ranking. In China, the number of patent applications has increased at an average annual rate of more than 20% over the past ten years.12.20.2011

There are more Porsche Sport Utility Vehicles in Greece than taxpayers reporting EUr 50,000+ incomes.10.31.2011

an unmistakable trend began at the end of the bear market and continued through 2011: investors have been abandoning equities. according to the Investment Company Institute, in 2011, investors redeemed over USD 130 billion in equity funds, the biggest outflows since the financial crisis in 2008. Where did these assets go? bond funds took most of the assets, and then some.

Investors generally own fixed income products for two principal reasons: diversification and income. as practitioners of asset allocation, we believe in allocations to fixed income. bonds have diversification qualities – especially versus public equities – that can be critical during times of financial market turbulence. but for income generation, we believe inves-tors should think more creatively going forward. yields on certain fixed income instruments, such as U.S. Treasuries, are so low now that they are not even delivering a yield in excess of inflation. a 10-year U.S. Treasury yields about 1.9% and Core Consumer Prices are growing at 2.2% on a year-over-year basis, which mean that investors are locking in an inflation-adjusted – or “real yield” – of -0.3%. We concede that some of the flows into bond funds were due to investors’ seeking safety and a return of capital rather than a return on capital. However, it is clear to us that investors must think outside the box to find yield in this persistently low interest rate environment.

Seek and yi(eld) Shall Find

Table 1market volatility Over the Last Three Years has Caused investors to abandon Equities

as of 12/31/2011 Source: Investment Company Institute

14 The Global Search for yield

net Flows into/Out of mutual Funds (USD bn)

Growth & Capital World Total Total income income appreciation Equity Equity Bond

2008 -31.7 -10.4 -105.4 -80.3 -227.8 29.1

2009 -15.3 -6.8 -5.6 27.9 0.2 380.6

2010 -27.7 -9.6 -57.4 58.0 -36.7 241.4

2011 -25.2 -1.1 -108.2 4.1 -130.3 124.7

Total -99.8 -27.9 -276.6 9.7 -394.6 775.8

The Global Search for yieldWrITTEN by barbara rEINHarD, CFa,

PrIVaTE baNkING aMErICaS

INVESTMENT STraTEGy aND aDVISOry GrOUP

Investors must think outside the box to find yield in this persistently low interest rate environment.

Seek and yi(eld) Shall Find


is the Search a One hit Wonder?

We think the global search for yield is going to be one of the more enduring investment themes over a multi-year period for three key reasons. First is “financial repression”. The concept long has been discussed in economic and academic circles, but Carmen reinhart, Peterson Institute fellow, brought the term to promi-nence in the June 2011 paper, “Financial repression redux”. Financial repression occurs when governments implement policies to channel funds from deregulated open markets to themselves. Policies such as quantitative easing, currently being implemented by the world central banks, are likely to keep yields on selected fixed income instruments, such as U.S. Treasuries, extremely low for a prolonged period.

Second, poor returns from global equities over the past decade have left investors feeling disillusioned. In our opinion, equities are among the most unloved and underappreciated asset classes in our investment universe. between the burst of the Tech bubble in

Figure 2Traditional Fixed income – Government Bonds – are Currently not keeping Pace with inflation

as of 12/31/2011 Source: bloombergNote: real yield is equal to 10-yr Treasury Note less year-over-year CPI

Real Yield

-3-2-101234567

12.87 12.92 12.97 12.02 12.07 12.11

%

Figure 4Changing U.S. Demographics U.S. Population in Millions

Source: census.gov

1990

Under 65 65+

2000

2010E

2020E

2030E

282 55

284 72

31218

35247

40268

1990

2010 19.2 years

17.2 years

U.S. Life Expectancy at age 65


2000 and the Financial Crisis in 2008, investors have endured a decade of weak equity markets (see Figure 3). With a 10-year compounded annual growth rate for equities of 3.5%, it is no wonder that investors despair over equities. However, as we have said previously, the last ten years is generally a poor predictor of the next ten years. We are still at the early part of the recovery from the lost decade. With interest rates at such low levels, we think fiduciaries will increasingly look to equities for income and growth.

Demographics are the third pillar of our macro view on yield. It is no secret that the U.S. is facing an aging population: baby boomers, people aged 65 and older, have been increasing as a percentage of the total U.S. population. according to a Congressional research Service’s March 2011 report, “The Changing Demographic Profile of the United States”, the older population (ages 65 and up) repre-sented 8.1% of the total population in year 1950. That percentage increased to 12.8% in 2009, and is projected to reach 17.9% in 2025.

Put another way, close to one in five americans will be over 65 within the next 13 years. additionally, life expectancy is increasing. In 1990, an individual who was 65 could expect to live an addi-tional 17 years. by 2010, that number jumped 12% to 19 years. Investors are likely to expect their investments to supplement their retirement income, and to do so for longer.

Considering these three pillars, we see that the demand side of the yield equation may outstrip the supply-side of income- producing investments, as the need for yield in a multi-year low interest rate environment leads investors to income and growth from atypical places.

Where Do We Go from here?

Dividend-paying equities are one of the obvious beneficiaries of the search for yield. We know that many investment strategists have been extolling the virtues of dividends for some time, but we do not

Figure 3S&P 10-year rolling returns have recently Experienced Generational Lows as of 1/01/2012 Source: Ibbotson, Credit Suisse Private banking americas Investment Strategy and advisory

10-year Rolling Returns for the S&P 500 Index

-10

-5

0

5

10

15

20

25

01.36 01.55 01.74 01.93 01.12

%

Long-TermAverage 11%

Financial repression, demographics, and lackluster equity market returns have created the demand for yield and are long-term factors driving investors to search for yield in atypical asset classes and strategies.


S&P 500 Index Dividend Payout Ratio Average

20

30

40

50

60

70

80

01.91 01.95 01.99 01.03 01.07 01.12

%

Figure 5Corporations are Choosing to Preserve Cash

as of 1/31/2012 Source: bloomberg

Figure 6Growth in Dividends in Emerging markets is Outpacing Developed markets (annualized Change of Trailing 12-month Quarterly Dividends) as of 12/31/2011 Source: bloomberg, Credit Suisse Private banking americas Investment Strategy and advisory

1.2

U.S. Developed Markets ex-U.S. Emerging Markets

-6-4-202468

10121416

3-Year 5-Year 7-Year 10-Year

-2.3-4.6

1.0

%

6.1

2.0

5.3

9.3

5.57.7

13.3

0.1

Figure 7Emerging markets account for an increasingly Larger Percentage of Global Equities

as of 12/31/2011 Source: MSCI

Emerging Market Equities within MSCI All Country World Index

0

2

4

6

8

10

12

14

16%

12.89 12.95 12.01 12.07 12.11

think the bias is overdone or over-owned by investors. In thinking about dividends, we are reminded of the work of the late financial luminary Peter bernstein. In his 2005 Financial Analyst Journal article, “Dividends and the Frozen Orange Juice Syndrome”, bernstein postulated that a generation that grows up drinking only frozen orange juice will forget that any other form of orange juice exists; similarly, a generation that grows up thinking that dividends and income do not matter are like those frozen o.j. drinkers. as far as relative returns go, the highest quintile dividend yielding stocks in the S&P 500 Index gained 6.1% in 2011, out-performing the 2.1% gain for the overall index, but this is the first time that has happened in five years. additionally, mutual fund flows in Figure 1 illustrate that income-seeking investing has not become the herd mentality yet.

We think U.S. companies have the wherewithal to lift dividends, even if done so gradually. Cash on S&P 500 companies balance sheets is USD 879 billion, and the payout ratio – the amount of earnings paid out in dividends to shareholders – is at an all-time low of 28%, which means that companies have a plenty of cash to pay their shareholders.

One asset class investors have not traditionally looked to for dividends has been emerging market equities. While many inves-tors own emerging market equities to gain exposure to fast grow-ing economies, an additional positive is that emerging market companies have been growing their dividends at five times the pace of developed market equities over the last five years (see Figure 6). as the depth of their local capital markets continue to broaden, we would expect companies in these regions of the world to continue to reward shareholders.

While equities are a far more volatile asset class than traditional fixed income, there are strategies that can enhance their yield and lower the volatility of a long equity portfolio position. Call option overwriting is a strategy of holding a long position in a stock or portfolio and selling call options on the held positions to collect the option premium. Investors execute this type of strategy to increase the yield on an equity portfolio and to add some downside price protection by collecting the option premium. There are risks and rewards to such a strategy: it will tend to produce better returns in a range-bound equity market, limit some losses in a down market, but lag overall market gains in a quickly rising price environment, as the call options are exercised and the position is called away from the option seller.

Last on our shopping list for the search for yield is Master Limited Partnerships (MLPs). MLPs are limited partnerships that are pub-licly traded and generally engage in enterprises related to the use of natural resources. They trade somewhat similarly to common stock, with a few differences. Instead of shares, MLP interests are denominated in units; instead of dividends, MLP investors receive quarterly distributions. MLPs are required by their partnership agreements to distribute all of their available cash to their partners. What we find attractive about MLPs is their yield – currently, the alerian MLP Index has a yield of 5.6% – and a track record of distribution growth that has exceeded inflation. In every year since

Figure 8mLP Distribution Growth has Outpaced inflation

as of 12/31/2011Source: Factset, bureau of Labor StatisticsNote: Distribution growth excludes GPs; CPI takes y-o-y change as of December 31; 2009E distribution growth based on consensus and Credit Suisse estimates; 2009E CPI estimate based on Credit Suisse estimates.


1998 (see Figure 8), the MLP distribution growth has outpaced headline consumer prices. However, commensurate with the potential for greater returns come risks. Inherent risks to investing in MLPs include: a potential change in the tax treatment of distribu-tions of limited partnerships; the inability to access the capital markets to finance growth; the chance that a rapid rise in interest rates could check the growth of distributions; and, lastly, the pos-sibility that a severe economic downturn would affect the demand for energy and commodities.

Conclusion

We think financial repression, demographics, and recently lacklus-ter equity market returns have created the demand for yield and are long-term factors driving investors to search for yield in atypical asset classes and strategies. We think the durability of demand is long-tailed in nature. because central banks potentially could keep interest rates at artificially low levels for a prolonged period of time, we think the market may reward a meaningful premium to asset classes and strategies that can produce income and the growth of income going forward.

MLP Distribution Growth (Median) Y-o-Y Change in CPI

-2

0

2

4

6

8

10

12

1998 2001

9.9

5.0

3.32.8

4.4

5.5

3.1

8.8

4.3

2.6

0.0

7.4

4.0

9.1

10.210.9

2004 2007 2010 2013E

%

Compass 19

While many investors own emerging market equities to gain exposure to fast growing economies, we note the additional positive that emerging market companies have been growing their dividends at five times the pace of the developed markets over the last five years.

kuala Lumpur, malaysia

20 Conversations with Thought Leaders

President Obama’s approval rating has fallen from a high of nearly 70% to about 46% today, largely because economic growth remains sluggish. Do you think the economy was too broken to fix, or did Obama fail?

George Will: It was very broken. any fair-minded person would admit he inherited a mess. but I think he made the mess worse with a kind of activist government that misdi-agnosed the problem, a problem he thought was something government could change by infusing demand into the economy through government spending. Trouble is, every government dollar comes from somewhere else. Like taking water out of the deep end of the pool and pouring it into the shallow end, it didn’t have much effect.

a lack of jobs remains a headwind to growth as well. During the Great recession, about 9 million americans lost their jobs, and we’ve since only hired back about 3 million of them. Conversely, U.S. corporations have about USD 2 trillion on their balance sheets. Why aren’t they using this money to hire?

GW: because there’s no demand. businesses will spend money; they want to invest. It’s part of the ethos of capitalism, part of the culture of our healthy competitive system. businesses want to invest and expand their companies. The problem is, there’s an insufficiency of demand, partly because the american people lost USD 7.4 trillion … that’s with a T … trillion dollars, of home equity value. Their 401(k)s are down. They’re worried about losing their jobs because Uncle Fred and aunt Mae and all kinds of people they know have lost their jobs. So there is paralysis.

Conversations with Thought Leaders

WiTh GEOrGE F. WiLL, WaShinGTOn POST COLUmniST anD nEWSWEEk COnTriBUTinG EDiTOr

2011 was a year of anomalies, not the least of which was the break

from the historical pattern that the third year of a Presidential cycle

typically experiences the highest equity returns. If historical trends do

prevail in 2012, equities are in line for positive returns. Since 1926,

the fourth year of a Presidential term has seen average equity returns

of 11%, with negative returns in only four out of 21 fourth years.

While it seems we have history on our side, the future is unclear.

President Obama’s approval rating has been cut nearly in half since

he took office, yet republicans cannot seem to find anyone who can

beat him. Opinion polls of the republican candidates have more highs

and lows than a chart of the VIX Volatility Index. Seeking clarity on the

situation, we are delighted to present the views of George Will, one of

america’s foremost political commentators, and a recent keynote

speaker at the Credit Suisse Wealth Management Conference in

Los angeles.

INTErVIEW by JIMMy JaMES, PrIVaTE baNkING INVESTMENT STraTEGy aND aDVISOry GrOUP

Compass 21

Do you think the next direction for taxes, both corporate and personal income, should be up or down?

GW: Down. Down, but not just down. That’s not most of the problem. The problem isn’t that rates are too high, although they are. The real problem is that the tax code is so full of perverse incentives, so full of the government trying to tell people, through the tax code, what to do with their wealth. Picking winners and losers, with so-called targeted tax cuts, because the government approves of solar energy or this kind of light bulb or something else. Simplify the tax codes. Do what ronald reagan and the Democrat, Dan rostenkowski, did in 1986, with the help of bill bradley and Dick Gephardt, and a lot of others: lower the rates, and pay for it by broadening the base. Classic tax reform.

and how much of a role do you think the wealth and income gap is going to play in this upcoming election?

GW: I don’t think it will play a big role. Most americans are just concentrating on the fact that they want to go back to work. It’s hard to get the american people to stop creating wealth. We’re good at it; we like to do it. We’re an industrious, educated population. It took perverse government policies to get us here. by the way, at this point in the recovery from the reagan recession of 1981-82, during which, by the way, unemployment got to 10.8%, higher than it got in this recession… at this point, after the recovery began in the reagan recession, the economy was growing 7%. Now, we’re barely doing 2%.

if you were President, what steps would you take to reform entitlement programs like Social Security and medicare?

GW: I’d raise the retirement age for Social Security and raise the eligibility age for Medicare. I would tell everyone who’s nearing retirement, say, 50 or 55 years old, just what Paul ryan has told them, you can have Medicare as it exists. you can have Social Security as it exists. but for those coming along, on Social Security we’re going to allow you to take a portion of your payroll tax and invest it in your own account, which is guaranteed to grow faster than Social Security; and with regard to Medicare, for those younger people now, we’re going to have what’s called premium support. The government is going to give you aid, money, your money in the form of a tax credit, including a refundable tax credit, if necessary, for you to go to the market and shop for your own health insurance. Empower people.

in the lead up to the primaries, mock polls showed a so-called “generic” republican candidate beating Obama by as much as ten percentage points. But once you made people actually choose a candidate, they didn’t seem to have anyone that was electable. Why is that?

GW: Polls that say “generic” candidate, people are thinking to themselves, ah, Lincoln or ah, reagan. That’s who it’s going to be… well, it never is, is it? So I think the real polls, as your question rightly implies, are specific candidate against specific candidate. I actually think this is going to be a very close election. I’d be sur-prised if either guy got 53% of the vote, which is what Obama got

Credit Suisse Wealth Management Conference Survey results

Source: Credit Suisse Private banking USa Marketing Collected during the Los angeles Wealth Management Conference. (November 2011) answers provided by over 200 attendees representing private investors from the United States.

Will Obama be re-elected in 2012?

What is the number one issue for the 2012 election?

yes 46%

No 54%

Jobs 59%

Economic Growth 29%

The Middle East 0%

The Deficit 12%

22 Conversations with Thought Leaders

in 2008. It depends entirely on two things: who the republicans nominate, and what’s the jobless rate at that point.

and do you think Obama’s best plan of winning re-election is to sit back and let republicans beat themselves? Or does he need some grand vision of, like you said, to reduce the jobless rate or increase economic growth, which, thus far, hasn’t proven to work?

GW: Obama’s best, Obama’s only available strategy, is to make this a referendum on the fitness of the republican candidate. He has to say, “you don’t like me. I’ve had my problems. Things aren’t good. you’re probably not better off now than you were four years ago, but… the other guy’s worse.”

are there any dark horse candidates you see potentially winning the republican nomination, or a third party candi-date, perhaps?

GW: I can see a third party candidate. I could see ron Paul saying, I’m not running for re-election in the House. I’ve got nothing to lose. I’ve got a fundraising apparatus in place. I’ve done this now for four years. I’ve got supporters all over the country. and ron Paul supporters are fierce. They will come out on a snowy day to vote in November. and he’ll say, well, I’ll just go out and I’ll make my point. Suppose he gets 6% of the vote. 80% of that 6% is going to come at the expense of the republican candidate, who otherwise would have gotten those votes. because it’ll be an anti-incumbent, anti-Obama, conservative libertarian point of view. and as you know, two or three percentage points in a number of states can tip those states over to Obama.

Do you think the debt ceiling debacle was yet another example of how political grandstanding and posturing leads to inertia?

GW: I disagree that it was a debacle. I think the debt ceiling debate was excellent, I think it was government functioning well. remember, what the President wanted was what he called a clean debt ceiling extension. by that he meant, no Super Committee, no reduction of spending, nothing. Just raise the ceiling so the spend-ing merry-go-round can spin on and on forever. The republicans said, “Time out. We have governments from athens, Greece to Sacramento, California, in deep trouble. We’re not going to do that any more.” It was ugly, sure it was. but that’s often the way it looks when democracies begin to come to grips with their problems. I don’t think it was a debacle last summer. I think it was the govern-ment actually turning around and saying, “Enough. We’re going to start coming to grips here.” Now, yes, our credit rating was down-graded, and you know what happened? There was a flight of money into U.S. Treasuries, not out of them.

One of your latest columns questions the usefulness of presidential debates, at least as they’re currently construct-ed. how do you think they should be restructured to make their output more meaningful?

GW: Well, they shouldn’t have what we smilingly call “debates.” With eight people on a stage, it’s madness. and then of course,

the networks, CNbC, MSNbC, CNN, and Fox, they all overdo it. you get three or four or five questioners. you get questions from youTube, questions from Twitter, questions from Joe’s bar down the street in Duluth. I mean everybody. and it’s chaos. What kind of a debate is it where they ask, “What is the meaning of life? – you have 60 seconds.”

When Lincoln and Douglas debated, you know what they did? Whoever started spoke for an hour. The second guy responded for an hour and a half. and then the guy who started responds to him for half an hour. Three hours. That’s a debate.

Globalization has transformed financial markets. as one of the most widely acclaimed writers on baseball, do you think globalization or international expansion can benefit major League Baseball?

GW: I think you’re going to see the internationalization of the game. I don’t think you’ll see a Major League franchise overseas. Not until you get supersonic transports to get people over … there’s so much travel in baseball. The NFL can play one game in London. baseball has opened the season in Japan before, with a three game series. but a franchise overseas would be a bridge too far.

You’ve been a Chicago Cubs fan since you were a toddler. What do you think will happen first, the U.S. reaches a budget surplus or the Cubs win another World Series?

GW: I don’t expect to live long enough to see either. but I’d bet on the budget surplus over the Cubs. No one ever went broke betting against the Cubs.

George F. Will George F. Will is today’s most widely read columnist. His newspaper column has been syndicated by The Washington Post since 1974, and today appears twice weekly in approximately 400 newspapers in the United States and Europe. In 1976, he became a regular contributing editor of Newsweek magazine, for which he provides a bimonthly essay. In 1977, he won a Pulitzer Prize for commentary for his newspaper columns. In 1981, Will became a founding panel member on abC television’s This Week. In 1990, Will published Men at Work: The Craft of baseball, which topped The New york Times best-seller list for two months. Will was born in Champaign, Illinois, educated at Trinity College, Oxford University, and Princeton University, where he earned his Ph.D. Today, Will lives and works in Washington.

Compass 23

Uncertainty surrounding the European debt crisis has had various negative effects on the growth outlook. Concerns are that a larger country (e.g. Italy, a G7 nation) may ultimately default on its debt, or that the Eurozone might break up. business confidence has been very visibly affected and has deteriorated more sharply in Europe than elsewhere. Despite the general weakening, divergence within the Eurozone persists, with Germany and France weaker, but still at the stronger end of the spectrum, and the most indebted countries, which now have to conduct the most significant fiscal tightening, at the weaker end. Even in Germany, businesses show an increased unwillingness to invest, due to the uncertain outlook. In addition, higher capital requirements and more challenging funding conditions for banks could result in significant tightening of credit conditions, thereby adding to the growth risks. Overall, we forecast near stagnation in the Eurozone as a whole, with visible declines in GDP in Italy and Spain. The political situation remains fluid. Over the past two years, grand announcements to tackle the debt crisis have been met with initial relief and then disappointment. To ensure that investor and business confidence improves sustainably, politicians must deliver ongoing fiscal consolidation and reform prog-ress at the national level, as well as furthering European integration.

Short-term Strategy Changes Dependent on Political news Flow

Our current European country strategy reflects our core scenario of gradual crisis contain-ment. as long as we do not have a sustainable solution, we continue to prefer less-cyclical equity markets (e.g. Uk) and exposure to economically healthier countries (e.g. Germany). However, if the politicians are able to present a reasonable solution, we will have to adjust our strategy and may change our country recommendations.

Compass 23

European Country Strategy: Debt crisis weighs on confidenceWrITTEN by GrEGOIrE bIOLLaZ, rETO HESS, DraZENkO LakIC, PrIVaTE baNkING GLObaL rESEarCH

highlights

n The debt crisis has weighed on European business confidence. We forecast a recession for the Eurozone in 2012.

n The robust and comparative German economy is relatively well prepared for an economic slowdown.

n Uk equities are attractive due to undemanding valuations and attractive, stable dividend payments.

n For Switzerland, improving earn-ings momentum is offset by high relative valuations; the strong currency remains challenging.

n Expectations for France and italy are still too high, in our view. We maintain our cautious position.

European debt crisis concerns dominate

Table 1Selected Eurozone GDP Forecasts (In %)

*EM-8: brazil, China, India, Indonesia, South korea, Mexico, Turkey and South africa as of February 1, 2012 Source: bloomberg, Credit Suisse Private banking Global research

2010 2011E 2012E

Germany 3.5 3.0 0.5

France 1.5 1.7 0.0

Switzerland 2.7 1.9 0.5

United kingdom 1.4 0.9 1.0

italy 1.2 0.9 -1.0

Spain -0.2 0.8 -0.8

Global 4.9 3.8 3.5

Em-8* 8.6 7.1 6.5

United States 2.9 1.8 2.1

24 European Country Strategy

Germany DaX Companies Well Prepared for a Slowdown

In 2012, we expect investors to increase their focus on the slow-down of the global economy and expect earnings momentum to slow. However, the comparative advantages of German companies (e.g., low leverage, high cash, rising dividends and high exposure to EM regions) versus companies in other European countries remain valid, making German companies better prepared for an economic slowdown than ever, with higher cost flexibility and lower inventory levels. Further, the most cyclical German automobile sec-tor has not seen a significant drop in demand so far. However, if demand drops, the car industry still has the option to cut costs. Hence, we believe current attractive valuations compared to the “riskless” bond market (Figure 1) should act at least as a protection for investors or as a strong driver for the DaX if surprising and convincing political measures in Europe improve risk-taking.

France We maintain a Cautious rating as Several risks remain

While French banks have reduced their sovereign exposure to peripheral Europe by roughly 60% since Q2 2011 – which was one of our main concerns – several risks remain, in our view. Most importantly, the French government’s budget deficit target for Fy 2012 could prove challenging. Depending on the country’s GDP growth, further budgetary measures may be required posing further risk for corporate earnings. In addition, MSCI France’s 12-month forward P/E is broadly in line with the MSCI Europe and earnings momentum is negative. We, thus, maintain our cautious view on the French market, especially in light of S&P’s announcement to review France’s credit rating, which could lead to a downgrade by up to two notches.

Figure 1DaX index Dividend Yield above Government Bond Yield

as of 1/31/2012 Source: Datastream, Credit Suisse Private banking Global research

Figure 2French 12m Forward Earnings momentum is negative

as of 1/31/2012Source: Datastream, Credit Suisse Private banking Global research

% 7

6

5

4

3

2

1

001.02 01.04 01.06 01.08 01.10 01.12

DAX 30 Index Dividend Yield 10-Yr German Bond Yield

5

0

-5

-10

-15

-20

-25

MSCI France MSCI Europe

12 M forward earnings (3M change in %)

09.08 05.09 01.10 09.10 05.11 01.12

Compass 25 Compass 25 Compass 25

Spain Companies with Exposure to Latin america Preferred

although the MSCI Spain screens relatively attractive from a valu-ation point of view, trading at a 12-month forward P/E of 8.6, we maintain our neutral stance on Spanish equities. Spain remains challenged by the burst housing bubble and the increase in private sector debt before the crisis. Further, the near-term growth outlook is deteriorating due to fiscal restraints. also the Spanish unemploy-ment rate continues to rise and stands at a record high 22.9%, substantially above the average level in the European Union. Continued weak domestic macro signs and pending negative effects from the austerity measures taken are why we continue to prefer companies with substantial exposure to fast-growing emerging markets (mainly Latin america), whereas we would still avoid stocks focusing on the domestic market.

Italy Continued Downside risk to Earnings Growth

Earnings momentum remained negative and downward momentum has even intensified recently. Current aggregated expected earnings growth for 2011 now stands at –2.5%, down from more than +20% at the beginning of 2011, which is consistent with our predictions. We now think this is reasonable. However, for 2012, aggregated expected market earnings growth stands at 17.1%, which we believe is still fairly optimistic, especially if austerity measures limit earnings growth. For 2012, our top-down analysis for earnings growth stands at 6%–8% (base case) and should not be too different in 2013. With this, the Italian market trades at about eight times 2012 earnings, which represents a 10%–12% discount relative to the pan-European equity market. as such, we see downside risks to earnings growth and volatility of earnings/equity prices.

Figure 3Performance of mSCi Spain relative to mSCi Europe


Figure 4rising Cost of insuring Debt Pressures Equities


1.05

1.00

0.95

0.90

0.85

0.80

0.75

0.7001.10 07.10 01.11 07.11 01.12

MSCI Spain vs. MSCI Europe

Spain Underperforms

400

360

320

280

240

200

600

500

400

300

200

100

001.10 05.10 09.10 01.11 05.11 09.11 01.12

MSCI Italy Index CDS Italy 5-Yr (rhs)

Basis Points

26 European Country Strategy

United kingdom Cheap and Stable

Like the rest of the large European equity markets, the Uk is trading on very undemanding valuation metrics, particularly relative to safe-haven-type assets. On this front, the Uk equity market dividend yield is over 100 basis points higher than the 10-year gilt (Figure 5). However, what differentiates the Uk is its stability. Indeed, within Europe, the Uk appears to be the relative safe haven when it comes to dividend sustainability. For one, year-on-year EPS growth among Uk-listed corporates has been solid, unlike in Spain, Italy, and, particularly Switzerland. In addition, the Uk market enjoys the highest interest charge cover ratio among the large European markets, which indicates high relative safety. Finally, the dividend stream in the Uk has historically been signifi-cantly less volatile than in the other large European markets.

SwitzerlandSwiss Equities: Balanced 2012 Outlook

On the positive side, momentum has increased considerably in Switzerland (Figure 6) and the 12-month forward P/E of 11.5 reflects an almost 20% discount to the 10-year historic average of 14.0. However, current forecasts still imply EPS growth of 16% in 2012, even if estimates have already declined by 17% for the same period. In addition, earnings revisions are still negative and the relative valuation compared to European peers is currently at a 23% premium, versus a 10-year average premium of only 8%. In addition, we believe that macro-economic risk remains elevated and may have a negative impact on Swiss equities. Swiss companies are highly dependent on the global economy in general and on Europe specifically, given the high share of exports, and we forecast low economic growth for the latter region. Finally, the CHF is still high in a historic context and has raised competitive pressure.

Figure 5Uk Equity Yields are attractive


Figure 6Earnings momentum has Significantly improved recently


%4

2

0

-2

-4

-6

-8

-10

-1201.80 01.88 01.96 01.04 01.12

UK equity market dividend yield minus 10-Yr gilt yield

1400

1200

1000

800

600

400

200

0

0.8

0.6

0.4

0.2

0

-0.2

-0.4

-0.6

-0.8

-101.02 01.04 01.06 01.08 01.10 01.12

MSCI Switzerland – Aggregate Price MSCI Switzerland – Earnings momentum (rhs)

12 M forward earnings (4M average in %)

Compass 27

a strong governance system and code remain critical to extending a family’s values and wealth across generations.

For this reason, the term “family gover-nance” often arises in wealth manage-ment discussions. yet, the notion may overwhelm family members by implying complex structures, documents, or obligations.

at its core, family governance simply refers to the process of governing a family and its decision-making for multiple generations. Ideally, family governance helps to sustain the family’s basic values and preserve its assets through inevitable challenges and changing circumstances.

Financial capital, while critical to a family’s wealth, constitutes only one type of capi-tal that a family may convey to descen-dants. Family members, through their talents and connections, also possess human, intellectual, and social capital1, all of which merit cultivation.

accordingly, developing and preserving the family’s capital requires a deliberate process of communication, decision-making, and long-term planning. While the process should not entail undue com-plexity, it should, in order to be sustain-able, be consistent and customized for each family. a customized process also should account for the culture and nation-ality of the family members involved.

Family governance generally consists of these components2: a family constitution: the family’s poli-

cies and guiding values that reflect the family’s core beliefs and history.

This written document can be as short or long, as detailed or simple, as necessary.

a family council to plan, create policies, and help family members fulfill their respective roles and responsibilities.

Periodic (typically annual) family meet-ings.

The following steps address key issues in establishing a family governance process.

identify the Family members to involvea family may consist of several genera-tions and branches. as a policy matter, deciding on whom to involve in your fam-ily governance is necessary before reach-ing key decisions, especially in leadership succession. Family members may par-ticipate in family governance to differing degrees, depending on their time and interest. To avoid disappointment and resentment, it is important to communi-cate the expectations and roles of each family member in managing his or her collective capital.

For instance, do you look to a specific family member to serve as a current or future leader? Does the decision-making process involve spouses and/or partners of family members? If not involved in the family business, how can a family mem-ber’s talents or social connections never-theless enhance the overall potential and influence of the family? How can family members serve as stewards of the fami-ly’s values? Does family philanthropy have a place for certain individuals? Understanding the growth potential and

Wealth Planning

Family GovernanceWrITTEN by JULIa M. CHU, PrIVaTE baNkING aMErICaS WEaLTH PLaNNING

Family governance helps to sustain the family’s basic values and preserve its assets through inevitable challenges and changing circumstances.

28 Wealth Planning

diversity of your family’s collective capital can help clarify the roles and expectations for each family member.

Clarify and Communicate the Family’s values and missionDefining your family’s core values remains critical for setting the agenda for your family’s (annual) meetings and for the family council. In addition, your family’s values will form the basis of your family charter or constitution.

Every family has a unique history and set of principles that guide him or her. With families of great wealth, these unique characteristics and principles often account for their financial success, and may still motivate certain family members.

The answers to these questions often reveal many facts and qualities that may resonate with younger family members. This collective discovery can serve as the first step towards a governance frame-work for your family. These values can then inform the family’s long-term goals and priorities on which the family as a whole may focus.

Draft a Family ConstitutionThe family constitution articulates a fami-ly’s vision for the future, its core values,

and its decision–making process. a family constitution often exists in conjunction with a family business to provide for orderly governance and succession.

a Family Constitution may include3

The Preamble: The preamble sets forth the purpose of forming a constitution. In particular, the preamble may affirm the family’s intent to establish the rules under which they will reach decisions and govern their affairs. To ensure adoption of this governance process, it is critical for the key family members to fully support the need for a protocol and an underlying constitution. This affirmation reminds and motivates family members to adhere to this process in managing anticipated conflicts.

The Family history: a family multi-generational narrative can bind the disparate personalities and interests of various family members into a common heritage and source of pride. a history that highlights significant events can add color and detail in distinguishing the family.

Core values: The questions outlined above may help to identify the family’s priorities and guiding principles. These will help the family reach key decisions affecting its future. To provide meaningful guidance going forward, it may help to provide some context and detail in describ-ing the family’s core values. For example, in addressing the terms of family assis-tance, the family may invoke the value of self-sufficiency as an ultimate goal.

Decision–making Process: at the out-set, the family needs to identify the types of issues that impact the family as a whole and warrant a collective decision. Such issues may include conditions in order to work in the family business; restrictions on the transfer of shares; rules governing the use of a vacation residence and other family assets; the operation of family philanthropic/charity projects; and the establishment of family educational initia-tives. additional issues may include: who can vote on the family-wide decisions? Do spouses qualify? Does each branch or generation of the family designate a representative, and if so, how would this

To begin the discussion within your family, ask the following questions:

What values define your own behavior and goals (e.g., fortitude, compassion, resilience, integrity, independence)?

What motivates you most (e.g., security, your business and/or professional success, creative expression, a standard of lifestyle)?

What milestones and lessons have your grandparents and great-grandparents gained? What characteristics distinguished them?

Collectively, what values and attributes have led to your family’s wealth?

How do you want your family to be known and/or remembered?

Which family achievements or moments inspire the most pride?

What core values does your family represent, now and in future years?

What goals do you seek for the family at large?

Compass 29

designation process occur? Should the family vote by consensus? Does a family council decide on any key issue as the final arbiter? Who can serve as a member of the family council, and under what pre-requisites?

To remain flexible and relevant, the constitution should also establish the grounds and procedure for amending it in the future.

Form a Family CouncilLike any successful business, a family depends on strong leadership and repre-sentation in optimizing its financial and personal potential.

as a governing body, a family council may consist of certain family members for the purpose of governing on key issues, mentoring family members, and strategic planning to preserve and develop the family’s capital. The family council struc-ture may also consist of standing or ad hoc committees to address specific topics. These committees, in addition to a junior board comprised of younger family members, may provide the forum to train and groom successive generations on the stewardship of the family’s capital.

To set expectations, the family should clarify and memorialize, ideally in the family constitution, the family council’s specific roles, responsibilities, and decision-making authority. The family constitution may also establish in advance the qualification elements for serving on and rotating off the family council; require-ments may include a certain threshold age, or a certain degree of involvement in the family business.

Conduct regular Family meetings with a Planned agenda

besides holiday gatherings and occasional family reunions, regular family meetings remain critical for apprising family mem-bers of, and deciding collectively on, key family asset issues.

In addition to quarterly business and investment reviews, family meetings may also incorporate family philanthropy plan-ning and site visits. Family meetings may also provide the opportunity to educate

family members on a wide array of issues. The family may invite guest speakers to address various topics on a national or global level.

Begin a Governance Process and adjust as neededas often stated, a family governance pro-cess need not begin as an elaborate bureaucratic procedure set in stone. It should, however, provide a framework for airing and resolving conflicts without resorting to impulsive actions.

a formal protocol and regular convening, while unfamiliar at first, may provide a reliable system to help preserve and develop the family’s resources across generations, without relying on a single individual and lifespan to make key decisions going forward.

In summary, “family governance” reflects a process rather than a specific tool or procedure. It entails the commitment of a family to work together in a consistent manner to preserve and optimize its financial, human, social, and intellec-tual capital. Identifying the family’s history, core values, and unique attributes can serve as a powerful and unifying initial step.

1. Charles W. Collier, Wealth in Families, 8-9 (2008).2. John Davis, the Three Components of Family Governance, Harvard business School Working knowledge

(November 12, 2001). 3. barbara Hauser, International Family Governance, STEP Journal, Society of Trust and Estate Practitioners

(June 2010)

Family governance entails the commit-ment of a family to work together in a consistent manner to preserve and optimize its financial, human, social, and intellectual capital.

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