The diversification benefits of family holding companies

March 2020 - Joe Bauernfreund

For an investor, finding the hidden investment opportunity that the rest of the market has overlooked is the holy grail of stock picking.

Inefficiencies within the market can often throw up anomalies such as strong, high quality companies trading at a wide discount to true valuations. Finding these companies, however,requires looking where others don’t – or won’t.

Uncovering prime investments is a time-consuming task, but worth it to reap the long-term returns. Historically, some of the best of these overlooked companies have been closed-ended funds and family holding companies.

Their long-term orientation make family-controlled holding companies well placed to navigate volatile markets

At this late stage of a bull market, discounts in this area of the market remain attractive. The meteoric rise of US technology companies has drawn investor attention elsewhere, with many ignoring the more obscure and less liquid companies. This in turn has led to widespread mispricing of assets, creating strong opportunities for canny investors.

Not only are family controlled holding companies a less researched area, they are also predominantly found in Europe or Asia. Given Europe’s slow growth and lukewarm sentiment, firms on the continent have been hit hard by low levels of investor interest. The reality is that many of these companies are in fact global in nature, owning attractive quality assets across the world.

Macroeconomic sentiment is, we fear, misguiding investors and impacting the valuations of these companies. This effect is compounded by a lack of both investor interest and, in turn,meaningful sell-side research.

Linked to this lack of research, there are several common misapprehensions about family controlled holding companies. Even the concept of family control is controversial. Many investors see this as a source of interference. We, however, see families as providing long-term stewardship and active ownership, working to create value. The long-term out-performance of such companies attests to this.

Diversified portfolios of unlisted assets held in seemingly complex structures can also scare off investors. We see this as a potential goldmine of mispriced assets and represents potentially significant hidden value for specialists who have the time to understand structures and value the assets.

Missing out on the opportunity to own family holding companies means missing out on a stock that can act as a well-balanced diversifier for an investment portfolio. Family businesses are not just interested in the next quarterly earnings. The businesses aim to create wealth for future generations, boding well for shareholders. This alignment and long-term outlook allow family-controlled holding companies to take advantage of contrarian opportunities.

The very best examples in this niche sector are companies with strong balance sheets and proactively minded families, able to take advantage of market dislocations and generate value from their holdings.

EXOR – the investment vehicle of the Italian Agnelli family – is a prime example of the attraction of investing in family-controlled holding companies. Listed in Italy, EXOR owns controlling stakes in listed companies Ferrari, Fiat Chrysler and CNH Industrial, as well as 100% of Partner Re, an unlisted re-insurance business. Despite a very strong record of NAV growth, EXOR has spent recent years trading at close to an in excess of a 30% discount.

John Elkann, the great-great grandson of Fiat’s founder Giovanni Agnelli, has developed a strong track record of compounding wealth, well in excess of global equity markets. Elkann actively manages EXOR’s portfolio with an eye on value creation, such as spinning Ferrari out from Fiat. Since then, Ferrari’ share price has more than doubled. Currently EXOR, ever the active owner, is trying to unlock value trapped inside CNH’s conglomerate structure, splitting the company into two specialised businesses.

Image: New Holland Agriculture, owned by EXOR

EXOR is just one example of how family-controlled holding companies offer investors a way to align the interests with skilled capital allocators, managing portfolios of quality assets to generate wealth over the long-term.

The diverse nature of holding companies means a concentrated portfolio of the most attractive names still results in a well-diversified look-through exposure.

A combination of this diversification, the quality nature of their underlying assets, and their long-term orientation make family-controlled holding companies well placed to navigate volatile markets. Investors would be wise not to overlook this.

Find out more about the AVI Family Holding Companies Fund