Family Investment Holdings
As wealth manager, it is our core responsibility to achieve attractive long-term returns, while empasizing risk management with the objective of preserving capital and purchasing power. We are convinced that we can achieve these objectives by investing in companies where the founding family holds a large portion of the shares outstanding. Research has shown that due to a number of important characteristics, family businesses perform better than companies without a family or reference shareholder:
- Long term focus: thinking in generations instead of quarters;
- Skin in the game: the family capital is at stake;
- Family planning: the business and the capital invested in it must be transferred as prudential as possible to the next generation;
- Risk-averse and conservative management;
- Resilient balance sheets;
- Aversion for debts, financing preferably takes place from the operating cash flows;
- Stewardship prevents an excessive focus on the short term, high debt levels, or over-ambitious expansion strategies.
These characteristics result in higher profitability, more sustainable business growth and a considerably better investment return. By investing in the investment companies of such families, so-called investment holdings, we entrust our capital to families who have demonstrated that they are able to beat the stock market over a long time period, as shown in the chart below.
Source: presentation Investor Day Exor N.V., October 2017
TSR = Total Shareholder Return
Annualized TSR = average return per year
The chart above clearly shows that investment holdings and the listed companies in their portfolio perform almost twice as well as the global stock market, represented by the MSCI World Index.
Source: Exor N.V. conference call, May 2018
In addition to a better return, family investment holdings are also more crisis-resistant. The chart above considers the credit crisis and zooms in on the period from June 2008 to June 2011. In the first instance, it is noticeable that both the global stock index MSCI World and family businesses are falling during the epicenter of the credit crisis. When a stock market crisis occurs, investors often sell all their shares out of fear, whether they are well performing or underperforming companies.
During the recovery phase, however, it is visible that within a few months after the low point, family businesses are already back above the starting point, where the MSCI World Index needs until 2011 to return to the same level. At that time, family businesses have already yielded a return of 53%.
The reason for this strong performance of family businesses is that they have relatively lower levels of debt than the average company on the stock exchange. As a result, they are more flexible during a financial crisis and can continue to invest, where other companies are struggling to keep their heads above water. These companies are also often able to take over their ailing industry peers at a relatively attractive price. This then results in these companies continuing to grow and being relatively much more profitable than non-family businesses, which were generally loss-making during the credit crisis.
It is often also the case that these family investment holdings are traded at a (substantial) discount compared to the intrinsic business value.
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