The world’s most famous investor Warren Buffett may have made money out of buying family businesses, but he’s done so by buying them outright. An indirect approach to investing in family enterprises, buying into a fund, which invests in listed family businesses, isn’t likely to be as lucrative. Here’s why.
There are a number fund managers that have tapped into investor enthusiasm towards family businesses. They sell the usual stuff with marketing spiels about family businesses being good examples of “long-term risk-averse strategies” and “having defensive characteristics”.
In general, their investment performance hasn’t been bad, but nor has it been brilliant. A fund’s performance is often difficult to interpret given the many criteria used to judge it --the fund industry likes it that way -- but let’s see what can be surmised from a number of funds.
An interesting fund is the Swiss-based Quaero Family Enterprise Fund, which says it is designed to maximise long-term capital growth by investing in small and medium sized European companies that are listed but still partly owned by family shareholders. Small and medium-sized European companies funds have performed well over the last three years and the Quaero fund is no exception.
Over the last year, according to Citywire Global, the fund, quoted in euros, returned 59%. Not bad, but there are some big caveats to these returns. In terms of the funds in the small and medium-sized European companies sector, the Quaero fund ranked 100 out of 166, with the best performing fund up 120% during the same period. So, the family aspect achieved with the Quaero fund doesn’t necessarily add a great deal more to performance.
Other funds looking to tap into family businesses are the March Family Businesses Fund, the Syz Oyster Continental European Selection fund and the GS&P Fonds Family Business fund. All these funds have performed moderately well against benchmarks, but nothing spectacularly. Also, their performance doesn’t take into account the costs associated with buying and selling these funds, which range from between 1% to 5%.
Many of these funds also have a loose definition of what constitutes a family business, which of course starts from the premise of the fact they aren’t 100% owned by the family given that they are listed. Most have a filter to be included in their fund of just 15% of the share capital needs to be owned by the family. This means that family control is often very diluted with some of the companies that comprise the funds.
So, if you want to make a Warren Buffett-type fortune out of family businesses, don’t go down the funds route. Better to invest in them directly. Of course, that is going to cost a fortune to do so. As the old adage goes - money begets money...although, Buffett had to start somewhere.