John Elkann reckons that listed family-owned diversified holding companies represent an excellent investment opportunity, especially if held over a long period. The chairman and chief executive of Exor and arguably Italy’s most famous businessman might be expected to say this given he oversees one of the world’s biggest holding companies, but the data appears to back his view.
In a recent letter to Exor shareholders, Elkann provided some illuminating data on the performance of listed diversified holding companies, many of which are family-owned like Exor. In fact, in the last 20 years, according to Exor’s analysis, total shareholder returns of these businesses is around five times more than the MSCI World Index denominated in US dollars (see chart below). And they outperform the businesses they own by 50%.
The businesses used in the analysis were owned by families, or have families as the biggest shareholder. They were Investor AB, Groupe Bruxelles Lambert, Bolloré, HAL Holding, Koç Holding, Industrivarden, CK Hutchison, SM Investments, Jardines, Swire Pacific, Mahindra, JG Summit, Loews Corporation, and the Power Corporation of Canada.
“Many of the holding companies that we have studied are family-controlled,” says Elkann. “This is of course of particular interest to my own family which is now in its 5th generation of actively managing our portfolio of businesses. We have therefore spent time trying to understand why family-owned businesses have on average consistently outperformed the market.”
Elkann puts this outperformance of these family-owned diversified holding companies down to a number of reasons:
- They are prudently run, particularly when it comes to financial matters, which makes them robust during a downturn;
- They have the patience not to act when action is unnecessary and resist pressure to do so;
- They are aware of changes in the world and are able to adapt when required; and
- They have strong cultures, clearly defined purposes and a sense of responsibility.
However, many of these businesses, as Elkann says in his letter, tend to trade at a discount to their net asset value of their shares. The two reasons why this might be the case, as mentioned in the letter, are:
“Holding companies are perceived to give disproportionate advantages to their controlling shareholders instead of delivering returns to all shareholders; and buying shares in holding companies is seen as less attractive than buying shares in the listed businesses within their portfolios because of the reduced transparency and the additional holding cost.”
Despite these reasons, value-oriented investors often like buying businesses with a discount to their NAV - they have plenty of upside potential given their discount and are likely to perform better when their sector and/or economic factors improve. Warren Buffett has always been a big buyer of companies with a discount to their NAV.
Combine that discount with a diversified holding company and the potential might be even greater. At least that’s what one value investor reckons.
“We have a real interest in holding companies, especially in diversified holding companies, which we would consider offer many of the attractions of mutual funds, but without the explicit level of associated fee costs,” says Tim Price, founder of UK asset management group, Price Value Partners.
“If you accept the argument that successful investment ultimately comes down to superior capital allocation, as we do, then there is real merit in investing alongside great capital allocators, especially those with a long and successful track record of generating superior shareholder returns.”