Investment

Value investing, funds tracking listed family businesses, and coronavirus

Managers are not normally keen to confess that one of their funds has fallen 19.5% in a month. But these are not normal times. Funds are collapsing across the global markets. 

But Andreas Wueger, chief executive of Swiss-based Lapis Asset Management can at least point out the fund in question, a global investor in high-yield family businesses, has beaten the S&P 500 and MSCI World indices by 2.3 percentage points in the month to 20 March. 

The leverage in the system is so enormous now – especially US corporate debt – that we risk another financial crisis, possibly more profound than 2008

The fund is also ahead by 84 basis points in the year to date, reasserting the tendency for family businesses to outperform the indices, prior to their recent tech-driven surge. The potential fragility in the indices was foreshadowed in  Family Capital last year.

Three-year returns compared to the indices for the Lapis family strategy were not exciting, particularly compared to the S&P 500. But Lapis has beaten them by a fat margin since 2007, with a total return of 163% expressed in dollars.

Wueger senses a change in sentiment has started to blow in favour of family businesses: “Now, we have a chance of showing the world what our process can achieve.”

The opportunity has come at quite a cost. Social restrictions to fight the coronavirus pandemic have led to a dramatic fall in revenues needed to service debts, higher than they were 2008 despite some reductions at the banks.

Governments have pledged to make the losses good. Central banks have cut interest rates to the bone. But societies will bear the cost through higher taxes, inflation, weaker currencies and cuts in services. JP Morgan forecasts an alarming shrinkage of US GDP by 14% in the second quarter. 

According to one strategist: “The leverage in the system is so enormous now – especially US corporate debt – that we risk another financial crisis, possibly more profound than 2008.” 

Few trust the sharp recovery in share prices, following news of a $2 trillion injection into the economy by the US government.

This narrative is completely different from the sunny optimism of 2019.  Before persuading investors to part with their cash, managers will need to copper bottom their promises. 

According to consultants, family offices will take greater care to reinforce their investment approach through careful risk management and data analysis.

Co-investment between like-minded peers will continue. But everything will depend on friendship, and trust. 

As Pim van Vliet, head of conservative equities at Robeco, once said: “Think about it.  If you lose 50% of your capital in a single transaction, you need to double your remaining capital to break even.”

Tech-driven giants will continue to attract investors because of their rock-solid balance sheets. But investors won’t want to buy growth at any price. 

Companies with sufficient cash flow to underpin steady dividends will also attract support. Securities firm Jefferies says investors can “practically steal” some of really solid US stocks brought low by random selling.

Intriguingly, low-volatility ETFs are performing relatively well because they invest in companies whose share prices do not rise, or fall too far. 

Setting aside smaller firms, exposed to economic uncertainty and family feuds, established family businesses are a safety-first low-vol play. They may be shy, but that is better than coming up with grand plans to impress the stock market. Research published by Credit Suisse in 2018 showed that companies 20%-owned by families had stronger top-line growth than the rest, where chief executives are only in charge for three to five years.

Funds sponsored by Baillie Gifford, Quaero Capital and March Group are among those which have targeted family businesses. Like Lapis, they have sometimes struggled against the indices.

Lapis Asset Management, profiled by Family Capital last year, has set out to keep things simple with a quant fund which tracks its Family-Owned 50 Dividend Yield index. Each of its 50 family businesses has a market value greater than $5 billion, plus a policy of maintaining and increasing their dividends over ten years. 

In 2019 the fund’s prospective dividend yield was 3.3% against 2.5% from the MSCI World. The average debt/equity average for their investments was 66% against 136% for components of the MSCI. Their earnings multiple was 15.6, against 20.6. The underlying value for money in the family fund is clear.

Families need to own at least 20% of their businesses to qualify for inclusion. The fund, rebalanced quarterly, does not own bank and oil stocks, due to their complexity, which has not harmed its recent performance one bit.

 

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