Family holding companies and family-run businesses are often overlooked by investors moving their money into Europe, according to Baillie Gifford’s Stephen Paice (pictured), who argues they offer a plentiful source of opportunities. 
The fund manager, who co-manages the Baillie Gifford European fund alongside Tom Coutts and Moritz Sitte, believes there are ways to sidestep the macroeconomic noise created by fears of a Grexit and rumours that the European quantitative easing stimulus could end early.
“Europe is not the eurozone – what happens in Greece has very little effect on the rest of the economy,” he said.
“There is a great speech written by Andy Haldane, who is an economist at the Bank of England. One of the stats he raised was that, because of the size and growth rate that China has generated, it creates a new economy the same size as Greece every month and the same size as Portugal every three months, so for companies in Europe that have a global outlook, what happens in China, Canada and the US is much more important than what necessarily happens in Europe.”
“I think we still have that top-down view of Europe: certainly if you read the FT and The Economist, you will see a lot of angst over QE and what this means for inflation – what’s happened to the oil price? Why has the Swiss franc tanked? There’s loads of issues there and you could, in a picture of Europe, just stumble from one problem to the next. This is probably something you could say for the UK and the US as well.”
Paice believes that Europe has been a fantastic place to invest in over eight years but if investors have held on to a fundamentally top-down view, they would have had a very different attitude and experience when investing in the continent.
As a bottom-up stockpicker, the investments that Paice thinks are particularly successful are those which are family-owned. In fact, out of 52 stocks in the portfolio, 40 of them are family-oriented companies.
“[Family businesses] have insiders on board that we trust and that’s a theme which plays out heavily within the portfolio. It does play a very big part in what we do.” he continued.
Ryanair is one of the largest family-run stock weightings within the fund.
“With someone like Ryanair, you could say that technically it’s not under the correct definition of a family-owned company – I think the correct definition is an insider with more than a 10 per cent [ownership],” Paice admitted.
“[CEO] Michael O’ Leary has 3 per cent, but for us the customer influx that he has, the stewardship and the long-term nature of his investments are such that he is actually quite a good steward of our clients’ capital as well.”
Other family-run companies in Baillie Gifford Europe’s portfolio include Carlsberg, Volvo, Coca-Cola HBC, L’Oreal and Novo Nordisk.
What’s more, Paice says the other subset of family-type companies that don’t often get talked about are the European family holding companies, which are investment vehicles set up to manage the assets of very wealthy entrepreneurial European families.
Out of the 40 family-run businesses in the portfolio, seven of them fall into this category.
He said: “There are quite a lot of family holdings in the portfolio because we still think they’re one of the best kept secrets in the financial world.”
“They’re very similar to investment trusts. They’ve got favourable tax regimes, they’ve got low expense ratios, you get access to unlisted assets as well as listed assets in the portfolio, and most of these trade at a significant discount.”
“What is probably the most important part is the inflows that those families have in the companies and the assets which they effectively control. They are able to influence capital allocation and ensure that the companies themselves are focused on long-term valuation.”
“We think that’s a pretty powerful argument for holding some of these.”
However, Paice admits that the discounts for some of holding companies in the portfolio have shrunk recently. As a result, the team has begun to reduce weightings and keep a close eye on the fund’s current positioning. However, he still believes that holding companies are attractive vehicles to invest in.
What’s more, the fund manager says that being a long-term shareholder with these companies means the team can gain access to people it might not have been able to interact with otherwise.
Investor, a holding company that was founded by the Swedish Wallenberg family almost a century ago, is the second-largest weighting in Baillie Gifford European’s portfolio and has returned 15 per cent per annum for 20 years.
“I think this quote from the chairman of Investor sums up their investment approach: ‘We are long-term shareholders, and when I say long-term, I mean more than 50 years’,” Paice said.
“That’s the type of multi-generational investment horizon they’re taking which puts us to shame really, but being able to talk to these people, to be able to share information with them, is a very useful thing.”
Other holding companies that the fund has bought into are EXOR, owned by the Agnelli family in Italy, Kinnevik, owned by the Stenbeck family in Sweden and Groupe Bruxelles Lambert (GBL), a Belgian industrial holding company owned by Albert Frère and his family.
These investment decisions appear to have worked for the Baillie Gifford European fund, which has achieved total returns of 69.4 per cent over five years compared to its benchmark’s 51.66 per cent and its sector average of 56.35 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The fund has a clean ongoing charges figure (OCF) of 0.69 per cent and yields 1.66 per cent.