Investors put off investing in family-controlled businesses might be missing out on some of the world’s best-known and exciting brands, according to AVI Global Trust’s Joe Bauernfreund.
The manager said family-controlled companies are one of the three key areas for the £842.9m AVI Global Trust and one which many investors won’t invest in due to concerns about the ownership structure.
Typically, these listed companies are found in Europe and Asia and tend to invest in listed and unlisted businesses.
However, Bauernfreund said this part of the market is “inefficient” and one where strong brands can be picked up at attractive valuations.
“It tends to be less liquid than other parts of the market and they tend to be under-researched,” he explained. “So, from our perspective, they’re an inefficient part of the market – neglected and overlooked – and they trade at varying discounts over time.
“But when one looks at what they own and what their performance track record is, it’s very attractive. And for that reason, we find opportunities in this in this area of the market to buy high-quality assets for the long term at very attractive valuations.”
One such example held by Bauernfreund found in the trust’s top-10 holdings (at 5.4 per cent) is Exor, an Italian holding company controlled by the Agnelli family and the owner of brands like Ferrari, Fiat-Chrysler and Juventus football club.
Performance of stock in euro over 5yrs
Source: Borsa Italiana
Another company in its top-10 that AVI has held for a long time is Jardine Strategic, an Asian family-controlled company which owns brands such as luxury hotel group Mandarin Oriental and Hong Kong Land. It represents a 5.22 per cent position in the trust’s portfolio.
Famly-owned holding companies also tend to be quite stable and well-managed, particularly during more turbulent conditions, said the manager.
Indeed, while investors might view family-owned companies as little more than a plaything for wealthy heirs and heiresses, the truth is much different with family members are much more likely to be focused on governance. 
“Many of these families are already into their fifth, sixth, seventh generation of wealth and they don’t see these vehicles as piggy banks to fund the private jets and superyachts,” he said.
“It’s really about generational transition of wealth and it brings with it quite a high degree of maturity and conservatism.”
Bauernfreund (pictured) explained: “The typical model that we’re looking for is a family holding company that has a strong balance sheet, and they invest in high-quality, cashflow generating businesses.
“What that means is that when the cycle turns and markets fall, or companies struggle with challenges, the parent and the holding company have the resources and the long term perspective to see that through.”
He added: “So, if companies need more cash, they can move more cash in. If they need to take tough decisions to steer through a difficult patch, they can be patient and have that long-term perspective, which other listed companies can’t.”
As such, many family-owned businesses have established a strong track record over the past couple of decades and even outperformed the broader global equity markets in some cases.
“One of the factors that I point to in understanding that is this conservatism, and this long-term horizon, that enables them to take those difficult but very creative decisions without worrying about short term performance,” said Bauernfreund.
The trust manager said that he aims to own these holding companies for the long term and align interests with the families to benefit from strong net asset value (NAV) growth and narrowing discounts over time.
“The beauty of the family holding company structure, coupled with investing through a closed-ended fund structure is that we can invest in situations that are more long term and less liquid,” said the manager.
“I can take that long-term view without worrying about the open-ended fund redemptions that are obviously a challenge at certain points in time.”
Family-owned companies make up around one-third of the trust split into three different regions: 18 per cent is held in European family-owned holding companies, 11 per cent in Asian companies and 3 per cent in Latin America.
The trust’s biggest sector by percentage of invested assets is a 45 per cent allocation to investment trusts.
Here, too, the manager said he aims to identify closed-ended funds that own assets but are mispriced and have the potential to grow but are trading at a wide discount.
“But given that they’re not controlled by a family or other shareholders, our objective really is to try and be a large – if not the largest – shareholder in these other trusts and try to engage proactively and constructively with the board’s best interests, introducing policies and measures that would lead to a narrowing for discount,” he said.
“That can range from a number of things like improving corporate governance – such as directors and the exchange that they’re listed on – to putting a trust into realisation mode and returning capital as and when assets are sold or a full liquidation of the portfolio and return of capital at net asset value rather than discount.
“So, we only buy into a trust where we like the underlying assets and we’re looking for some kind of catalyst or event to generate a narrowing or the elimination of the discount.”
The final part of the portfolio is held in Japanese smaller companies where the manager believes changes enacted by prime minister Shinzo Abe could help create an opportunity among undervalued, cash-rich businesses.
“The signs and the evidence of real change and attitudes towards corporate governance – in things like share buybacks and payout ratios – are really improving in Japan at a faster pace than we might have envisaged a year ago,” he said.
“There are signs that the low fundamental valuations that we’ve seen in Japan, the justifications for those discounted, valuations are beginning to go away. That’s pretty positive.”
Bauernfreund has managed the four FE Crown-rated AVI Global Trust – previously known as the British Empire Trust – since October 2015. During this time, it has made total return of 81.61 per cent, compared with a 77.83 per cent rise for the average IT Global peer and a 60.62 per cent gain for the MSCI AC World benchmark.
Performance of trust vs sector & benchmark under Bauernfreund
Source: FE Analytics
The trust has is 5 per cent geared, is trading at a discount to net asset value of 9.7 per cent and ongoing charges of 0.86 per cent.