In my study of 100-baggers since 1962, Berkshire Hathaway came out on top. It’s no wonder that investors are ever watchful for “the next Berkshire Hathaway.” (And it’s why this headline always works). Though there may never be another, it’s fun to think about what made Berkshire such a success and to try to find similar set-ups.
Below, we take a look at holding companies and one that is already a ten-bagger in ten years, but with a 42-year-old at the helm, it has a long way to go…
I have always had an interest in holding companies. I suppose many people have such an interest stemming from the success of companies such as Berkshire Hathaway, Markel, Fairfax Financial and the old Leucadia National. (I have another one I like, which I'll get to below).
What makes these companies successful? It’s hard to generalize, but we might say a few things about what they have in common.
First, they all have permanent capital. None of these firms have to deal with investors pulling their money out just when it is the best time to put money to work. They can take positions and hold them indefinitely. I’ve said this before, but having permanent capital gives you an enormous advantage over other investors with flightier capital bases.
Second, the alignment of interests is strong. The people at the helm usually own a lot of stock. This bodes well for thoughtful capital allocation. And it is often good protection for the grosser stupidities committed by hired gun CEOs with misaligned incentives. (For example, bonuses tied to things like EBITDA growth). While insider ownership doesn’t guarantee success, it does seem to raise your odds over time.
Of course, it helps to have a talented asset allocator. And all the successful firms I mentioned above seem to have at least one such person at the top.
There are other factors that help, too. It seems these holding companies may have some edge in finding deals. Certainly, Berkshire does. People come to Buffett. But other holding companies also develop good networks that turn up deals. And because of their reputations, they can have an edge over other buyers. Holding companies also often exert their influence on the companies they invest in, either by sitting on boards or through outright ownership of the whole thing. This can be an advantage over investors who have no control.
Of course, there are negatives. The biggest one I see is that holding companies trade at persistent discounts to their underlying net asset values – usually at least 20%. You shouldn’t buy a holding company just because of a discount in NAV. (Though sometimes they can blow out to historically wide discounts and then you may have something).
Anyway, some investors find the discount frustrating. I just take it as a given and always discount whatever valuation I have by at least 20%. If NAV grows over time and the discount persists, it won’t matter. If someday it does go away – for whatever reason – you have an extra bump in your return.
In any event, holding companies do seem to perform rather well. What kind of research backs this up? I asked Todd Peters of Lyndhurst Enterprises, Inc.
Whenever I think of investing in holding companies, I think of my friend Todd. I wrote about him in my book 100-Baggers. He keeps a list of publicly traded holding companies around the world (there are over 100). He’s studied the subject deeply and even created a holding company focused portfolio, The T.F. Ryan Portfolio. (Financier Thomas Fortune Ryan, ran the first US holding company, Metropolitan Traction Co.).
Here an excerpt from 100-Baggers:
“I spend my free time studying financiers from the 1860s to 1920s,” Todd said. When he visits a city, he likes to see whether there is a historic home he can visit to see who created the wealth in that city.
“I started studying these guys when I was in my teens,” Todd told me. “I knew about the Vanderbilts, the Rockefellers and Carnegies. But now I’m looking for the second-, third- and fourth-tier ones that aren’t as well known. And some of those, to me, are the most incredible stories.”
And not all of these stories end well. Some of these people made a bunch of money and also lost a bunch. So you get a ton of lessons out of studying them. Historically, Todd said, there have been five people or groups he considers holding-company inspirations. Ryan was the first, chronologically. The Van Sweringen brothers, from Cleveland, followed him. They at one point owned the most miles of railroad track in the country. They got crushed in the Great Depression, and their holding company eventually became Alleghany—another model holding company today.
Next was Canadian financier Izaak Walton Killam. When he died in 1955, he was Canada’s richest man. Fourth were the Bronfman brothers, who were kicked out of Seagram. Their holding company, Edper, bought Brascan, which ultimately became Brookfield Asset Management. (In the ’80s, Edper controlled 15 percent of the Toronto Stock Exchange.) And rounding out the top five is Albert Frère, currently the richest man in Belgium, who controls the holding company Groupe Bruxelles Lambert. [Note: Frère died in December]
“Those five groups have been instrumental in how I think about hold- ing companies,” Todd said. “And that takes you from the 1880s to today.” He finds the history helpful, as it shows the good holding companies are business builders.
He notes that wealth creation—real wealth creation, “not flying-first- class wealth, but having-libraries-named-after-you kind of wealth”— comes from owning and operating and building businesses and having a long-term commitment. “And that’s what I see in the Brookfields, the Loews and the Leucadias.”
I asked Todd if there was any research on the performance of holding companies over time. Other than the proprietary research Todd himself has done – which shows wide outperformance – there really isn’t much about traditional holding companies per se. There is a lot of research on family-owned companies, which are often holding companies. (And they do tend to out-perform their peers).
But there was one chart Todd shared, from 2017. It showed how the performance of 14 select holding companies (called here “diversified holdings”) beat out the MSCI index and also out-performed the shares of their underlying businesses.
This chart comes from the Investor Day deck prepared by Exor, which gives me a nice segue to talk about it…
Exor’s Annual Letter
We own Exor in the Woodlock House portfolio. (Our average price is about $49 euros). Last night I read Elkann’s shareholder letter, which is what inspired me to write this post today.
The Agnelli family created Exor in March of 2009, when they re-organized their holdings. The family’s wealth begins with Giovanni Agnelli who was one of the founders of what became Fiat. Today, Exor’s main investments include Partner Re Fiat Chrysler, Ferrari, CNH Industrial, Juventus and The Economist. The Agnelli family owns 53% of the stock.
John Elkann (only 42 years old) leads the group and is the handpicked successor and grandson of Gianni Agnelli, who is the grandson of the founder Giovanni Agnelli. So, we’re talking fifth generation here. I like how Elkann thinks and I greatly respect what he has done so far. (The FT had a short profile of him last weekend here.)
Elkann begins with a warm appreciation for Sergio Marchionne, the CEO of Fiat Chrysler who died last year. In financial terms, Sergio’s accomplishment is… well, let the numbers tell the tale: “If you had invested €6 when Sergio first became CEO [on June 1, 2004], it would have become €41.4 [by July 20th, 2018].”
Exor itself has also done very well. Since inception, and including dividends, the stock has been a ten-bagger:
"On the day our shares started trading, March 2, 2009, they were worth €5.8. By March 1, 2019 they were valued at €54.3 and we had distributed €1.2 billion of capital in the form of dividends and buybacks, giving our shareholders a total return of close to 10x."
Here is a table Elkann references in his letter:
Great numbers. They will be tough to repeat. But Elkann is young, only 42. There is a lot of time yet to do interesting things. And he has shown a knack for making good moves, or hiring people that make them. In his letter, he talks about the stock portfolio Exor runs for PartnerRe:
“In 2018 we started deploying part of our cash and cash equivalents, which have now grown to $306 million, into the equity portfolio that we manage for PartnerRe. At the end of March 2019, this investment portfolio has delivered a gross return of 56.2% in USD since its inception in 2017, and, in the period since EXOR also started investing, a gross return of 37.3%. The performance of MSCI World Total Return Index in those periods was 19.4% and 1.7% respectively.”
That portfolio is big time concentrated. Two positions make up 60% of the amount invested. The largest holding is Ocado, the food e-commerce company, up over 4x since Exor invested. Elkann still likes it:
“However, we believe there is still significant opportunity for further growth as food retailing is a very large market, equating to approximately 50% of total retail spend, or $2 trillion globally, and the channel shift to online is still in its early stages and accelerating.”
The second biggest position is in South African platinum mines, which provide 60% of the world’s platinum. Elkann writes:
“Platinum miners are trading at historic lows following a period of oversupply and depressed metal prices. The enterprise value for the listed sector has therefore declined from over $20 billion in 2011 to less than $2 billion in 2018.”
With no new big mines coming online, shrinking inventories and growing demand, Elkann expects a “sharp recovery.” We’ll see.
In the last couple of years, the discount to NAV has been somewhere around 30%. (And that’s what it is today). I wouldn’t invest expecting it to close – though it has been narrower in the past. I do like that Elkann is mindful of that discount:
“Given the discount at which our shares were trading back in November 2018 (around 36%, well above its 5 year average), we decided to allocate €300 million of our cash resources… to share buybacks.”
In this piece, I’m just taking Exor’s NAV at face value. Of course, you should look to make your own adjustments to that NAV. And you have to get comfortable with the big underlying investments – Partner Re, Fiat Chrysler, Ferrari and CNH Industries.
One criticism I get on Exor is that it owns mostly capital intensive, kind of subpar, businesses. Do you really want to own Fiat Chrysler long-term? CNH Industries? I understand the criticism. (And I’d point out that Berkshire started with a lousy business. Fairfax’s early businesses weren’t so hot. In fact, part of the short thesis early on focused on Fairfax as a roll-up of crappy insurers. Leucadia never had great businesses, if memory serves…)
I admit I have dreams where I wake up and discover Exor sold Fiat for a nice number… but I don’t think that’s going to happen. I do think Elkann will try to make a deal – either a merger or some kind of partnership. He was very close to Marchionne, after all, who delivered what may be the best presentation on the auto industry ever. (see “Confessions of a Capital Junkie.”) And it was not all that long ago when Fiat was in bad shape. Elkann, I am sure, has not forgotten.
There are catalysts on the horizon. Fiat agreed to sell Magneti Marelli, an auto parts supplier, for €6.2 billion. This should close in the second quarter of 2019. So Elkann will have fresh cash to deploy soon. (We already know some of it is going toward buybacks).
Price must also enter into the equation. Fiat and CNH are not great businesses, but arguably their valuations reflect this. And there is potentially good upside on tap for both.
So, I like Exor. Someday, perhaps, people will be writing stories about the great holding companies and they won’t leave Exor off that list. As I like to say, we’ll see.
You can find Elkann’s letter here.
This blog post is long enough, so I’ll stop here, except I want to share one thing from the mailbag…
*** Mailbag
“I enjoyed your piece on Rowe Price. John Train writes about him in The Money Masters. Apparently he was a rather vituperative, vindictive man who wouldn't think twice about humiliating his colleagues in front of others. He didn’t believe the firm would survive without himself so sold his entire shareholding to those colleagues when he retired. It was for a paltry sum compared to TROW’s $24b today. He also broke his own rule about not selling it should be said.”
Yes, I didn’t mention this in my review but Price seemed to be kind of a crabby guy. Not one to hang out with the fellas and have a beer, if you know what I mean. And he did break his own rules more than once, as he himself admitted. (And who among us has not broken our own rules?)
But I’d contest the idea that he sold his firm for a “paltry sum.” It didn’t seem so at the time. (And he sold it in pieces as the book points out). After he sold his firm, the 1973-74 bear market hit. Earnings collapsed and things looked bleak. In the very long run, the price may seem cheap, but keep in mind Price died in 1983. So, I think he did all right.
Thanks for reading. Write me at info [at] woodlockhousefamilycapital.com
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Published April 4, 2019
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