Since the late 1900s, the investment company has been popular with families of great wealth. Its structure permits family members to assume the role of majority shareholders, a position they can maintain even while expanding the pool of investible assets in a controlled fashion by issuing limited share capital.
But is it really a good idea to have a dominant family interest involved when it comes to managing money?
I’ve yet to meet a family that hasn’t got its fair share of tension and troubled relationships, with the danger of family disputes and the impact these can have.
Caledonia Investments (CLDN) hit the headlines in 2001 for this very reason.
Caledonia was launched in 1928 as the Foreign Railways Investment Trust Ltd, and the Cayzer family acquired it in 1955 to hold its investments. The Cayzers had built a successful steam shipping business since 1877 when they founded the Clan Line, which traded between the UK and India.
The Cayzer family has retained a substantial shareholding since making the acquisition, with members holding shares directly as well as through The Cayzer Trust Company Ltd (which comprises hundreds of family shareholders).
In 2001 Sir James Cayzer rejected an offer from the board to buy his shares held by The Cayzer Trust for £30 million; he believed their value was £40 million as the fund had persistently traded at a heavy discount to its net asset value (NAV) from the late 1990s. He put forward a resolution to allow family members at least one opportunity to sell their shares at a price closer to NAV. If approved, this would have to have been offered to all shareholders.
The motion didn’t succeed. This highlights one of the benefits of an investment company: the board of directors. The board must act in the best interests of all shareholders, and not just the more prominent ones. At the time of this dispute, the board was not fully independent; former chairman Peter Buckley’s mother was a Cayzer. Indeed, the board remains heavily populated with family members, although steps have been taken to redress this imbalance.
How did these squabbles affect performance, though? On a share price and NAV basis, Caledonia outperformed its peers in the Morningstar/AIC Global Growth sector and the MSCI World index each calendar year, from 2000 to 2003. Given the company is managed internally, and there is no external investment manager, this team’s focus wasn’t diminished sufficiently to impact returns. To be clear, those dissenting family members were frustrated at the wide discount to NAV at which the fund was trading. In 2001 and 2002, although the annual share price return was negative, the company lost much less money than its peers.
RIT Capital Partners (RCP) is another investment company with a strong family interest. It is home to the wealth of Lord Jacob Rothschild, who has been its chairman since setting it up in 1988 (in its current form). Lord Rothschild has a long career in the investing world and was a founder investor in a number of companies over the years, such as St James Place Capital and GAM. Unlike Caledonia, there are far fewer family members invested in this company as the family wealth hasn’t been distributed through generations to the same extent.
Capital preservation is paramount to this company and is a stated objective in the fund’s prospectus. It’s this mindset that has been a driving force behind the fund’s long-term record. Like Caledonia, the fund is managed internally. Unlike Caledonia, however, the fund has traded at a premium to its NAV more often than not over its history. While total returns may not have been as strong as those at Caledonia on a calendar-year basis, the shareholders haven’t faced the same frustrations as the Cayzer family. Since 2003 to the time of writing, the two funds are on a level playing field in terms of their NAV returns.
Then there’s Hansa Trust (HAN), in which the Salomon family own more than 51% of the voting share capital. At first glance, its investment portfolio looks far from conventional: at March 31, 2010, more than 39% of its assets were tied up in just one company--Ocean Wilson Holdings Ltd--and the weighting only changes as its value fluctuates. In other words, the managers don’t sell the shares in this holding. Ocean Wilson Holdings is part of a business acquired by Walter Salomon in 1959 so it quickly becomes clear why the portfolio is managed in this way.
In keeping with the two trusts already mentioned, Hansa is also managed internally. The Salomon family itself is no stranger to the investment management world: William Salomon (son of Walter) set up Finsbury Asset Management and Rea Brothers was the family bank.
Performance of the Hansa Trust depends to a great extent on the performance of Ocean Wilson Holdings. The trust has had a couple of rocky years in the past--2007 and 2008 were disappointing in price terms, although in 2007 its NAV did well.
What sets Hansa and RIT apart from Caledonia is the number of family members invested in the vehicle. In the first two, the family influence lies among just a few key individuals, whereas the latter has a vast number in comparison.
In all three cases, the fact they keep management in-house is a sign of their determination to protect their wealth. And even disputes haven’t detracted along the way. There’s much to be said for investing alongside such families where there is a strong sense of preservation of wealth. I can’t help but think my interests as an investor would be served well by virtue of the fact that we share the same investment fate; I’m not interested in losing capital and neither are they.
This article first appeared on Investment Week.
