What do BMW, LVMH and Walmart all have in common? It’s not that they all contain the letter M. In fact, it’s that the founding family still retain a large ownership in the business.
While one may think that a family-owned company would be smaller in nature, some of the largest and oldest companies in the world still have a high degree of family ownership:
- BMW, the German car manufacturer, was founded in 1916 with the Quandt family holding around 49% of the company shares
- Walmart, the £352bn market cap American grocery company founded in 1962, is still significantly owned by the Walton family; and
- the origins of LVMH, the European luxury goods conglomerate, date back to 1743 with the Arnault family retaining a shareholding of around 48%.
The longevity and success of the aforementioned companies are just some examples of the concept of ‘Vested Interest Performance’ or ‘VIP’ Investing.
What is VIP Investing?
At CS Investment Managers, we define VIP Investing as ‘Vested Interest Performance’ and it’s a key philosophy underpinning our investment process. The aim is to preserve and enhance the value of a client’s capital by investing in a range of investments in which the fund manager or management team have a significant interest in the performance of the fund or company.
More commonly known as ‘skin in the game’, this philosophy means that it’s not just the investment reputation of the decision makers that is put at risk, but their own personal wealth too.
Perhaps it’s not surprising that when the fund managers or company management teams have a substantial part of their own wealth invested either in the management company or in the funds that they manage, investor alignment is stronger.
At CS Investment Managers, we believe that the transparency of a fund manager’s position should at least equal the transparency in the USA, where the US Securities and Exchange Commission requires managers to disclose their fund holding within stated bands.
Why is skin in the game important?
When dealing with private clients’ portfolios, we’re not just providing a service, but managing to best advantage an individual or family’s wealth, be it from lifelong savings, inheritance, or the sale of a business.
A plethora of objectives could be involved, e.g. to increase financial security, achieve lifelong dreams, set up family for their future or meet philanthropic goals.
Investing in companies or projects where the principals have a significant financial stake can offer a sense of reassurance. It indicates that the people in charge are not just interested in short-term gains but are dedicated to the long-term success.
Does it make a difference?
Yes, we believe it does. While not guaranteed, our research has shown that, on average, funds or companies with a vested interest have shown ability to participate strongly in the good times but also protect during difficult periods. This, compounded over a long term, has resulted in strong performance.
A study by Credit Suisse in September 2020 found that, on average, family-run companies carry lower levels of debt and have stronger balance sheets. During the financial crisis in 2008, family companies reduced debt levels quicker, thus providing more security. While this may mean that in the good years these companies don’t reach the same levels of growth, over a long-term horizon, they tend to do just as well, if not better, but with lower levels of volatility.
Is it essential?
No, but it can certainly make a difference. As an owner-managed business ourselves, we believe wholeheartedly in this concept. Not only does it align our interests with clients’ assets, but it also builds trust and confidence.
VIP Investing is about more than just financial commitment; it's about trust, accountability, and a long-term perspective. By aligning clients’ interests with those of the companies and funds within a diversified portfolio, we believe this increases the chance of meeting clients’ objectives over a long-term horizon.
An example of this concept can be seen from Hugh Grieves, co-manager of Premier Miton US Opportunities who, along with other fund managers, took part in Interactive Investor’s ‘skin in the game’ campaign. He said “Absolutely. And I think it’s great, I think fund managers should declare. I can’t see a reason why you wouldn’t want to invest in your own fund. It is the group of companies in America that I have the most conviction that anybody should be owning right now. So why wouldn’t I put most of my own money in my own fund?”
So, the next time you are reviewing an investment or your investment manager, why not consider, "do they have skin in the game?".
Sources: Refinitiv Eikon; Credit Suisse. All values correct as at 30th September 2023
