Premiums up for grabs

Δημοσιεύθηκε: 7 Μαΐου 2015 - 23:13

Want to test your wealth manager's intelligence? Or patience? Try this brainteaser. Which of the following would have proved the best equity investment in the past decade?

a) An income fund that aimed to generate at least 110 per cent of the average FTSE 100 yield;

b) A conservative growth fund that aimed to return 1.5 percentage points over the London interbank offered rate;

c) A discretionary portfolio that aimed to achieve a positive absolute return of 3.5 per cent a year net of fees;

d) Shares in companies whose entrepreneurial founders aimed to give 150 per cent, 24/7, week in, week out, putting in the hard yards, going the extra mile, pushing the, er, envelope.

If your investment professional starts furiously clicking a spreadsheet to divide 24 by 7 and multiply by 1.5, be slightly worried. If he or she smiles and says, "Good joke. Entrepreneurs, eh, what are they like? Marvellous clients," be faintly reassured. But if the manager replies, "It's d), as demonstrated by Rudiger Fahlenbrach and Joel M Shulman", be impressed. If slightly pitying. But grateful. Because knowing this can make a bigger difference to your portfolio than is widely appreciated.

Until recently, the added-value of an entrepreneur-led business would typically be expressed in some kind of cliche-ridden anecdote. No one had successfully quantified the return on those extra miles and pushed envelopes.

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>As recently as May 2008, Arthur Korteweg of Stanford University and Morten Sorensen of the University of Chicago concluded the valuations put on entrepreneurial companies - and hence the assumed investor returns - were hopelessly unreliable because they were skewed by successful companies' financing rounds, flotations and acquisitions, or, as they put it, "problems arising from the endogenous timing of the observed valuations are substantial". Academics, eh, what are they like?

Admirably persistent, thankfully. Less than a year later, Fahlenbrach, at Ohio State Fisher College of Business, having determined 11 per cent of the largest US public companies were still entrepreneur- or founder-led, backtested the return from their shares between 1993 and 2002. He found it was 8.3 per cent a year - from which he deduced the "abnormal return" attributable to entrepreneurial behaviour was 4.4 per cent annually.

However, others have suggested a much larger entrepreneur premium persists. Studying US public companies between 1998 and 2010, Shulman used 15 attributes to pick out those still operating in an entrepreneurial way - such as above-average ownership by key stakeholders, low expenses and long-serving key managers. Irrespective of market capitalisation, these companies' shares beat benchmark indices by several extra miles. Over 12 years, small-cap entrepreneurial companies produced the strongest results, with a total shareholder return of 3,000 per cent. Large-cap entrepreneurial companies returned 2,400 per cent and mid-caps a mere 1,800 per cent. Over the same period, the comparative S&P 500, Russell 3000 and Russell 2000 indices returned -2 per cent, 3.53 per cent and -1.25 per cent respectively.

<>Part of the reason for these "extraordinary premia" - Shulman puts them at 21.95-27.86 per cent a year - is the extra risk taken on. His entrepreneur share baskets exhibited considerably higher standard deviations than the indices. Korteweg and Sorensen found the beta of entrepreneurial companies - how much they amplify market moves - ranged from 2.6 to 3.

But actual investors suggest the long-term outperformance is no fluke. Robert Ruttmann, investment specialist at private bank Julius Baer, says companies run by entrepreneurial families have "a multi-generational competitive edge" thanks to their long-term focus, conservative financial management and emotional commitment.

Carmignac, the asset manager, has set up a Euro-Entrepreneurs fund to capture this threefold advantage. Its manager, Malte Heininger, says: "Entrepreneurial clients tend to be enthusiastic about other entrepreneurs and are keen to back promising, ambitious, founder-led businesses."

For some advisers, though, this can be a problem. "There is a tendency to seek out opportunities in the asset class with which they are familiar," admits Stephen Skelly, private wealth solutions head at HSBC Private Bank. "Our job is to encourage clients to diversify their risks." Pushing the money back into the envelope, so to speak.

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