EM equities: Keeping it in the family

01/11/2017

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Glen Finegan, Head of Global Emerging Market Equities at Janus Henderson Investors, believes that family ties make for a formidable force in both business and investing.

While wealth generation is a goal for all businesses, some family firms appear to place an equal emphasis on the goal of longevity. Each successive generation attempts to pass on the baton to the next and maintain the good name of the family. We believe that this combination helps create a long term and risk-aware approach to allocating capital and is why we favour such groups within the context of accessing the global emerging markets investment opportunity.

Unique ownership structure

The unique ownership structure of family businesses gives them a long-term orientation that traditional public firms often lack. The cautious chief executive who balances both risk and reward will be fortunate to remain long at the head of a listed company. Since bonuses and share prices are often related, together they call for maintaining a certain head of steam in terms of business performance. Any diversion from maximising profits on a consistent quarterly basis is likely to lead to dismissal.  It therefore makes it an entirely rational decision for an executive management team to prefer to fail conventionally by following the herd and taking on too much risk, than never fail at all.

To many, the phrase ‘family business’ denotes a small or mid-sized company with a local focus. This does not, however, reflect the powerful role that family-controlled enterprises play in the world economy today. Not only do they include corporations such as Walmart, Heineken, Tata Group, and Porsche, but they account for more than 30% of US, French and German companies with sales in excess of US$1bn, according to analysis from Boston Consulting Group (BCG).

Family-controlled businesses are more prevalent in emerging markets. BCG research indicates they account for approximately 55% of large companies in India and Southeast Asia and 46% in Brazil. The significant presence of these types of businesses within our opportunity set, and our belief in the ability of such groups to generate wealth in a risk-averse manner, helps to explain the significant presence of controlling family groups within the portfolio. In aggregate they make up over a quarter of the capital invested and account for five of the top-ten holdings as at 30 September 2017*. These investments can be in the form of exposure to a single listed entity, such as in the case of Uni-President Enterprises, or to a number of entities under the control of a single family. This is the case with our ownership of the individually listed equities of Antofagasta, Quinenco and Compañia Cervecerias Unidas. These are all entities majority controlled by the Luksic family based in Chile.

*Source: Janus Henderson Investors

Selectivity is crucial

Often the more complex a conglomerate’s corporate structure, the greater the potential for misalignment between controlling-family interests and those of shareholders. Equally, having a simple organisational structure is not a guarantee for sensible alignment. At the heart of the issue for minority investors is whether there is an alignment between voting rights and access to cash flows and financial returns.

Trust has to be earned and we do not simply make an assumption that a family owner will act in the common good and emphasise stewardship over greed. The case of Samsung Vice Chairman Jay Y Lee allegedly paying government officials to gain government support for a merger of Samsung C&T and Cheil Industries speaks to the fact that not all family-founded firms create strong governance structures that protect minority shareholders.

We test this premise through our fundamental bottom-up research and we ask questions such as:

  • How has the family treated its minority shareholders in the past?
  • What businesses do the family own outside the listed entity and are there conflicts of interest?
  • Are there good quality independent board members providing oversight?
  • Does the family conduct government-related business and if so how does it win contracts or licenses?
  • How is the family regarded by non-financial stakeholders such as local communities and environmental non-governmental organisations?

These lines of enquiry help us form a view of quality over and above looking at historical financial returns. We want to see returns that have been generated in a risk-aware manner as this fits with our absolute, rather than relative, return approach to what are more risky markets, often with weak rule of law.

Profiting from uncertainty

Another attraction of long-term owners, such as families, is their ability to take far-sighted, sometimes contrarian decisions, that a professional management team more focused on short-term results and stock market pressure might not.

A chief executive with a reduced time horizon can take decisions that are influenced by the short term and often pro-cyclical moves of the stock market, which can hurt the long-term value of a business. This is particularly the case in commodity and cyclical sectors of the market.

An example of longer-term thinking comes from family-controlled Chilean miner Antofagasta, which is controlled by the Luksic Group and announced in July 2015 the acquisition of an excellent copper asset from a financially-distressed seller. In contrast to many of its peers, Antofagasta had maintained a strong balance sheet throughout the last decade and was able to act while other miners, facing pressure from a weakening copper price and highly levered balance sheets, were forced to dispose of high-quality assets. This counter-cyclical behaviour by Antofagasta is exactly how we believe mining companies should act but it requires a management team able to resist short-term market pressure, which in this case the family provides.

Resilient businesses through market cycles

These types of controlling groups also importantly tend to share our belief in a long-term approach to investment. They also put themselves in this position by being risk aware when it comes to the amount of debt that the business is willing and able to hold.

In modern corporate finance a judicious amount of debt is considered a good thing because financial leverage maximises value creation through the leverage of returns. Family-controlled firms, however, associate debt with fragility and risk. Debt means having less room to manoeuvre if a setback occurs and can also lead to being beholden to a bank or bond markets during periods of cyclical economic weakness.

Ensure alignment of interests

Emerging markets present a distinctive context in which to operate a business, with constant evolution in economic, political, regulatory and financial conditions. The prudence shown by family-controlled groups can allow them to navigate these conditions in a manner that supports long-term value creation. Backing families with good reputations that share our belief in a long-term approach to investment is, in our view, an important way to align interests and deliver ‘risk-aware’ returns for investors.

Glossary

Absolute return – The total return from a portfolio, as opposed to its relative return against a benchmark. It is measured as a gain or loss, and stated as a percentage of a portfolio's total value.

Balance sheet – A financial statement that summarises a company's assets, liabilities and shareholders' equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders. It is called a balance sheet because of the accounting equation: assets = liabilities + shareholders’ equity.

Cash flow – Cash generated from a company’s trading activities taking into account expenses, which indicates if a company has had more inflows or outflows over a given period. Over the medium to long term positive net cash flow (total inflows minus outflows) is required to sustain trading and meet financial obligations.

Cyclical stocks – A cyclical company’s value or earnings tend to be strongly affected by ups and downs in the overall strength of the economy, when compared to non-cyclical companies.

Leverage – The use of debt / borrowing by a company to operate and potentially generate greater (but riskier) returns.

Listed company – A company listed on a stock exchange, which is available for investment.



Note: The stock examples are intended for illustrative purposes only and are not indicative of the historical or future performance of the strategy or the chances of success of any particular strategy. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Emerging Markets Fund

The Janus Henderson Fund (the ""Fund"") is a Luxembourg SICAV incorporated on 26 September 2000, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the Fund’s registered office in Luxembourg: 2 Rue de Bitbourg, L-1273 Luxembourg”, in Germany: Janus Henderson Investors, Tower 185, Friedrich-Ebert-Anlage 35-37, 60327 Frankfurt am Main, in Austria: Bank Austria Creditanstalt AG, Am Hof 2, 1010 Wien, in Spain: offices of the Spanish distributors, a list of which may be obtained at www.cnmv.es (Janus Henderson Fund is registered with the CNMV under number 259); in Belgium: Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; in Singapore: Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; and in Switzerland from the Swiss representative: BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, CH-8002 Zurich who are also the Swiss Paying Agent.

Please note that Isle of Man investors will not be protected by statutory compensation arrangements in respect of the Janus Henderson Fund. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Information on this document is on Henderson's best endeavours.

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • Emerging markets are less established and more prone to political events than developed markets. This can mean both higher volatility and a greater risk of loss to the Fund than investing in more developed markets.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

Janus Henderson Emerging Markets Opportunities Fund

Please read all scheme documents before investing. Before entering into an investment agreement in respect of an investment referred to in this document, you should consult your own professional and/or investment adviser.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street, #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

Information on this document is on Henderson's best endeavours.

Specific risks

  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.

Risk rating

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