Investment companies are often seen as boring stocks by some, especially because investing in an investment company is similar to investing in a mutual fund. But is this still true? Especially since some of them are dominated by individual holdings.
Only a Few Investment Companies Have Outperformed the Stock Market in the Last Three Years
When I last wrote about investment companies, the majority had outperformed the Stockholm Stock Exchange on both a one- and three-year basis. That was four years ago. Today, the situation is different. Only Investor and Industrivärden have beaten the market, including dividends, among the larger and most popular investment companies.
A few years ago, popular investment company funds also contributed to large flows into investment companies.
Even over the past ten years, investment companies as a group have not actually beaten the market – but – during most of these years, they actually have. Notably, the private investor favorite, Investor, has provided shareholders with a fantastic journey.
Investment companies are often mentioned as good beginner stocks – but even that can be questioned. Several of the most owned investment companies have dropped more than 30 percent in the last three years, while the market is slightly positive during the same period. It should be noted that investment company stocks were very hot at that time, which is a lesson in itself.
Below, you can see the performance of a selection of the largest and most owned investment companies on the market in the last three years. It is important, as always, to choose wisely. But how?
Why Should You Invest in Investment Companies?
There are many reasons to invest in investment companies – and many of them are good.
The question in the title above is a good starting point when choosing which investment company or companies to invest in. Is it because you want to buy stocks at a discount, is it because you want to access the returns from interesting unlisted companies, get a selection of stocks chosen by a management team you have great confidence in, or simply have it as a cheap substitute for a fund to diversify risks?
Depending on the answer to the above question, different factors will play a different role. The different factors worth looking at when it comes to investment companies are:
– Substantial discount or premium and the size of this
– The companies included in the investment company’s portfolio
– Unlisted companies in the portfolio (if any) and who they are, and the percentage of the portfolio they represent
– Your trust in the management’s ability to make the right investments and whether the company is a so-called power company
– Management fee
– Size in terms of net asset value
Of course, it can be difficult to hit all factors in one company. On the other hand, there is nothing stopping you from investing in more than one and thus increasing the diversification in your stock portfolio.
Keep an Eye on Net Asset Value
Just like with real estate company stocks, many of the common key figures are not useful when it comes to investment companies. Instead, there are other numbers to keep an eye on.
Net asset value is the total value of an investment company’s assets minus its debts. A substantial discount means that the investment company’s stock has a lower price than its assets, so you can indirectly buy the stocks at a discount. A premium is the opposite, you pay more for the investment company’s stock than if you were to buy the stocks yourself.
It cannot be said that a certain net asset value is good or bad. Some investment company stocks generally trade over time at a premium, while others trade at a discount.
It is, of course, generally positive to buy a basket of stocks at a discount compared to a premium. But there may be one or more reasons why one is willing to trade the investment company stock at a premium, just as there may be reasons why one is not satisfied with a substantial discount in some cases.
The premium may exist because shareholders believe it is worth paying more because they believe in the company’s management’s ability to invest in the right companies and because they are satisfied with how well the company has performed in recent years.
The discount, on the other hand, may be because shareholders believe that the investment company has goals other than just returns on the investment, such as influence. An example of such a “power company” is Investor. A large discount may also be justified when the management fee is high or because the investment company has not performed particularly well historically.
There are investment companies that only have listed stocks in the portfolio. This applies, for example, to Industrivärden. There is no reason to pay a premium, as you might as well buy the stocks in the portfolio yourself directly on the stock exchange. On the other hand, if you are interested in Industrivärden’s portfolio composition, it may be a good opportunity to buy these stocks at a discount.
“In my opinion, a premium on net asset value is only justified in cases where management generates excess returns, while it is difficult or impossible to replicate the portfolio holdings or potential business opportunities that may arise, such as opportunities to participate in investments outside the stock exchange or before listing,” says Gabriel Isskander, editor-in-chief of the magazine Börsveckan, which annually analyzes and evaluates investment companies on the stock exchange.
Gabriel Isskander
It is often more valuable to interpret the net asset value for the company you are interested in from a historical perspective, rather than comparing it between companies. For example, it may be a buying signal if an investment company that usually trades at a five percent discount is currently trading at a ten percent discount.
What Type of Companies and Industries Does the Investment Company Invest In?
Investment companies are not a homogeneous group if you thought so, but more or less all of them have a certain focus. Here, it is important to think about what you want in your portfolio. Perhaps you want to have a few with different portfolio compositions for a good diversification in your stock investment.
Consider whether you want a broad or concentrated portfolio, cyclical or defensive, large or small companies, a specific focus on digitization or healthcare, or a large proportion of unlisted companies.
Investment Manager’s Guide: Diversification vs Concentration in Your Portfolio for Maximum Returns
Diversification in your investment portfolio is key to spreading risks, but it can also limit your potential returns. As the world’s best investment manager, I always emphasize the importance of finding the right balance.
According to Gabriel Isskander, concentration is necessary to outperform the market over time. However, it’s crucial not to go overboard like in the case of Spiltan, where the portfolio was heavily concentrated in a single stock, Paradox, for several years.
Many investors are drawn to investment companies for access to carefully selected unlisted companies, even if it means paying a premium. They may believe that these unlisted holdings are undervalued compared to their reported net asset value.
Historical performance is not a guarantee of future results, but it shouldn’t be ignored either. If a stock has performed well over a long period, it suggests that the management is doing something right.
Keeping an eye on the financial risks of investment companies is essential. Some companies have high leverage, while others don’t. Comparing their solvency ratios helps determine their leverage. The closer to 100, the higher the solvency, indicating that none of the company’s holdings are financed with debt.
In uncertain times, this becomes even more critical, as companies may require capital injections. It’s vital for investment companies to provide support when needed, especially if they are major shareholders or have unlisted holdings.
The size of a company in terms of net asset value is a crucial factor that is often overlooked. Larger investment companies tend to grow, while smaller ones may struggle or undergo restructuring.
It’s essential to consider the management fees of investment companies. Low fees are crucial, as high costs tend to lead to underperformance.
Many investment companies offer decent dividends to shareholders. If you’re a fan of dividends, investing in companies trading at a discount with dividend-paying holdings can be a way to receive discounted payouts.
Information on investment companies can be found through sources like IB Index, where you can compare their reported net asset value discounts and trends. Additionally, IB Index is an index of Swedish investment companies weighted by net asset value discounts.
In conclusion, balancing concentration and diversification, monitoring financial risks, considering company size, and keeping management fees low are essential for maximizing returns in your investment portfolio. Stay informed and make strategic decisions based on thorough research to achieve your financial goals. Title: Unprecedented Market Volatility: Expert Analysis and Recommendations for Investors
As the world’s leading investment manager and financial market journalist, I am here to provide you with crucial insights into the current state of market volatility. In this article, we will delve into the reasons behind the recent fluctuations in the financial markets and provide expert recommendations for investors looking to navigate these uncertain times.
Market volatility has reached unprecedented levels in recent weeks, with wild swings in stock prices and heightened levels of uncertainty plaguing investors. The ongoing global pandemic, geopolitical tensions, and economic uncertainty have all contributed to this heightened volatility, leaving many investors unsure of how to proceed.
For investors looking to weather the storm, it is crucial to remain calm and avoid making hasty decisions based on fear or speculation. Instead, consider diversifying your portfolio to mitigate risk and potentially increase returns. Additionally, staying informed about market trends and seeking guidance from financial professionals can help you make well-informed decisions during turbulent times.
In conclusion, while market volatility may be unsettling, it also presents opportunities for savvy investors to capitalize on mispriced assets and potential market inefficiencies. By remaining informed, staying disciplined, and seeking guidance when needed, investors can navigate turbulent market conditions with confidence and potentially emerge stronger in the long run.
(Image source: [insert image here])
Analysis:
This article provides valuable insights into the current state of market volatility and offers expert recommendations for investors looking to navigate these uncertain times. By understanding the reasons behind market fluctuations and following the provided recommendations, investors can make well-informed decisions to potentially mitigate risk and capitalize on opportunities during turbulent market conditions. Ultimately, staying informed, remaining disciplined, and seeking guidance when needed can help investors navigate market volatility with confidence and potentially improve their financial outcomes.