Profile of an investment company
More and more investors are wondering how to achieve an excess return in today's market environment with enduringly low interest rates and higher levels of volatility without investing in individual stocks. Well-managed investment funds with a global, regional or sector-specific investment approach are a good option – provided that they have a long-term track record of outperformance in their particular category.
An often overlooked and yet equally promising alternative in this environment are listed investment vehicles whose returns are driven by fundamental value chains and the earnings of companies in their portfolios in the form of dividends, for example, or stock transactions.
These investment vehicles, which invest in promising companies, are like investing in multiple stocks with a single stock while addressing investor wants in terms of diversification, a long-term business model and predictability – but without the time-consuming and challenging task of selecting which stocks to invest in. Investment companies operate with significantly more freedom than the more heavily regulated open-ended investment funds.
They can invest in all publicly listed companies and provide venture capital to business entities within their applicable legal and regulatory environment. Thanks to their flexibility, the portfolios of investment companies can also include less liquid stocks in fast-growing markets, companies at different stages of development, or even pre-IPO investments. The advantage here is that as yet undetected – and inexpensively valued – businesses with global market leadership potential can be added to the portfolio before they appear on the radar screens of the mainstream investment community.
Yet another advantage is that investment companies can hold higher levels of cash while they wait for the best entry points. Collective funds with variable capital, by contrast, must maintain lower cash allocations and generate the necessary liquidity whenever their investors want to sell their fund units. The liquidity that is made available to listed investment companies, on the other hand, is at their disposal over a long-term horizon, and the buying or selling of their shares in the open market does not trigger any portfolio inflows or outflows.
Success factors for investment companies
Investment companies that can deliver a strong performance over the long term are distinguished by the following strategic success factors:
- Experienced management
- A sustainable business model that is not easy to copy
- A common understanding regarding future corporate development
- A structured investment process and stringent risk management
- An active dialog with the executives of portfolio companies
- A long-term investment focus, eschewing short-lived trends
Other examples of successful investment companies besides BB Biotech are Berkshire Hathaway and Investor AB, the investment company controlled by the Swedish Wallenberg family.