8 questions and answers about holding companies
January 17, 2024
3 minutes to read
1. What are holding companies?
A holding company is a parent or umbrella company that holds shares in other companies. Typically, a holding company doesn't manufacture anything: it doesn't sell any products or services, nor does it conduct any other business activities. Generally speaking, a holding company only supervises (or guides) management decisions without actively participating in its subsidiaries' day-to-day activities. Berkshire Hathaway is the world's largest – and perhaps best-known – listed holding company. Warren Buffet's holding company covers more than 60 companies, which it owns either in whole or in part. You can also find several holding companies listed on the Brussels stock exchange, such as Sofina, Brederode and Ackermans & van Haaren. Holding companies not only hold a minority or majority stake in other companies; they can also invest in real estate, manage patents, and much more.
2. What are the advantages of investing in holding companies?
Holding companies are an interesting option for diversification. Investing in a holding company means you invest in several companies – albeit indirectly. You may invest in just a few companies, but many holding companies cover dozens – or even hundreds – of companies. One exception to this rule are holding companies that only hold a stake in one company. The diversification provided by holding companies offers several advantages. First and foremost, it is a simple way of spreading the risk: if one or several subsidiaries are struggling, the other companies can compensate for the loss. Second, holding companies are able to invest in companies that are not listed on the stock market – giving you access to companies you would otherwise never be able to invest in as a private individual. By investing in holding companies, you also benefit from the expertise and a network of experienced investors. Such investors often have years of experience in identifying promising companies and markets, which can in turn lead to better investment decisions and potentially higher returns. What's more, if you invest in a listed holding company, your investment is also more liquid than a direct investment in private companies. In other words, you can sell your holding in a listed holding company at the touch of a button, while you have an entirely different process to follow with direct investments.
3. What are the disadvantages of investing in holding companies?
Gaining an in-depth understanding of the exact activities and financial health of the underlying companies can be a challenge – especially when it comes to unlisted companies. Holding companies often publish consolidated figures, which makes it difficult to assess individual companies' performance. You have to take the time to evaluate all stocks in the holding company in order to calculate the discount or premium (see also question 4).
As an investor in a holding company, you have no direct influence on the operations carried out by the subsidiaries. Your voting rights and influence are more limited compared to direct shareholders (although such influence is negligible for an individual, private investor).
4. Why are holding companies sometimes listed at a discount?
A discount means a holding company's market value is less than the sum of its investments. This may seem strange at first glance, but there are a few worthwhile explanations to bear in mind. One reason is liquidity risk. A holding company cannot simply sell a company in the blink of an eye if things go awry. This may be the case if, for example, it holds a majority stake and it is unwise to sell off all the shares in one fell swoop, or it owns shares in a company that is not listed on the stock exchange, which makes it more difficult to find buyers.
Another reason for a discount is the visibility risk. After all, a holding company isn't obliged to disclose all of its subsidiaries' figures. As an investor, you are not always sure what you are investing in – and this is another reason why a discount may be involved. After all, you can often invest in holding companies at a greater discount in times of (expected) economic uncertainty or when stock market sentiment is falling. That said, holding companies can also be listed with a premium, which means the holding company's market value is greater than the sum of its investments. And it is especially true that investors are willing to pay more to invest in holding companies that succeed in beating the market year in, year out.
5. Are family holding companies more attractive than non-family holding companies
Some holding companies are managed by families, often over several generations. And because the family's fortune is invested, there is also more at stake on a personal level. A holding company run by a handful of 'anonymous' managers who don't put their own money on the line is something else entirely. After all, a family holding company will not 'play' with the family's wealth and will prefer not to build up too much debt. This slightly more cautious approach may make family holding companies less successful during periods of economic prosperity, thought it does increase their chances of surviving in times of crisis and achieving a healthy return in the long term. Family holding companies are generally far more patient and more likely to mature their investments over time, which can lead to higher returns in the long term.
6. What running costs are associated with a holding company?
If you invest using an investment fund, you pay for the services provided by the manager. Even so, there is also an entire team of analysts working behind the scenes – all of whom want their slice of the pie. Depending on the fund, you can easily pay between 0.5% and 2% per year in management fees for active management, on top of any entry fees.
The running costs are much lower if you invest in a tracker – another way of diversifying – and typically range from around 0.05% for highly popular trackers to 0.50% for thematic or more specialised trackers. Holding companies often lie somewhere in the middle. You should expect running costs of around 0.50%, although it varies significantly depending on the holding company.
7. What about the return?
Unlike mutual funds, which rarely manage to beat the market year after year, holdings can present better assets over the longer term.
Anyone who opens the newspaper in January sees the same story almost every year: holdings historically beat the stock market smoothly. Many Belgian holdings do not have to underperform in this respect. Most of them significantly outperformed the Brussels BEL20 index in the past, although they did create a false note in 2023. Investing in a holding company will allow you to generate returns in three ways. First, you may profit from increases in the net asset value by gaining more stocks (think of IPOs of subsidiaries, for example). Second, you can simply follow the market sentiment and any general economic developments, and the markets will often be ahead of the curve. Last, there is often a dividend yield, which is particularly attractive for holding companies with large listed holdings.
8. How should you choose a holding company?
As a rule, past returns offer no guarantee for the future. Yet in the case of holding companies, historical performance certainly represents an indicator that should be taken into account. Holding companies that have outperformed the market for years and consistently create value for their shareholders may be a better buy than holding companies that have been lagging behind for years. It goes without saying that you should delve deeper into the information at your disposal. Some holding companies are not particularly diversified, or may be highly exposed to a certain region or sector. Some holding companies invest primarily in private equity, while others mainly have listed companies in their portfolios. The holding companies' websites generally list the most significant holdings. If you are never likely to buy into most of the companies involved yourself, you have found the right holding company for you.
You should also pay attention to the debt ratio: the less debt a holding company has, the better. This will ensure the holding company is not on a knife edge in the event of a downturn, and doesn't have to be forced into selling.
Want to invest in holding companies, too?
- Log in to Keytradebank.be on your laptop or desktop - Click on Advanced at the top, next to Search by instrument name, symbol or ISIN - Tick the asset class you want (trackers, funds, shares, etc.) - Search by holding company name