Investor AB: The Swedish Industrial “Mini/Baby”-Berkshire

I believe Investor AB is well know by most investors, even non-Swedish investors. It has an outstanding track-record of growing net asset value (NAV) for over a century.

In this analysis I bring forward some arguments for why I’m long the stock, and why I believe it will continue to outperform. I believe the simplest investment ideas are the best, and Investor AB fits this idea nicely: You simply invest in a group of capital allocators that historically have an outstanding track-record: the Wallenberg family.

As always, the article is not a recommendation to buy or sell – do your own due diligence.

Summary: I’m long Investor AB because of these reasons:

  • 100 years of successful investing. Investor AB has outperformed the Swedish index.
  • The Wallenberg family controls the company, and they have proven themselves as good capital allocators.
  • The Wallenbergs and management think like owners.
  • I look at Investor as an active mutual fund (22 major holdings) with a very low management fee (0.11% of market cap).
  • It has a proven philosophy and culture developed over 100 years.
  • Management has skin in the game and substantial ownership.
  • Operates mainly in the Nordic/Scandinavian region, a well functioning part of the world with social and economic stability.

The Wallenberg’s track-record from 1916 to 2015 reads like this:

Investor AB: Share price performance back to 1916. Source: Annual report of 2015.

The more recent performance from year 2000 until 20th of April 2020 looks like this:

Investor AB: share price performance (left axis, logarithmic) and rolling 5-year CAGR (right axis).

We can spend hours on calculating or measuring the performance of their investments, but in the long run the share price reflects their ability to pick which companies to invest in. Investor AB is a long-term investment, not a vehicle for short-term opportunistic “asset play”. Sweden is an industrial powerhouse, and Investor’s holdings reflect this (many holdings are cyclical industries). This can be seen by the poor performance in 2002/2003 where the share price dropped 55% from the peak in early 2002. However, the drop in 2008/09 was less severe with “only” 40%. Despite its cyclical nature, the share price has over many business cycles performed very well.

The business:

The common denominator for Berkshire and Investor AB is capital allocations, which they both have done pretty well, admittedly Berkshire has performed better in terms of CAGR. But Investor AB is not far behind and additionally has a much longer track record dating back to 1916 when it was founded by the famous Swedish Wallenberg family. Furthermore, Investor AB has no insurance business and float to invest, but apart from that it does the same thing as Berkshire: it takes positions in listed securities and acquires smaller unlisted companies. Their preferred location for investments is in the Nordic region (Norway, Sweden, Finland, Denmark and Iceland), but occasionally they invest outside this region.

Investor AB is an investment company, they are not operators, which they leave to the local management. However, they only invest in companies where they can obtain a substantial ownership and board participation. This means they to certain extent take a “hands-off” approach in how to run the daily businesses.

Currently the business is divided into three segments:

  • Listed core investments (69% of total assets)
  • Patricia Industries (unlisted assets, 23% of total assets)
  • EQT (7% of total assets)

In the listed core investments segment most of the holdings have been owned for decades, even centuries. Their first holding dates back to 1856 when André Oscar Wallenberg founded Stockholms Enskilda Bank, now Skandinaviska Enskilda Banken (SEB), still a major part of their holdings. During the 1870’s, when Sweden was hit by a recession, the bank became the owner of several industrial companies, customers to the bank, by converting debt into equity, in order to protect its capital. Swedish legislation restricted the banks’ ability to own other companies, and thus Investor AB saw the day of light in 1916 to become an owner company. The second oldest holding, Atlas Copco, became part of Investor AB as well. Other long-time holdings are AstraZeneca and ABB since the 1920s, SAAB since the 1930s and Ericsson and Elektrolux since 1950s.

The main priorities are threefold (in this ranked order):

  1. Grow the net asset value.
  2. Operate efficiently.
  3. Pay a steadily rising dividend.

Personally I’m not so happy about number three, something I will get back to under the heading called “The dividend”.

To read more about the history of Investor AB I recommend the annual report of 2015 which marked the 100 year anniversary.

The investment portfolio:

At the end of 2019 the investment portfolio consisted of these holdings:

Investor AB: The investment portfolio. Source: annual report 2019.

Atlas Copco is, in my opinion, the best company among the listed companies with a terrific long-term performance. Most of these holdings are typical cyclical and industrial, with the exception of Nasdaq, AstraZeneca and Sobi. Epiroc was spun-off from Atlas Copco in 2017/18. In Sweden many listed stocks have dual share classes, as can be seen from the list (ownership differs from voting rights).

The unlisted holdings are a bit more interesting because most of them are related to healthcare, with the exception of Piab (industrial) and Vectura (real estate management). Healthcare is a sector that most likely will have a decent tailwind in the decades ahead: It’s a mega-trend where an ageing population and better living standards in the developing world create outstanding opportunities. Mölnlycke, by far the biggest holding, has a considerable long runway left, according to the management, due to its global sales.

EQT AB was co-founded by Investor AB in 1994 and differs from the rest of the holdings. It’s a manager of private equity and infrastructure funds, in total 19 funds and 40 billion EUR under management, which contributes to 7% of the NAV at the end of 2019. Investor was one of its founders back in 1994 and now owns 18% of EQT. In October 2019 EQT was listed on Nasdaq Stockholm, and Investor let its holding be somewhat diluted to secure a sufficient free float.

Management, competitive advantage and skin in the game:

The ownership structure can be found on this link. There are two classes of shares: class A shares each confer one vote, and class B shares one-tenth of one vote. The Wallenbergs control 50.1% of the voting rights, which in effect put them in complete control of the company.

The fourth generation of Wallenberg is on the board, and all four of them have successfully navigated the company to outperformance. Is this likely to continue? I believe so. The Wallenberg family influences the Swedish society hugely. The company is a highly desired workplace and they can attract the most competent analysts and allocators, resulting in long-term development of skills, learning, mindset and knowledge. I believe there is a strong corporate culture which thinks like long-term owners. Today Investor AB employs 92 people who oversee their investments and keep looking for new opportunities.

Most of the voting rights are owned via foundations. The board owns about 1 million shares, about 500 million SEK (50 million USD), where Jacob and Marcus Wallenberg own the most. Management owns almost 200 000 shares where CEO Johan Forssell owns 66 000, worth about 32 million SEK. All in all I would say both the board and the management has a significant skin in the game, aligning the interest of the outside shareholders. All Investor employees are given the opportunity to invest approximately 10-15 percent (or in some cases more) of their gross base salary in Investor shares. In 2018 approximately 92 percent of Investor’s employees participated in the Long-Term Variable Remuneration program.

The dividend and capital allocation:

The priority to pay a steadily rising dividend leads to a very sticky way of “rewarding” shareholders. I asked Investor’s IR and the answer is many of the big shareholders want a steady dividend, foundations for example.

However, there are four arguments against this thinking:

  1. Why is this preferred over buybacks and potential reinvestment opportunities?
  2. As you start paying a rising dividend, it gets “sticky” and hard to reverse. It has the potential of attracting what Benjamin Graham called “ignorant coupon clippers – not business owners”. Attracting the “correct” shareholders is important for long-term wealth creation.
  3. A dividend is an “income” that often is taxable.
  4. Managements often mouth that paying a dividend is doing something for shareholders, but it’s precisely the opposite. Dividends do nothing for shareholder unless it’s reinvested (unless you use it for consumption). When the burden of reinvesting is transferred to the shareholders, it means you have to get off your ass! Shareholders can sell shares to get “income”.

The dividend is pay twice a year: for 2019 14 SEK is proposed, where 10 SEK is paid in May 2020 and the rest in November 2020.

According to the annual reports the historical dividend payments look like this:

Investor AB: dividend history. Source: Annual reports.

Clearly, in tough times the board is careful and reduces the dividend, if needed, to support their businesses, which of course makes a lot of sense and is in the long-term interest of the shareholders.

Very little buybacks have been done over the years. The latest were done in 2009 to hedge their program for share-based remuneration. No other buybacks have been carried out since the board considers it more attractive from a long-term return perspective to invest capital in new and existing holdings (and prefer dividends to buybacks).

The balance sheet:

The Swedish business mentality is one of prudence and conservatism, and Investor AB is no different. At the end of 2019 net leverage was a very modest 2.8%. Investor’s target leverage range is 5-10 percent over a full business cycle. While management allows leverage to fluctuate above and below the target level, it should not exceed 25 percent for a longer period of time. The idea with the leverage policy is to allow to capture investment opportunities and support their companies when opportunities arise.

Valuation:

Every quarter a NAV is calculated. The core listings and EQT are of course easy to value, while the valuation of the non-listed businesses is based on stock market valuation of similar companies, mainly EV/EBITDA. Investments made less than 18 months ago are valued at cost. It does not make sense to use P/E as a valuation tool for an investment company, but net asset value does:

Investor AB: Historical discount to NAV. Source: Annual reports.

Today’s discount seems to be about average for the last 20 years. Because of the difficulty of valuing the non-listed companies, I assume Investor will always be trading with a discount to NAV.

Conclusion:

Investor AB is a family-owned asset allocator which has proven itself for over 100 years with four different generations at the helm, and additionally they think like owners and have long-term mindset. Despite its growth in assets under management, I believe the runway is still long as the valuation of the investment universe also increases.

I’m long, and intend to add on pullbacks.

 

Disclosure 1: I am not a financial advisor. Please do your own due diligence and investment research or consult a financial professional. All articles are my opinion – they are not suggestions to buy or sell any securities.  

(This article was published on the 23rd of April 2020.)

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