What's wrong with Investor AB?

[turboseize]

(@ mods: Have not found a stockpicking thread, if there is one, and you see this topic to fit better in that thread than to stand alone please feel free to move it)

Investor is a swedish holding founded in 1916. They concentrate on traditional industry and healthcare, but also invest in start-ups and real estate. They focus on companies from nordic countries. Seeing themselves as long-term investors, they aim at gaining influence through substantial minority ownership and capital provisions.

There are A- and B-shares, the first with 1 vote, the latter with 1/10th of a vote. The Wallenberg family controls 50% of the votes. Dividend is the same for both (7 SEK). With last years earnings (and, Q3 interim report looks like this year should not be worse, but better) and current prices, that means a dividend yield of 3.36% and P/E of 6.37. Sounds to good to be true. And why are A shares (full vote!) on a discount compared to B shares (1/10th vote), if both pay the same dividend?


Risks I see:
- Concentration risks: listed investments are concentrated in traditional industry (very sensitive to business cycles) and health care. Within these sectors they are not very diversified. Their real estate is tied to their healthcare (and hotel) business.
- financial risk: investor guarantees a 4bn SEK loan to 3 Scandinavia (which does not show up on the balance sheet).
- "political risk": obviously, nothing happens against the Wallenbergs. (But then, this might also be an advantage: the Quandt family doesn't seem to harm BMW, for example...)
- and the obvious: currency risk. At the moment, the swedish crown is strong against the euro, this might well change someday (although I do not expect this to change as long as Draghi runs the ECB).

Is there anything I have missed? Does the market see something I don't?
I am tempted to see investor AB as a great means of getting some exposure to the scandinavian market (which might some day come in handy, since my parents own a house and live in Sweden (and with their investments mostly in Euro, suffer a bit due to current exchange rates).


Link to the company discussed:
http://www.investorab.com/

[KingCoin]

Since this is basically just an investment fund, a better way to look at this kind of company is current discount to NAV vs. historical discount to NAV.

What's the effective expense ratio of the current management team?

[turboseize]

Price to assets ratio is 0.9. Management cost sank from 0.7% of net asset value in 2003 to 0.2% in 2012.

Heck, that's even better than what BlackRock charges for their European index funds (TER 0,31%).


I still don't find the catch. (Except the risks mentioned above, which would not scare me too much.) But historcal evidence shows, that always when I start salivating about something, there is a catch, with the only exception being the 2008 fire sale of everything.

[KingCoin]

Is .9 right?

This post implied that the discount to NAV has rarely been below 25% (it's about 9mo old):
http://discountinvesting.wordpress.com/2013/02/09/sell-investor-ab-invea/

A 10% discount would imply that it's trading very rich to historical levels.

[turboseize]

Thanks for the link, that definitely helps to bring some perspective! I used to think of any discount on NAV as nice and unusual - but then, I do not have much experience with holdings, only  "normal" companies that rarely trade on a discount.


Now that we know that Investor AB ist trading relatively high according to the discount to NAV and compared to it's own history, are there any rules of thumb how high the discount regularly is - for other holding companies with similar business models?


P/E and dividend yield look still sweet. I'd be in for the long run, so share prices fluctuating a bit during the next few years would not bother me too much. (My strategy is to build income streams by interest and dividends.)

[KingCoin]

With respect to looking at discount to NAV, I only trade CEF's, where the NAV history is easily available on websites like Morningstar.

Example:
http://performance.morningstar.com/funds/etf/performance-price.action?t=NMO&region=usa&culture=en-US&ops=&cur=USD&lan=en-US&productcode=COM

As a general rule, discounts become large when markets are in turmoil or an asset class is getting beaten down, which makes CEF's a great play during stressed times IMO.  When the markets are hot, I prefer to be in more liquid, transparent securities (this is the opposite of a "reach for yield" strategy).

Bloomberg has the estimated forward P/E listed as 19.7. Not sure why your figure is differing.
http://www.bloomberg.com/quote/INVEB:SS

If management cost is truly 0.2% (hard for me to believe) then this may be a fine investment. I'd seek out some research pieces that get into the nitty-grittty.

[turboseize]

Bloomberg has some funny numbers. They claim current earnings per share as 55 SEK and future earning per share as 10.56, leading to a current p/e of 3. something and estimated 2013 pe of 19.

Swedish newspaper Dagens Industri takes 2012 earnings per share of 31.85 SEK for calculating P/E. That number is backed by investor's 2012 report. 

The 2012 report states comprehensive income of 23.85 bn SEK. Q3 2013 interim report claims earnings of 24.25 bn SEK during the period jan-sept 13 alone, so I fail to understand how bloomberg got their numbers.


2012 report:
http://ir.investorab.com/files/press/investor/201303150578-2.pdf
page 107 gives the 10year summary (including development of managing cost).


interim report Q3 2013:
http://ir.investorab.com/files/press/investor/201310178773-1.pdf

[bigchrisb]

This company sounds very similar to the LIC's in the Australian market, and what are called closed end funds in the US?  Over the last few years I've have a preference for these over ETFs, for the following reasons.  In there interest of full disclosure, I've got about $300k of exposure between AFI, MLT, CIN, BKI and SOL in the Aus market.

- They were trading at significant discounts to the value of their assets.  If I buy a share for $1, and it holds $1.20 worth of stocks, then you are getting economic exposure to 20% more dividends, than if I put $1 into an index fund/ETF.  This continues regardless of any increase/decrease in the size of the discount/premium over time, if a buy and hold investor.  Conversely, if trading at a premium, you get less exposure to dividends in the underlying securities than an index fund / etf.
- At the time, discounts were significantly larger than historical norms.  This added a potential capital gain if the discount shrunk.  Some of these are now actually trading at a premium (I did well, but investing new money now that discounts have shrunk may not).
- The closed end nature means that unlike an index fund or ETF, there can be no rush for redemption and forced realization of sale of assets if people rush for the exits or the entrance.  The impact of any rush for the entrance/exit is felt in the stock price, and hence only seen by those buying/selling, rather than impacting those who stay invested.  As a long term investor, I prefer this than in a mutual fund (my buy and hold doesn't subsidize the traders).
- A downside of this is that there are often very large unrealized capital gains tax liabilities within these companies.  Make sure you get a feel for what this is, and often part of the discount is due to a risk weighting on this unpaid tax. I don't know how the regulatory environment works there, but in the Australian market, LICs must report on the size of their unrealized capital gains tax liability whenever they state their net tangible assets.
- For some of these, the expense ratio is very low (the ones I hold are between 0.1% and 0.2%, which is on par or better than the lowest cost ETFs covering the Aus market.

For me, based upon my analysis, they have been a good investment vehicle.  You seem to be well on the way to doing your own due diligence on these - let us know what you decide to do and why.

[discount investor]

Turboseize, there's nothing wrong with Investor AB, once you realise that closed-end funds and holding companies like this tend to trade at fairly wide discounts to their NAV. There are a number of potential reasons for this, but even academics can't fully explain it. Discounts do however add an extra layer of volatility, and will tend to widen during periods of market turmoil, although this may not be a concern for a long-term holder. Investor's discount is currently fairly low by recent historical standards - around 25% for the non-voting A shares. The company provides a lot of detailed information including a summary valuation each quarter although it's quite easy to set up a real-time valuation. Historic quarterly numbers including the discount are provided on their website

http://www.investorab.com/investors-media/investor-in-figures/key-figures/

Investor holds some great industrial assets such as Atlas Copco and ABB, which are global companies. Its a good point on capital gains tax - I'm not sure what the tax position would be if Investor sold all its investments. The main benefit for a long-term investor is the uplift to the dividend. However, one other thing to bear in mind is that Sweden levies a 30% withholding charge on dividends, which potentially negates the discount depending on your tax position. If you're interested in this kind of investment, I write about them on my blog (which is also linked to above) and seekingalpha.

http://discountinvesting.wordpress.com/

Hope this helps.

[turboseize]

Capital gains tax in Germany is 25% + up onto which you pay a so-calles "solidarity premium" which amounts to up to 5% of the capital gains tax, and if you're either roman catholic or protestant you also pay 9% church tax.

You can, however, deduct taxes paid in foreign countries. So a swedish tax of 30% would be inconvenient, but actually not worse than what we already have to cope with.




As far as discount to NAV is concerned, if I understand it right, the historical high valuation of price/assets of 0.9 essentially doubles the market risk: in market turmoil, both the discount will grow - and the underlying asset value (at least of everything listed on a stock exchange) will shrink also.

[MrSporty]

Hi, just a quick comment- I work as an investment advisor in Norway. My company's main mutual fund that focuses on solid, divident yielding stocks have Investor AB as one of their top 10 stocks in their portfolio. Guess it's good to know that our experienced fund managers also have strong beliefs in the company... :)
 

[discount investor]

Turboseize, the withholding tax of 30% is on the dividends paid, which will obviously be treated as income not capital gains. For some people this might not matter, if they pay income tax at a similar or higher rate and are able to offset it against there tax bill. I'm not sure where the 0.9 comes from, but I think you have the right idea: the value of the underlying assets fall and you get a widening of the discount, so the holding company's share price falls even further. This does not always happen but it is a reasonable assumption. It increases short-term market risk. The best policy therefore is to be a long-term holder or buy when the discount is particularly wide (or ideally do both).

There are quite a few of these holding companies in Europe - most trade at a discount. Yes, Investor is one of the favourites of value-orientated investors. Others include Norwegian company Aker, Groupe Bruxelles Lambert (Albert Frere's main holding company) and Wendel.

[turboseize]

I'm in.
:-)


I'll let you know when/if this soneday will turn out as a bad idea.

[JohnPaul]

First post and in and old post, anyway, the stock was around 200 when the Q was asked odd 2 years ago and is now on odd 300 (excluding for dividends).
My answer is, nothing is wrong, it' is and will continue to be a world class firm and the stock is mandatory to me and many others.