Legacy Investment Fund
BEHAVIORAL FINANCE – CASE STUDY
LEGACY Investment Fund
Abstract
Founder CEO and family who control large equity in public listed companies act
differently and run their business in a more prudent way which can mitigate the excess
optimism and the risk taking of an employee CEO. Also, Founder CEO and family are
more conservative and have long term horizon view. We have selected a portfolio of
companies that belong to the Global Family Business Index (1) comprises the largest
500 family firms in the world.
Author(s):
Li-Kuan Fang (016008683D)
(With other co-authors)
Legacy Investment Fund
Behavioral Finance
One Chinese quote says “Walls fall, friends leave. Rely on yourself.” This expression is
the philosophical backbone of our behavioral finance and investment view. Our belief is
that companies run by their founder’s CEO or owned by families with a significant
equity stake could outperform the market. Firms of that type are managed more
cautiously which can mitigate the “excessive optimism” of employee CEO who
destroyed shareholders due to this behavioral theory. Behavioral Finance has shown
that an employee CEO tends to be overoptimistic and this leads to high risk taking in
contrast to the founder’s CEO decisions that are more conservative and as result
founder CEO/ family firm can achieve better results. In fact, they tend to invest more in
R&D which can lead to better products. Furthermore, they are more focus in M&A, they
buy a company which is strategic and enhance the firm’s value. In addition, we strongly
believe that the interests of the shareholders and family businesses are more aligned
when it comes to stock performance because they own a significant equity stake and
therefore in this case the principal-agent problem is mitigated. Our initial assumptions
got validated by several academic papers on of them was written by Rüdiger
Fahlenbrach (2).
Investment Strategy
The investment strategy is to buy and hold worldwide public listed companies that are
managed by their founding CEOs and families who hold a significant equity stake. The
strategy is designed to outperform the MSCI World Index. We have selected a portfolio
of companies that belong to the Global Family Business Index (1) comprising the largest
500 family firms in the world. Global Family Business Index is composed by privately
and publicly held firms. We only chose publicly held firms from the index which are
classified as a family firm in case the family holds at least 32% of the voting rights.
Each stock we selected should be a key player in its region or worldwide and will be
equally weighted in the portfolio. We diversify our portfolio industry-wide and world-
wide, and replace those in which the CEO was not the founder-CEOs at the moment by
a new listed firm.
Legacy Investment Fund
Historical Analysis
The portfolio is composed by a basket from 35 to 45 stocks through the time, choosing
stocks that match strategy selection criteria. The strategy was back-tested in order to
support the investment proposal, the time frame considered is from the 1st January
2007 to September 2016. During that period, we took in consideration portfolio
management activity to adjust the basket with new stocks: for example, some IPO
aligned with our assumptions have been added and deleted stocks in which
founder/CEO where not more related significantly in the firm or delisted. The decision
to take in consideration that specific period is based on future fund duration (8+2 years)
and on the opportunity to test if the strategy works even in downside market trend.
The empirical result of our strategy fund shows that in the past back-test the fund
performed mainly over the market: during market recession with a reasonable margin
above the market, but with an increasing outperform when world trend market is
positive. Thanks to their strictly connection between founder and management, the
Legacy Investment Fund
stocks could outperform the benchmark. Indeed, over 9.75 years, the fund registered a
monthly based Beta with the market of 0.94 and an Annualized Alpha of 8,53%% with
significantly significance of 95% confident level. The final return of the fund over the
investment period is 9.74% Gross and 6.82% after fees and costs, whereas the VaR at
95% confidence level is 26.76% annually.
Fund Structure
1. Subscription Policy:Close fund. Accepting subscriptions during IPO only.
2. Duration:8~10 years, we have the right to extend the duration at the end of.
3. Redemption Policy:Redemption is blocked to the end of the duration of this
fund.
4. Management fee: 1,5% (Custodian, management, auditing, and accounting all
in)
5. Performance fee:
- By the high-water-mark approach, at the end of each year during the
duration, we charge 10% performance fee over the hurdle rate of 3,5%.
6. Minimum subscription during issuance:250.000 $
7. Minimum-Maximum amount raised: 5 Million $ - 250 Million $
8. Minimum asset invested:75% of asset under management
Net PTF Gross PTF Index MXWO
Annualised Return over 9,75 Years
6,82% 9,74% 1,45%
VaR 95% - -26,76% -30,64%
C-VaR - -39,77% -40,04%
Average Annual Return - 11,48% 2,91%
Standard Deviation - 17,30% 16,74%
Alpha vs Index - 8,53% -
Beta vs Index - 0,94 -
Legacy Investment Fund
9. Dividend Policy:No dividend
10. Reinvestment policy:Dividend reinvesting
11. Risk Disclosure:
FX Risk
Macro economy Risk
Political Risk
12. Investment Policy:
Asset allocation:
Cash :2%, at least.
Equity:98%, at most.
Target markets: Listed stocks worldwide
13. FX hedging: No hedging
Sources
1: http://familybusinessindex.com/
2: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=606527
Founder-CEOs, Investment Decisions, and Stock Market Performance by Rüdiger
Fahlenbrach, Swiss Finance Institute
Legacy Investment Fund
Appendix
Legacy Investment Fund
Monthly data PTF IndexAverage Return 0,91% 0,24%Median 1,09% 0,29%Standard Deviation 4,99% 4,83%Kurtosis 1,98 1,74Skewness -0,58 -0,71Minimum -18,7% -19,0%Maximum 15,1% 10,9%Count Obs. 116 116
Coefficient Stat t p-valueAlpha 0,00684 3,55 0,00056Beta 0,94130 23,52 0,00000
R squared 0,8291Annualised Alpha 0,0853