VT Holland Advisers fund manager Andrew Hollingworth explains why most funds are underweight entrepreneur-led businesses.
Entrepreneurs are generally “eccentric” and “don’t care what other people think of them”, according to Andrew Hollingworth, manager of the VT Holland Advisors Equity fund, which can rub some fund managers up the wrong way.
As a result, many of his peers shy away from investing in entrepreneur-backed companies, as they are run by “difficult people” who can be “volatile”.
He highlighted Michael O’Leary, chief executive of Irish budget airline Ryanair, as an example of someone who swears a lot – something that is uncommon in the professional corporate world.
“The chemistry between investors and entrepreneurs isn’t good,” said Hollingworth.
There are several reasons for this. Firstly, getting access to these owner-managers can be a challenge. Hollingworth suggested that fewer than 5% of companies are run by their founders and the few entrepreneurs who are still in control of the companies they have built are typically much more difficult to get hold of than appointed CEOs.
“Those people don’t do much investor relations,” he said.
Once in the room, there is a litany of differences between regular CEOs and entrepreneurs. One is that most chief executives tend to be more cautious with their investors as they have career longevity and (in some cases) remuneration packages to consider.
“Around 98% of investor meetings are not with an owner-manager. They’re with the chief executive of a telecom company or a utility or an employment agency, who has an incentive share option scheme,” said Hollingworth.
“When you ask questions, they say: ‘That’s a really interesting question, thank you so much for asking that.’ The subtext being: you own me, you’re the owner and I’m the manager, and I’d really like to make sure you approve my share option scheme at the end of next year.”
This is very different with the likes of O’Leary or with Lord Wolfson at Next, Hollingworth said, who own large parts of their companies and so “don’t care what you think of them”.
It can be particularly difficult in meetings if investors ask “questions that show they don’t really understand the company”, as these individuals tend to have little time for poorly prepared investors.
“Woe betide if you sit in front of them and show them you haven’t researched their company,” he said.
Entrepreneurs are not all that common. While the likes of Elon Musk (Tesla and SpaceX), Mark Zuckerberg (Meta) or Jack Dorsey (Square, formerly CEO of Twitter) are well-known, they represent a very small number of companies.
Most businesses are run by chief executives who have come up through the business or who have a foundation in the corporate world, with Hollingworth suggesting the number of companies in the market still run by these owner-managers standing at around 5%.
As a result, these companies are underrepresented in most portfolios.
“When it comes to an investment portfolio, someone might have two or three entrepreneurs in a portfolio of 80 stocks,” he said.
This is despite most people agreeing that businesses managed by entrepreneurs are more likely to outperform than if headed by run-of-the-mill chief executives.
“If I said to you, there are five people in your village that run companies – one is a good entrepreneur and the other four have just all been brought into the business from a local institution – you’d all assume that the entrepreneur would run the best business,” he said.
Hollingworth tries to take the opposite approach, with around 95% of the stocks in his portfolio run by entrepreneurs. “We go seeking that out,” he said.
“That’s what we go looking for, because we know that there is gold with those companies.”
It is one of three key tenets to the VT Holland Advisers fund. The others are to find the companies with the best business models and buy at opportunistic prices.
“I’m a massive admirer of Warren Buffett and all the great investors that have gone before and I think what I’ve learned from all those people over a 25-year study is that there are only three or four ways to really compound at better rates,” he said.