In an active value approach, the numbers and valuation are only part of the story.  The people managing the assets of the business are just as important to the investment case, or perhaps more so.  When it comes to the actual decision to commit capital and successfully monitor the investment decision, one must literally sit down with management, face to face, and deeply probe their intentions, plans and commitment to change.

Careful assessment of management's intentions is particularly critical in leveraging one of today's most attractive, prospective sources of investment value: family controlled holding companies.  Such companies-many of them on the lists of the biggest public companies in Europe, Latin America and Asia-are among the most under-researched and undervalued companies in the world today.

In fact, families hold the reins of many highly successful, yet not-well-known enterprises around the world.  By one estimate, families control more than two thirds of the largest listed firms in Italy, nearly half of such firms in France, and nearly four of 10 of such firms in Germany.   In France, of the top 40 companies listed on the CAC 40 stock market index, one in four is family controlled, according to Standard & Poor's.

They are often complex entities, with many different kinds of businesses, and therefore not easily researched by firms that practice industry specialization.    Moreover, because the companies are family owned, it's often assumed that the owners have no interest in shareholder value.

In fact, many of these companies, centuries old, have flourished in some of the world's most challenging business environments, from a political, regulatory and cultural standpoint.  In many cases, a "next generation" of family management recently has taken control and is intensely interested in evolutionary action, either on their own or with the assistance of outside management expertise.  They are deeply committed to the maintenance and the growth of the value that their families have carefully nurtured for hundreds of years - and that they know may now be threatened in a new world.

Such situations, though they may offer extraordinary investment opportunity, are not always easy to find, get to know or understand.  It takes more than a quick chat with an investor relations functionary. To an even greater degree than in other value situations, an investor assessing a family owned enterprise must establish a lasting relationship of mutual trust and respect with controlling interests-a process that can proceed over weeks, months and literally years-and then assess in a clear way whether management will deliver on their prospects.

The value creation success of many family controlled enterprises has been clearly documented.  Analysis by Credit Suisse found that, as of January 2007, European stocks with a significant family interest-that is, where the founding family or manager retained a stake of more than 10% of the company's capital-had outperformed their peers by 8% a year since 1996.

The lessons of good business learned in challenging times over centuries are driving the success of many family controlled situations today.  Such companies represent a significant portion of the value opportunities that exist today for investors with a genuinely discriminating, active approach.

The Principles Of 'Active Value'

For any advisor seeking to evaluate the merits of a fund following an active value orientation, these portfolio management attributes are essential:
    Rigorous analysis of company fundamentals as a key initial step in the winnowing of value situations.
    "On the ground" assessment of a situation's prospects-through personal contact and dialogue with corporate management.
    Firm differentiation of managers committed to value creation from those who will inevitably destroy it.
    The consistent discipline of closing out an investment when the potential for value has been fully realized-or has dissipated.