Dodging an automotive bullet

I have been long on premium German carmakers for some time now, on the basis that a weakening Euro and a growing China would make premium European brands a good investment.  This makes the recent news of the VW scandal a fascinating moment for me.

I’ve held BMW and Daimler (Mercedes), but not VW.  My omission of VW was deliberate; not because I think Golfs are less premium than 3-series and C-classes, but because I have never liked the shareholder governance at VW.

As soon as I read the VW news I sold my entire BMW and Daimler holdings.  This proved to be a timely call, because both stocks have fallen by over 10% since I sold.  I don’t normally sell holdings and I do still consider BMW and Daimler to be good long term bets.  But my gut told me that where there is smoke there is fire, and that the Germans hunt in packs, and whatever VW is being pilloried for is probably going to splatter its near rivals too.  So until the dust settles, I’m going to sit the sector out.

But the wider point here is my original decision to avoid VW.  I know it is too early to claim full vindication here (though I am certainly not the only investor to make this subjective call – VW’s has traded at a ~20% discount to less-premium Renault, for instance).  Why did I decide shareholder governance at VW wasn’t good enough for me?

There is a lot to like about VW.  It has large family holdings – which is usually good for a long-term outlook and dividend policies.  It has scale, and a pretty clear strategy.  It is ‘based in the right place’: Germany == Automobiles.

However, there are also some big red flags about VW:

• Economic rights do not mirror voting rights.  Minority shareholders have 40% of the economics but only 12% of the votes.  Whereas the Porsche and Piech families have control despite owning only around 25% of the economics.  This is not pretty.
• Family-related feuds are common.  There has been a lot of press over the years about Ferdinand Piech, the patriach, and his rows/fits with successive CEOs.  In the last twelve months Piech was himself partially ejected from the business after losing in a row with the now-fallen-on-his-sword Winterkorn.   This sort of stuff is not seemly and can distract a large organisation disproportionately.
• Minority shareholders repeatedly get upset.  Do a search for ‘VW minority shareholders’.  The first four headlines contain the words ‘dispute’, ‘appeal’, ‘recoil’, ‘squeeze out’.  Being a VW minority investor is not a happy place to be.
• Use of derivatives / lawsuits / etc.  Back in 2008/9 there was an almighty tussel in which Porsche tried to evade some ‘Anglo Saxon’ rules of ownership disclosure by using derivatives to secure a large, secret holding in VW.  This led to big profits for Porche, initially at least, large lawsuits and numerous brushes with the regulators.  This sort of stuff is not Blue Chip.

So, thanks to these red flags my nose and my gut recoiled from the prospect of supporting VW and, as of today, I am glad I trusted my gut.