A little mystery...not too much though.Originally Posted by chloevankatie
I admit I was not aware of spin-off funds. Concept not suprising but wasn't sure volume would be consistent enough to warrant a fund. I will try to keep it brief but a lot underneath the question so likely a wordy reply...since this sub-forum isn't for those rushing for sex I won't apologize further.
As for my opinion, I would avoid. Here is my thinking behind that. In theory, corporations exist to provide strong (not necessarily highest) returns for shareholders while limiting shareholder liability. A corporation makes the best returns for shareholders by being the "best" at something. That leads to market share growth, more customers, more revenue, and ideally more profit to distribute to shareholders. That is the simple version, ignoring vertical or horizontal integration, etc.
In reality, though, corporations are run by people. People who are greedy and out to maximize self-interest. Look at various studies of CEO compensation relative to shareholder return (much less average employee compensation!). CEO is technically governed by the Board, but that is mostly fiction. How does CEO maximize his/her pay? Usually by growth. The problem is organic growth (example, McDonald's adding a Shamrock Shake to lure in new customers) is slow. Easiest way is for McDonald's to buy Sonic. Huge, immediate leap in revenue and store count, menu items, etc. The downsides can be many, though. Bad cultural fits often overlooked. While some cannabalism is good certain acquisitions bring too much meaning time needs to be spent disposing excess. And, of course, the seller is often selling because they believe they get maximum value, whereas buyer thinks more value can be squeezed out...one of them is wrong. So corporations grow organically and through M&A. As they grow the scalability gives economies...a positive. Do more with less.
At some point the company gets too big. Geographically, product mix, something. They have moved beyond the core competency/ies that made it successful. Which means they have sabotaged their own value. Sometimes management realizes this itself. Sometimes it is activist shareholders. Sometimes it is an inquiring potential buyer of assets that gets them to consider selling. Sometimes it is a business unit management team interested in splitting off the parent. So management decides to sell part of the company. Usually it is a separate business unit (individual legal entity) cuz it is clean and easy. In theory this should be a win-win, and why spin-off funds make sense. The surviving parent is leaner, back closer to its core, with more cash, and the spun company is either standalone or part of a new organization which theoretically can get more value out of it. Why not buy funds focused on theoretical win-wins?!
Because theory ignores the human factor, and humans screw up spin-offs. They overpay or aren't disciplined bidders because they are so focused on growth for the sake of increasing their own reputation/compensation. Because humans undervalue potential cultural rifts (a 50% divorce rate proves that). Or they fail to appreciate the added value the selling company provided, and recreating or adapting to the buyer's methods can be costly, time-consuming, or outright impossible, which kills many of the expected "synergies" the deal was supposed to add. Maybe the buyer bought a business unit with bad management that was artificially propped up by the seller's structure? Lots of potential issues. Value leakage everywhere.
Look at companies that grew too big and had bad spin-offs. GE...poster child of ignoring the human factor. Time-Warner AOL is another. Countless smaller ones that don't get the same press.
My take is wait a year or 2 post-spin and buy the shares of those that proved they could manage in a different setting. Sure, you likely pay more, but you have de-risked by not buying a bucket which surely has some mistakes in it.
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