With new research showing that family-owned companies return three times more than their non-family counterparts, investors may want to explore this option more closely, says Lee Morris (pictured), Investment Director in Quilter Cheviot’s Jersey office
What difference does it make who owns a company? In theory, it shouldn’t matter at all. Any investor in a company wants to make a good return, regardless of who they are or the organisation for which they work.
The data, however, suggests something different. Investors in family-owned companies have historically enjoyed above-average returns. A recent study from Credit Suisse found that family-owned companies had returned three times more than their non-family-owned counterparts since 2006.*
While the Credit Suisse data only goes back 10 years or so, there is wider evidence that suggests family-owned businesses tend to do better. They are at the heart of economies such as Germany or Italy, and there are also successful family businesses in Jersey, including Seymour Hotels.
Why do family-owned companies do better?
Put simply, family-owned companies tend to take more of a long-term approach to their business. They focus more on investing in their business over the long term, and put money into developing new products and opportunities.
The idea that families run their businesses for the long term is not just based on theory. As Credit Suisse has discovered, greater family ownership ‘tends to increase the use of longer-term financial targets for management remuneration, and family-owned companies prefer conservative funding structures for investments’.**
In other words, investing alongside a family naturally leads you to invest in companies that are focused on the long term. As an added benefit, these companies are less likely to take on excessive or high-cost debt, making them more stable in the event of an economic downturn.
Are there any drawbacks?
Family-owned businesses still carry the usual risks of investing – your money can go down as well as up. Some have raised more specific concerns too. To begin with, there is a risk that families retain too much control, especially if they have extra voting rights or control over the management team.
When Credit Suisse looked at this issue, it didn’t find much evidence to support this though. Returns for family-owned companies with a disproportionate say were slightly worse in Europe and Asia ex Japan, but better in the US. While special voting rights are a risk to watch for investors, they don’t appear to be a reason to avoid family businesses entirely.
You also want to consider the regional biases that come with investing in family-owned companies. The majority are found in Asia ex Japan, with this region making up about half the global total of family-owned businesses. Europe comes in at 23% of the total and the US at 12%.
This is a very different country breakdown compared with global equity markets, with the US accounting for about half the value of all publicly traded companies in the world.
How can I invest in family-owned businesses?
There are several options if you want to invest in family-owned companies. In terms of actively managed funds, Richard Pease at FP Crux specifically looks for companies with family ownership or some type of founding interest. Around 40% of the European Special Situations Fund has exposure to these types of companies.
Another example is the Matthews Asia Pacific ex Japan Dividend Fund. Family-owned companies can be a good hunting ground for income investors, because the founders are often as keen on receiving a sustainable income as other investors.
There are also a number of tracker funds offering exposure to the theme of family-owned businesses. I would add a note of caution for these – the Credit Suisse data is selective on the type of companies that qualify for its group of businesses, so the broader performance of a passive vehicle might not match the returns Credit Suisse has calculated.
But with this caveat in mind, playing happy families is something investors may want to explore more closely.
* The CS Family 1000 in 2018, Credit Suisse Research Institute, page 5
** The CS Family 1000 in 2018, Credit Suisse Research Institute, page 2
Find out more
For more information please contact:
Lee Morris, Investment Director, Quilter Cheviot (Jersey office) at lee.morris@quiltercheviot.com
Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest. Past performance is no guarantee of future results. Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.
Quilter Cheviot
Quilter Cheviot, part of Quilter plc, is one of the UK’s largest discretionary investment firms and can trace its heritage to 1771. The firm is based in 12 locations across the UK, Jersey and Ireland and has total funds under management of £23.7bn (as at 31 March 2019). Quilter Cheviot focuses primarily on structuring and managing bespoke discretionary portfolios for private clients, charities, trusts, pension funds and intermediaries.
Quilter Cheviot Limited is registered in England with number 01923571, registered office at One Kingsway, London, WC2B 6AN, England. Quilter Cheviot Limited is a member of the London Stock Exchange; is authorised and regulated by the UK Financial Conduct Authority; has established a branch in Jersey and is regulated under the Financial Services (Jersey) Law 1998 by the Jersey Financial Services Commission for the conduct of investment business in Jersey and by the Guernsey Financial Services Commission under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 to carry on investment business in the Bailiwick of Guernsey; is regulated by the Dubai Financial Services Authority as a Representative Office (and its business name in Dubai is Quilter Cheviot Limited (DIFC Representative Office)); and has established a branch in Dublin, Ireland with number 904906 and is regulated by the Central Bank of Ireland for conduct of business rules. Accordingly, in some respects the regulatory system that applies will be different from that of the United Kingdom.
• This advertising feature was first published in the July/August edition of Businesslife magazine