It is just over 14 months since we published our feature on investing in family-owned companies. By and large, this hasn’t been a bad time to own UK shares of any stripe. A weaker pound has flattered earnings for companies selling in foreign currencies, the global rotation to equities has propped up valuations, and the overly represented natural resources sector has benefited from higher commodity prices.
On a total return basis, the FTSE All-Share has delivered a gain of 15.5 per cent. Anyone who opted to put their pounds into our 2016 portfolio of family-owned stocks (see table) would have banked a substantially higher return over the same period. The selections, which were drawn from companies whose founder or family owned at least 15 per cent of the stock, have collectively beaten the benchmark by 29.2 percentage points, again on a total return basis. As we detailed in last year’s article, a similar portfolio we constructed in 2010 outperformed the wider market at a similar clip.
| Name | TIDM | Total return (22 Jul 2016 - 28 Sep 2017) |
| Focusrite | TUNE | 95.9% |
| Antofagasta | ANTO | 93.9% |
| Henry Boot | BOOT | 79.5% |
| FW Thorpe | TFW | 58.5% |
| Mucklow (AJ) | MKLW | 35.2% |
| Schroders | SDR | 34.0% |
| Accrol | ACRL | 22.1% |
| Hochschild | HOC | -4.2% |
| Impellam | IPEL | -12.4% |
| Average | - | 44.7% |
| All-Share | ASX | 15.5% |
| Source: Investors Chronicle, Bloomberg | ||
Of course, we should not draw too many conclusions from either group of shares, both of which draw on a small sample of stocks. Certain features of the outperformance are also uncorrelated to family ownership. To take one example, the resurgence of the copper price probably had a far greater impact on the 94 per cent return from Antofagasta (ANTO) shares than any goodwill the Luksic family may have built up with Chile’s combative mining unions. Indeed, it is difficult to pinpoint the family virtues, or lack thereof, that have helped our stocks to beat the market.
As ever, it is useful to take a longer-term view, particularly if there is any merit to the notion that a far-sighted approach is a hallmark of family businesses, which often plan according to a distant or perpetual investment horizon. As Elizabeth Bagger, executive director of the Institute for Family Business, previously suggested to us: “They’re often able to take calculated risks, act in line with a strong set of values and be patient in terms of seeing a return on their investments.”
New research from Credit Suisse supports the concept of the ‘family factor’ – the propensity for family-owned stocks to outperform their peers. The bank’s analysis, which focused on the market performance of global equities since 2006, suggests family-owned companies have more than doubled the returns offered by non-family stocks. The report also concluded that family companies in first- or second-generation ownership tended to outperform their older peers; that the outperformance was strongest in Europe (followed by the US and Asia); and that family-owned companies did better regardless of sector.
The drivers of these findings are difficult to grasp from company to company. However, interviews conducted by Credit Suisse point to three approaches more commonly adopted by family companies: a heightened leadership loyalty towards the company, a more stable strategy and a focus on long-term, quality growth over short-term profit. An aversion to loans, and a preference for self-funding, was also evident.
None of these results are likely to surprise the Swiss bank. In 2002, it launched the Credit Suisse Family Index, a composite of 40 stocks in a variety of European and US industries with strong family or management ownership. Another year on, and the index has continued to beat the S&P 500 on a total return basis, despite the latter’s strong rally since the end of 2016.
