Wednesday, April 10, 2019

Investment Ideas – Family Owned Businesses

Lately I stumbled upon a few research reports that concluded what I had just heard as off-the-cuff comments about the advantage of owning stocks in family owned businesses. I had heard that there was research on the topic, but had never seen actual hard, cold data on this front until recently. At a basic level, the argument is fairly straight-forward: family-owned businesses have a better track record at taking a long term view and taking better decisions for the survival & growth of the business. As a result, the stocks in these companies consistently outperform their peers in the market, thus generating alpha for shareholders.
There are various slightly different terms used to indicate this kind of company control. Commonly used ones are owner-operator, or family-owned, or founder-run businesses. But no matter the term, the objective is the same: Build and grow a business; leave a legacy and/or continue the legacy of the business after inheriting from family members.
Some investors may feel that this gives a family greater control and is a bad thing, but that is not necessarily true. Even if the largest stakeholders belong to one family, the data shows that this is good for the long term health of the company, as short term gains are not the highest objective.

Skin in the Game

This shouldn’t come as a surprise seeing what is happening in the financial markets these days. I have lost count of the number of times I hear of executives in (non-family-owned) businesses taking on debilitating amount of debt, announcing share repurchase programs, and selling their stocks for a quick profit leaving absolutely no skin in the game.
To be clear, I am not saying that all buybacks/repurchases are bad. There are plenty of cases where a buyback is absolutely the right thing to do from a shareholder return & capital allocation perspective, but looking at some of the moves made by top-level executives from “blue-chip” companies such as IBM, GE, QCOM, BA & many more is simply appalling.

Family Owned Businesses

The research message is pretty straight-forward. Owner-operator/family-owned/founder-run businesses outperform rest of the market due to the long term outlook from the stakeholders.
From the Credit Suisse research report (linked below), there is breakdown of various performance number between family-owned & non-family-owned businesses and the amount of alpha generated in different geographical regions.
Interestingly, the amount of alpha generated in N.American is lower than ex-N.American companies.

Investment Ideas

My primary interest is in the North American market, since I have access to trade on these markets easily through my trading account. Others may want to look at the original research report for ideas in other geographical region like Europe, Asia etc.
There are some great companies in that list and we can see why they have performed well over the years. Owners of companies will continue taking better long term decisions that will benefit all shareholders. Buying a piece of these companies can be a good strategy for retail investors too.
Have you considered owning family owned businesses as an overall strategy? What are your thoughts on the investment ideas on this list? Share your comments below.
References:

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