Investing is all about picking a style with which you feel comfortable and sticking to it.
There are many different styles out there, all of which involve different levels of research and different perspectives on the market as well as a different temperament. But according to Credit Suisse (CS, Financial) there’s one particular trait the best-performing stocks have in common.
Some investors swear by value strategies, and others swear by growth strategies. Analysts at Credit Suisse have a different view. Rather than separating companies into growth and value buckets, the bank's analysts considered the performances of those companies with a high family ownership. What does this mean? It means the analysts studied those businesses that have been under the stewardship of their founding families since inception and continue to be run and managed by family members or descendants thereof. What Credit Suisse found by looking at these businesses is fascinating and astonishing.
Keep it in the family
The key takeaway from research is that family run companies tend to be vastly more profitable and efficient than their counterparts. On stock price performance alone the 900 family companies tracked around the world by Credit Suisse have outperformed the MSCI All Countries World Index by 4.5% CAGR since 2006.
The study’s other findings are also rather interesting. For example, according to the analysts, family run business growth tends to be mostly organic. Since 1990 M&A has been just 2.1% of sales versus 5.8% for nonfamily businesses. Between 1995 and 2015 the family owned company universe achieved annual sales growth of 10% compared to 7.3% for MSCI ACWI companies. Since 2006, this sales growth has averaged 8.5% for family companies versus 6.2% for the benchmark.
Family businesses tend to be more concerned about acquisitions and are less likely to waste shareholder cash on deals to boost headline figures without any concern to the long-term economics. Credit Suisse’s survey found that over 40% of first- and fourth-generation owners said that the typical time horizon for the payback on a new investment was five to 10 years and over 50% of second- and third-generation owners expected new investments to pay back over three to five years; 60% of respondents said that their long-term management perspective was necessary for the ongoing success of their business.
Higher profits
When it comes to profitability, family owned businesses outperform once again. CS Global Family 900 companies have generated twice the economic profit – earnings in excess of the opportunity cost of utilizing assets or capital – compared to benchmarks.
However, where family owned companies fall down is in R&D. R&D intensity is just 25% of benchmark levels; in Europe it is 20% below benchmark. Still, researchers find that there is relatively little difference between the level of returns in R&D investment between the family owned companies and their peers, leading to the conclusion that while family companies invest less in R&D, the investment is more targeted and efficient.
What does it all mean?
Taking all of the above into account, it is clear that if you are looking for the best stocks to buy, it is worth considering those that are still owned by the family. Whether it be first generation, second generation or third generation, Credit Suisse finds that family run companies are generally more efficient, profitable and look after investors better than their counterparts.
These findings follow a similar pattern to those companies with a high insider ownership. If managers invest alongside their stockholders, they are more likely to strive for the best long-term results for investors rather than trying to impress Wall Street.
The one issue with family companies I’ve not addressed is the issue of corporate governance. While it is reasonable to believe that corporate governance may be compromised with a family owned company, Credit Suisse’s research shows that there is a closer alignment between owner and minority interests than the market understands. What’s more, accounting quality at family owned companies is superior and reflects the owners’ focus on preserving wealth over the long term – another reason to keep it in the family.
Disclosure: The author does not own any share mentioned.
Start a free seven-day trial of Premium Membership to GuruFocus.
