Keeping it in the family pays
|The Wal-Mart logo is pictured on cash registers at a new store in Chicago, January 24, 2012. / REUTERS
LONDON - With all the booms, busts, policy fixes and financial turbulence of recent years, investors would have done well to keep it in the family -- or family businesses at least.
Even though family ownership to some conjures up thoughts of cronyism, internecine feuds and succession problems, performance data shows that listed companies where families have substantial shareholdings outstripped benchmark global indices over the past five years.
A Credit Suisse index of 225 family-dominated or influenced companies around the world, for example, has outperformed the broad MSCI World by some eight percent since August 2007 despite nominal losses of about 10 percent. (Graphic of CS Family Index: http://link.reuters.com/vyf72t)
With European small cap stocks down twice as much as that over the same period, this is clearly not just a speculative story of mom-and-pop shops, local widget-makers or entrepreneurial startups.
This universe, for example, is probably successful more for its inclusion of such corporate behemoths as Volkswagen, BMW, Samsung, Wal-Mart, Carrefour and L'Oreal.
Indeed consultants McKinsey estimate that a third of all companies in Wall St's S&P 500 index and 40 percent of the 250 largest companies in France and Germany are defined as family businesses -- defined as firms where a family owns a significant share and can steer decisions like choice of chairman and CEO.
So what's the secret of outperformance? Is it all smoke and mirrors or a temporal quirk related to the peculiarities of the credit shock?
The theme that seems to shine through all reports on the subject is longevity and long-term thinking -- doffing a cap more to the German or continental European style of capitalism that a heavily market-driven British bias, for example.
Post mortems of the credit crash all point in some way to the preceding short-termism and myopia of company owners, executives, shareholders and investors -- banks and financial firms most obviously -- that led to rash decision-making is search of the fastest buck at the expense of longer-term stability.
This so-called "quarterly capitalism", where horizons were little further than the next three-month earnings report and outsize annual bonus payments were rife, is perhaps best illustrated in the collapse in the average length of U.S. shareholding to just seven months in 2007 from 2 years in 1987.
Yet for all the squeamishness about vagaries family ownership and control, there is an inherent logic to the idea that they are longer-term in their horizons -- if only to pass on a healthy business to the next generation -- and that they jealously guard hard-won reputations.
Nearly half the companies surveyed in a poll of the family firm universe conducted by Credit Suisse are the more weather-worn firms who are in at least their third or fourth generation of the same family. And most of these tend to stay focussed on what they do best by concentrating on their core business.
But, perhaps critically in a credit crunched world, they are less leveraged than many of their corporate peers and prefer internal financing or one-off strategic investments to equity or debt financing on capital markets.
"This really is a distinctive model and one that seems to be working," said Michael O'Sullivan, Head of Portfolio Strategy and Thematic Research at Credit Suisse Private Banking, adding that a lot of family businesses in Europe in particular have more stable long-term bank financing as opposed to equity financing.
One question is whether this is just some old-world bolthole for fearful investors looking for something instinctively conservative in testing times.
But the CS index has about 21 percent of emerging market companies and the parallel survey also gives a more dynamic hue by showing more than 50 percent planning to expand into new countries.
Yet outperformance in such defensive times does point toward at least some sectoral skew alongside a perhaps counter-intuitive bias toward corporate size that may draw safety bids.
And the family index is indeed heavily weighted toward the likes of consumer staples and luxury goods and is light on the battered financials that whacked global indices over the period. Moreover, size does play a part, with more than 40 percent of the firms surveyed employing a thousand people or more.
A sharp recovery or world markets and the global economy over the coming years, as a result, could therefore undermine the theme.
"If in the next five years, if there's a big rally in the high-beta stuff -- banks, mining etc -- then that would probably leave family businesses behind," said O'Sullivan at Credit Suisse.
"But because private indebtedness remains so high and deleveraging will be likely continue to be severe for some time, family businesses should continue to be interesting as they tend not to be overleveraged and have that longer-term view."