Why it pays to invest in family firms – and how to buy in

The television drama Succession ended two years ago, but the fictional squabbling of the Roy family reflects how many family firms – where a family or the founder retains a major stake – are still viewed. Sometimes that view would not be far from the truth – families and founders do indeed sometimes treat their firms as their “own little fiefdoms” and minor investors can end up being “treated poorly”, says Tom Wildgoose, head of equities at Sarasin & Partners. Family ownership can also, however, give rise to “pride in building the business in a long-term and sustainable way”, which means staff and customers are treated well. Here, we consider why you may want to have some family firms in your portfolio, as well as how to distinguish the good from the bad.

Perhaps the most obvious benefit of family ownership is that “you’ve got a group of people who are extremely committed to the company and its long-term survival”, says Gerrit Smith, manager of the Stonehage Fleming Global Best Ideas Equity Fund. Unlike institutional investors, who tend to sell at the first hint of trouble and are reluctant to get involved with the company’s daily operations, families “are less concerned with every fluctuation in the firm’s share price, or quarterly twist and turn”. Instead, they “care more about doing what is strategically right for the business”.

This is important because professional managers tend to focus too much on the short term, say George Godber and Georgina Hamilton, managers of the Polar Capital UK Value Opportunities Fund. The chief executive of a FTSE 100 company stays in post only for an average of around five years, so they have no financial incentive to make long-term investments that might only pay off in 10 – all the more so if making the investment means cutting profits for the next year or two, which is the time frame over which the market usually judges a company’s performance.

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Godber and Hamilton point to Morgan Sindall as an example. Founder John Morgan still owns a large chunk of the shares, making him the second-largest shareholder. This has given him the incentive and power to get the firm to make investments in its social-partnership and urban-regeneration businesses. An ordinary CEO “simply wouldn’t have done” this. The company is now set to reap significant rewards from this forward-thinking behaviour and spending, as these areas provide a source of future growth.

Michael Field, chief European market strategist at Morningstar, agrees that a family with “skin in the game” in the form of a large stake can help hold management to account, especially when it comes to using funds in an efficient and productive way. Executive short-termism is a problem, but a lack of accountability can also lead to the opposite issue – what Field calls “empire building”. Even when a company has few opportunities for investment-led growth, chief executives may go on a buying spree or make other dubious investments rather than distribute the cash to investors, in the hope of increasing their pay and prestige. Family owners, in contrast, “may depend on the income they get from their dividends to survive”, so they will want to ensure the firm’s money isn’t just wasted. Family ownership can, then, help ensure the firm is run in the interests of all investors – including those interested in a regular income.

Smith notes that the same incentives that make family firms put reins on executives eager to buy other firms also makes them more focused on “one, or just a few, areas of business”. This increased concentration gives them an edge over more bloated conglomerates, that can come to lack purpose.

Overall, there is “a huge amount of academic research suggesting that family-owned companies tend to outperform their rivals”, notes Wilfrid Craigie, a senior investment analyst at Asset Value Investors. Craigie points to work by the now-defunct Credit Suisse Research Institute, which compiled a list of the top 1,000 family firms (defined as a firm where a family or the founder owns more than 20% of the shares or voting rights). They found that, between 2006 and 2022, family-owned firms beat the market by an average of about 3% per year, even when adjusting for the sector in which a company operated. Smaller firms did particularly well.

It’s not all smooth sailing for family firms

Despite the evidence that family firms deliver better returns on average, Craigie emphasises that, in many individual cases, they also come with drawbacks. One of the most obvious is that family influence means outside shareholders have “less power to influence the company’s direction”. What’s more, there have been many cases where the family hasn’t acted in the best interests of other shareholders. In the worst-case scenarios, such companies can be treated “as something of a piggy bank for the family controlling them”.

Field agrees that family ownership can be a “double-edged sword” because family-controlled firms may not have the same consideration for minority shareholders that typical public companies do. He notes a number of controversies where family owners floated their company to raise cash, then “stood by as the share price fell, using it as an opportunity to buy back the outstanding shares at a much lower price, with the result that the minority shareholders lost out”.

Family firms, in general, may also “not be as professionally run as other firms, and lack the transparency and communication that you would expect from companies of their size”. Field cites the examples of SGS in Switzerland and Bureau Veritas in France, two family-owned testing and inspection firms, as being far worse than their British rival, Intertek, when it came to transparency and communication. This has a knock-on impact on how some family firms are viewed and valued by the market.

This last point is particularly crucial. The market’s “mistrust” of family firms means that, even if the controlling family isn’t behaving badly, the perception that they are not being fully straightforward can have a devastating impact on a company’s share price. Field points to the catering company Sodexo, which removed its outsider CEO and installed Sophie Bellon, the daughter of the company’s founder, in his place. Although the move “wasn’t necessarily a bad idea in itself”, the company’s shares fell on the news because “markets were sceptical about the idea of a family owner installing themselves as CEO without a proper global search”.

How the outlook for family firms differs globally

The nature of family ownership tends to differ from country to country. James Harries and Blake Hutchins of Troy Asset Management note that the US has many “amazing family businesses that have become multi-million, or even multi-billion-dollar firms”. There is also “a rich tradition of well-run family firms in the Nordic countries, especially in Sweden”, while continental Europe, too, has many successful, multi-generational, family-run firms, says Craigie.

But in countries such as France, many family firms are structured to minimise the tax their owners have to pay (an important consideration given the country’s wealth taxes). “So you end up with very complex cascading structures where one holding company owns a stake in another holding company.” The market generally doesn’t welcome the complexity of such structures, so they tend to trade at a “discount to the discount”, says Craigie. Many European family-owned companies “have managed to survive for multiple generations” – sometimes for as many as five, six, or even seven – those in Asia have more problematic attitudes toward stewardship. In that case, “as sad as it is to say, the old cliché about the second and third generation squandering what the first generation built up might have a ring of truth to it”, something that also applies to Latin America.

Gaurav Narain, principal adviser at the India Capital Growth Fund, is blunt about the shortcomings of Indian firms. High taxes and poor governance meant that, until recently, they were notorious for founders and family owners using dubious transactions between separate parts of their business empire to divert money from the pockets of both shareholders and the taxman. What’s more, due to the relatively large size of many Indian families, “the number of family members involved kept increasing to the point where you didn’t know who was calling the shots”.

The good news is that such attitudes are changing. Narain points out that many Indian tycoons are educating their children outside the country. This new generation of Indian business leaders, who are now playing major roles in their family companies, are “trying to incorporate the best practices of the US and elsewhere when it comes to corporate governance”. This means having a strong board and getting professional managers as executives, “with the family members providing strategic direction rather than being in charge of the day-to-day management”. Indian family firms are hence “now very well-run businesses”.

Similarly, Craigie notes that over the past few decades, sprawling European conglomerates have started to rationalise and simplify their structures. This process is by no means complete, but the pace of change is quickening, possibly helped by the fact that countries such as Germany, the Netherlands and France have abolished their wealth taxes. As well as making family firms easier to manage, these changes have helped unlock a lot of the value hidden away in the web of interconnected holdings, as well as reducing the discount the market applies to such entities.

What investors should look for (and avoid) in family firms

There is a strong consensus that, when deciding which family firm to invest in, one of the most important things to watch out for is the quality of the firm’s governance. Like Narain, Craigie thinks the best situation is where there is a division of labour between family members and professional executives. In an ideal world, such firms “would be run by professional managers, with the rights of minority shareholders protected, while the family provides more of a long-term ethos”. He also likes to see evidence that the company is allocating capital efficiently.

Another key factor in judging the strength of governance within a family firm is transparency, says Field. This can be demonstrated by the documents they produce and “the level of detail they go into about their business in terms of revealing numbers and strategy”. If a family-run firm proves as transparent as its peers, that is a good sign. However, if it isn’t willing to get into much detail about how their business is doing, then that is a definite “red flag”.

Investors should also be particularly wary of investing in family-run companies that have been rocked by “incidents in the past or various scandals”, says Field. At the same time, it could be worthwhile to buy into a family-run company that is genuinely “trying to take positive action to improve the quality of its governance”. Of course, deciding whether the change is genuine involves some work, as it is easy for firms to come out with rhetoric claiming they are trying to change “without doing anything meaningful”.

In short, “you need to check to see the exact steps that they are actually taking”, says Field. Increasing the number of independent, non-family members on the board of directors would be a positive step, for example. Or changing divisions or moving away from certain unprofitable business areas. One positive sign that a company has moved on from a scandal is if “it is able to demonstrate proper accountability by having heads roll in the boardroom”, even if that means family members lose out.

The best investments to buy now

AVI Global Trust (LSE: AGT) invests in lots of family-owned companies, as analyst Wilfrid Craigie believes they fit the fund’s mandate of “investing in durable, growing businesses at deeply discounted valuations”. The trust’s top five holdings include Vivendi (controlled by the Bolloré family), News Corp (Murdoch family), and D’Ieteren Group (D’Ieteren family). The AVI Global Trust, run by Joe Bauernfreund, has outperformed comparable investment trusts over the last one, three and five years, and trades at a discount of 6.4% to net asset value. The ongoing expense ratio is just 0.87%.

Craigie thinks D’Ieteren Group (Brussels: DIE) is “a real crown jewel”. Even after more than doubling its revenue and growing its adjusted earnings fivefold from 2019 to 2024, it trades at only 12.6 times 2026 earnings, a multiple that should increase if the company follows through on plans to float subsidiary Belron, in which it owns a 50% stake.

Another investment trust with a strong family focus is the India Capital Growth Fund (LSE: IGC). Principal adviser Gaurav Narain estimates that the majority of companies in the portfolio are family-owned, including the two largest, Dixon Technologies and Skipper. The fund has returned an average of 15.3% a year since it was set up in 2011 and has outperformed other India trusts over the past five years. It trades at a discount of around 6% to net asset value and has an annual management charge of 1.25%.

Narain is particularly bullish about PI Industries (Mumbai: PIIND). It has built up a great reputation with global companies because, unlike many rivals, it respects intellectual property rights. The decision by the Singhal family to professionalise the management has also helped the firm grow earnings by roughly 20% a year.

As stated in the main story, George Godber and Georgina Hamilton of Polar Capital are big fans of Morgan Sindall Group (LSE: MGNS), a UK-based construction and regeneration group that “epitomises” the type of founder-driven firm that is able to deal with challenges as they arise. Morgan Sindall has seen its revenue grow by half between 2019 and 2024 and is expected to keep growing strongly. Income investors are now reaping the rewards of this growth, with the dividend increasing more than sixfold during this period. Morgan Sindall trades at 13 times 2026 earnings and pays a dividend yield of 3.4%.

A promising European firm is EssilorLuxottica (Paris: EL), about a third of which is owned by the Del Vecchio family (descendants of Leonardo Del Vecchio, who founded Luxottica). Gerrit Smith particularly likes the fact that, although the family is not involved in day-to-day management, they “have helped give the firm a strategic focus, as well as a long-term plan”. EssilorLuxottica continues to enjoy strong growth, with sales more than doubling between 2019 and 2024, which justifies the fact that it trades at 37 times 2025 earnings.

Tom Wildgoose, head of equities at Sarasin & Partners, particularly likes AO Smith (NYSE: AOS), which makes water heaters. The firm was founded 150 years ago by Charles Smith and his descendants still own just under a fifth of the shares. Wildgoose praises the fact that the company has delivered “strong and steady financial results for many years”. The firm has grown sales at a rate of roughly 5% a year over the past five years, with normalised earnings per share growing by more than two-thirds during the same period and delivering returns on capital employed of more than 20%. The stock trades at a relatively modest rate (for the US market) of 17 times 2026 earnings, with a dividend yield of 1.97%.

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