Three family-run businesses to buy now

Family-owned and run businesses really come into their own after sharp sell-offs, says professional investor Adam Johnson of Pictet Asset Management. Here he picks three of his favourites to buy now.

The real value of families becomes apparent in a crisis. The same applies to family-owned and run businesses. Our analysis shows that while they do well over the long term – between 2007 and June 2020 they outperformed the MSCI All Country World index by 56% – they really come into their own after sharp sell-offs, such as the one triggered by Covid-19 this spring.

Research shows that family firms are not only more profitable, but also outperform non-family owned companies. The source of this resilience is an emphasis on quality, growth and profitability. These firms tend to have lower leverage and consequently stronger balance sheets, something investors welcome during turbulent times. 

A leader in luxury goods 

These strengths reflect family owners’ priorities. First-generation companies tend to retain the founder’s drive, entrepreneurial spirit and ambition. But there is also a deep sense of stewardship from the first generation onward. 

This encourages a long-term approach. Of course, there are potential pitfalls too, not least risks to corporate governance that can be posed by a dominant shareholder. 

We evaluate companies’ governance according to our customised metrics. A particularly high-scoring company, and one we invest in, is Hermès (Paris: RMS), the luxury goods firm. Hermès’s long-term vision and identity is fiercely protected by the family. 

The focus is on quality, maintaining iconic status and resisting quick wins. The result is a stable, very profitable industry-leading company with plenty of cash to tide it over through crises such as the Covid-19 pandemic.

Delivering food with driverless cars

Roughly half of the firms we invest in have been family-held for several generations. The other half are still managed by their founders. One of these is our fifth-largest holding, Meituan-Dianping (Hong Kong: 3690), a leading Chinese online-shopping and services platform. 

Co-founder and major shareholder Wang Xing has impressed analysts with his entrepreneurial drive. He has a particular gift for identifying new niches and disrupting existing businesses. 

He demonstrated it during the height of the Covid-19 crisis and lockdown, when he managed to maintain grocery deliveries in Beijing by introducing an unmanned service in which driverless vehicles brought people their orders.

A second-generation winner 

Another company in our top ten is CGI (Toronto: GIB.A), one of the world’s largest IT and business-consulting services firms. Catering to both commercial and government clients, it is now in its second generation of family ownership. One of CGI’s key successes has been integrating acquisitions, thanks to its commitment to capturing the loyalty of its employees. 

Our portfolio is very different from standard global-equity indices. North American companies comprise less than 40%, with about as much in European investments. We hold between 40 and 60 companies. Our stocks are cash-rich and boast higher returns on equity, a key gauge of profitability, than the market average. And though we pay a premium based on price/earnings ratios, the valuations look very attractive once their growth potential is factored in.

Recommended

Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
19 Feb 2021
Three winning stocks for a post-pandemic world
Share tips

Three winning stocks for a post-pandemic world

Professional investor Dan Lane of Freetrade selects three stocks that he thinks will keep their relevance in a changing world.
1 Mar 2021
DR Horton: US housebuilder that's piling up profits
Trading

DR Horton: US housebuilder that's piling up profits

US housebuilder DR Horton’s stock rests on firm foundations and looks cheap. Matthew Partridge looks at the best way to play it.
26 Feb 2021
Investing beyond China: how to buy into wider Asian markets
Investment trusts

Investing beyond China: how to buy into wider Asian markets

There are several reasons to be sceptical about China’s development, says Max King. What’s more, there is vast potential in other regional emerging ma…
26 Feb 2021

Most Popular

A beginner’s guide to bitcoin: what is bitcoin?
Bitcoin

A beginner’s guide to bitcoin: what is bitcoin?

As a completely novel concept for many people, bitcoin can take a little effort to get to grips with. In the first of a short series on the cryptocurr…
1 Mar 2021
A beginner’s guide to bitcoin: how to buy bitcoin
Bitcoin

A beginner’s guide to bitcoin: how to buy bitcoin

For the novice, buying bitcoin can be a daunting prospect. Here, Dominic Frisby outlines the process from start to finish.
2 Mar 2021
What is “yield curve control” and why is it coming to a central bank near you?
Government bonds

What is “yield curve control” and why is it coming to a central bank near you?

Central banks around the world are determined not to let interest rates go up too quickly or by too much – a practice known as “yield curve control”. …
1 Mar 2021