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.
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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.
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