Family-controlled companies as a new asset class


A unique series of studies by Credit Suisse Research has shown that the performance of family-controlled listed companies around the world is so superior to other companies that they should be considered a separate asset class. Don’t laugh. Even if it’s not called an asset class, the investment case is compelling.

Credit Suisse Research, which has been studying big listed companies with more than 20 per cent of their shares controlled by family interests – usually the founders and their offspring – since 2006, last week published its latest report, ‘The CS Family 1000’.

The researchers expanded their universe from 900 to about 1,000 companies for their latest study, and also expanded the ‘control group’ of other listed companies for comparative purposes to more than 8,000. The results are therefore more robust, although they are consistent with the earlier studies.

The study shows family-controlled companies outperformed all others by, on average, 4.5 per cent a year since 2006. The family-controlled companies showed a cumulative return of 126 per cent over the 10 years, which was 55 per cent more than companies in the MSCI ACWI, implying an annual alpha of 392bps.

Urs Rohner, Credit Suisse Group chairman, said family-owned businesses had outperformed non-family-owned businesses in every geography and every sector, with European companies showing the strongest outperformance.

In terms of the underlying reasons for the phenomenon, Rohner said, the researchers concluded that conservative growth targets combined with organic cashflow or equity investments were among the key performance drivers and tended to produce sizable and sustainable returns.

“Furthermore, the family-owned businesses, in our assessment, pay specific attention to capital preservation, while at the same time – especially in the US and Asia – they invest more in research and development than their non-family-owned peers,” he said. “In fact, especially in Asia (ex-Japan), family owned businesses have tripled their research and development investment in the past four years.”

By family owned businesses, the researchers are not talking about the corner store. The largest five by market-cap are: Alphabet, Facebook, Alibaba, Samsung and Berkshire Hathaway. They are companies in which family owners or descendants have at least 20 per cent of the stock and 20 per cent of the voting rights.

In support of their suggestion family-owned businesses should be considered an asset class, the researchers say: “Our assessment suggests that the investment case for family-owned companies remains compelling as they have outperformed non-family-owned companies globally by around 400bps per year since 2006. Importantly, this impressive performance occurred in every region and sector of our analysis.

“While younger family-owned companies outperformed their more mature peers, we do not necessarily see this as proof of “succession risk,” but more likely a rejection of the more small-cap growth profile of younger family-owned companies. The degree of share ownership by the founder or family does not appear to be a key driver for performance.”

Family-owned businesses also beat the others on share price returns and revenue growth. Their risk/return profiles, defined by information ratio, are also superior.

The report examines areas of potential risk for family-owned companies, such as succession and governance issues, and gives them broadly a thumbs-up in those areas too. There is a drop in average returns after the second generation, but the analysis shows that is primarily due to the age of the company rather than succession. Smaller and younger companies tend to outperform larger and older ones across markets.