Relative returns: why you should seek out family-run firms

Succession problems can throw a company off course
Studies show that shares in family-owned companies tend to outperform the wider market. But how do you identify the ones most likely to succeed? Matthew Partridge investigates.

When it comes to family-run firms, we tend to think of small companies serving a market niche. In fact, several of the world’s corporate behemoths are in family hands. About 30% of the S&P 500 and 40% of continental companies with sales over $1bn meet the standard definition of family ownership: at least 20% of the shares are controlled by a single family. Family ownership is less common in the FTSE, although examples include Hikma Pharmaceuticals and AG Barr. But how do they perform? And how can investors identify the best bets in this field?
What the research tells us
There are two major studies on how family ownership affects stock returns. Investment bank UBS found that listed family-owned firms have raced ahead of the overall market over the last decade. Specifically, the UBS Small & Midcap Family-Owned Global List has returned 17% per year in the past 15 years, against 6% for the MSCI global large-caps and 8% for the MSCI global small-caps. Family-owned technology companies have vastly outperformed the Nasdaq, even though family-controlled businesses are often associated with the old economy. The shares of family-owned companies also tend to be less volatile than shares in comparable firms.
Of course, there are a few caveats. Shares in the UBS Family index have been hit harder than most small caps by the decline of the stockmarket over the past few months, falling by just under 20% since the start of the year. It is also important to note that their outperformance is not constant over time, with strong returns only continuing for as long as the family have a large stake and remain actively involved in what’s going on. Once families start drastically reducing their stake, with a view to exiting completely, the relative outperformance of the family firms usually starts to peter out.

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