Practical analysis for investment professionals
17 July 2015

Weekend Reads for Investors: Family Businesses, Pensions, and the Gekko Effect

Posted In: Weekend Reads

Most studies of the impact of family ownership indicate that, on balance, family control is a good thing for stockholders.

Family-controlled firms typically maintain a long-term perspective and strong balance sheets, and boast corporate cultures that have won the admiration of Warren Buffett.

Credit Suisse has added to the body of research on family-controlled firms with the recent release of “The Family Business Model,” a global study that sought to better understand why family-run businesses outperform.

The Credit Suisse Research Institute created an index of over 900 companies from around the world with market capitalizations greater than $1 billion and family ownership of at least 20%. Since 2006, the index outperformed the MSCI All Country World Index (MSCI-ACWI) by 4.5% annually.

What’s behind this superior performance? The study attributes it to a host of factors, including a greater emphasis on organic growth via value-added products and brand development and less reliance on mergers and acquisitions, which often turn out to be value destroying. Reflecting their conservatism, family-controlled firms also spend less on research and development, but profitability measures suggest their R&D spending is more efficient than their non-family peers.

The risks of investing in family-controlled firms are chiefly corporate governance-related. Related party transactions, self-dealing, and excessive compensation are just some of the hazards investors need to consider. And performance tends to peak with the founder. Once the torch is passed to succeeding generations, returns tend to decline.

Below are some other stories that caught my eye in recent weeks.

Strategic Thinking

Active Investing

Retirement

Big Business

The C-Suite

Cultural Matters

Emerging and Frontier Markets

That’s Entertainment

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©iStockphoto.com/Christian Mueller

About the Author(s)
David Larrabee, CFA

David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise: Equity Investments · Portfolio Management

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