Weekend Reads for Investors: Family Businesses, Pensions, and the Gekko Effect
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.
- Richard Bernstein warns of the dangers of stretching for yield. (Richard Bernstein Advisors)
- David Winters, CFA, believes “index funds are a dangerous market mania, akin to other market bubbles.” (Conseulo Mack WealthTrack)
- Aswath Damodaran examines how and why risk varies across countries. (Musings on Markets)
- “Jeremy Siegel: How a ‘Grexit’ Could Strengthen the Eurozone” (Knowledge@Wharton)
- Dividend investors need to pay attention to quality. (Research Affiliates)
- “Active Is as Active Does: Wading into the Active-Share Debate” (FactSet Insight)
- Considering Charley Ellis’s “defense” of active investing. (Morningstar)
- “An Ideal Retirement System” (Mercer and CFA Institute)
- “The State Pensions Funding Gap: Challenges Persist” (Pew Charitable Trusts)
- To gain financial independence, Michael Kitces is going to battle against “lifestyle creep.” (Bloomberg)
- “The Education of AirBNB’s Brian Chesky” (Fortune)
- “Twinkies Are Not Just Back from the Dead. Their Baker May Now Be Worth Billions.” (Washington Post)
- “The Trouble with Twitter’s CEO Search” (Bloomberg)
- A critical look at the investor-CEO feedback loop. (Bloomberg)
- Andrew W. Lo on the “Gordon Gekko Effect.” (The Massachusetts Institute of Technology)
- “Gender Diversity: A Hidden Problem for Fund Houses” (Financial Times)
- A call to bring “broken windows” policing to Wall Street (The Atlantic)
Emerging and Frontier Markets
- Sir Bob Geldof is part of “A Growing Chorus for Investing in Africa” (69th CFA Institute Annual Conference)
- Jason Zweig’s “Memo to China: Your Market Moves Are Doomed to Fail” (Wall Street Journal)
- What went wrong with the BRICs and can they recover? (Financial Times)
- A glowing New York Times profile of rapper 50 Cent praises his “exceptional business instincts” just days before he files for bankruptcy protection. (BBC News)
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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.
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