Build Your Wealth With Family Firms
LONDON -- It's surprising to think there are family owned or family controlled firms in the FTSE 100. But there are some, such as Associated British Foods , Schroders , and Reckitt Benckiser .
It's often said that family ownership helps to underpin long-term consistent performance. Does this stack up in the FTSE 100?
Well, just look at these share price performance figures over one, five, and 10 years:
Source: Google Finance. Prices as of Jan. 25.
An investment in any of these firms over the last one, five, or 10 years would have blown an FTSE tracker out of the window. In each case, the return over 10 years is at least four times what the index delivered.
I haven't taken account of dividends in this comparison. Looking at the total return would change the numbers somewhat, but the three firms are all good dividend payers, so the conclusions would be broadly the same. I suspect that the three firms would show even better outperformance.
What's so special about family firms? There is a wealth (an appropriate collective noun here) of academic research on the subject, and the consensus is that family firms perform better in the long run because they focus more on long-term objectives.
Indeed, some studies have suggested that family firms underperform in good times, precisely because they don't sacrifice long-term resilience in favor of short-term profit. So you're less likely to see family firms loading up on debt in boom years, for example. In fact, they tend to be more lowly geared throughout the cycle, emphasizing safety and balance-sheet strength over quick profits. The aim is to get rich slowly, not quickly.
Another common feature is that family firms are more careful with their money. They keep their costs down and are much more selective when it comes to capital expenditure. So it's no surprise that family firms indulge much less in buying companies, especially avoiding large acquisitions. Mergers and acquisitions are renowned for destroying shareholder value while boosting the stature and earnings of CEOs.
Finally, family firms tend to retain employees longer, building loyalty and a strong corporate culture.
ABF's ownership of Primark is a case in point. The now-incongruously named food group has seen its once-peripheral budget retail chain grow like a cuckoo in the nest to become one of its biggest profit generators.
There's no synergy between the retail stores and ABF's food businesses, and conglomerates are out of fashion. There would likely be a quick profit from a demerger. It's a fair bet that the Weston family's control has acted as a brake on that. It owns 55% of the company, the CEO is a family member, and the family appoints one director to the board.
Fund manager Schroders illustrates the parsimonious approach to acquisitions. "We've made five small bolt-on acquisitions [since 2006] without huge execution risk, which is what we like," CEO Michael Dobson told the Financial Times last year. That included a shrewd 25% purchase of an Indian fund manager -- but with net 3 billion pounds of cash on the balance sheet, plenty of CEOs would be agitating for a big deal.
The Schroder family controls 44% of the shares, and octogenarian Bruno Schroder, the great-great-grandson of the founder, sits on the board.
Reckitt Benckiser is perhaps not generally thought of as a family firm. But the Benckiser family owned about 15% of the shares until last year, when it sold down to 10%. It is entitled to nominate a director so long as the holding stays at that level. The current incumbent is deputy chairman Peter Harf, whose day job is running the family investment firm that also owns cosmetic giant Coty.
The company demonstrates the longevity angle to family firms. Current CEO Rakesh Kapoor has worked for the firm and its predecessors since 1987. He took over in 2011 from Bart Becht, who had been CEO since Benckiser merged with Reckitt and Coleman.
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The article Build Your Wealth With Family Firms originally appeared on Fool.com.Tony owns shares in ABF and Reckitt Benckiser but no other shares mentioned in this article. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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