Article
Family firms are more successful on average. When times are good, they are more profitable; when times are bad, they use a more defensive strategy. The difference on the stock market is measured by “alpha”. Investors would do well to take a closer look.
January 18, 2021
The numbers don’t lie: Family firms regularly perform better than non-family firms do, as confirmed by the latest study of the Credit Suisse Research Institute.1 For 14 years, the Institute has been following 1,000 publicly listed family firms. It includes companies whose founders and founder successors still hold an equity interest of at least 20% or control at least 20% of the voting rights. Among the top companies in the Credit Suisse Family 1000 universe are Alphabet, Facebook, Alibaba, Samsung, and Roche. The oldest firms in this universe are Norwegian conglomerate Orkla (founded in 1654), LVMH (1743), Bucher Industries (1807), Carlsberg (1847), and Davide Campari Milano (1860).
On the stock exchange, these 1,000 companies generated an outperformance of 5.0% in Asia, 4.7% in Europe, and 2.6% in the US (on a yearly average). Investors can benefit from these differences, expressed as a company’s alpha, by updating their portfolios to include individual securities from the Credit Suisse universe. Or they can take the simpler and more diversified approach of adding a fund that focuses on family firms.
Clear outperformance since 2006
Returns adjusted for sector, weighted by market capitalization;
index with January 2006 = 100
Historical returns and financial market scenarios are not a reliable indicator of future performance.
There are many reasons why family firms perform better on average. The amount of literature on the subject is manifold, and it’s hard to get an overview. What successful family firms have in common, however, is passion for entrepreneurship and proximity to their stakeholders, namely their staff and clients. “Walk the talk” is not just an empty promise: it comes from the family tradition, not a management manual. Shareholders, analysts, and other representatives of the financial community are also important to family firms, but are not necessarily the top priority.
The long-term horizon of family firms has a positive impact on sustainability. They perform slightly above average in the sustainability and ESG ratings. Compared with non-family firms, however, they lag behind somewhat in communicating about sustainability issues. This hesitance is most likely because family shareholders consider sustainability to be a matter of course in their corporate strategy and corporate management, thereby eliminating the need to communicate on this separately.
However, there is one area in which family firms do not tend to take the lead over their peers: governance. Thanks to voting right shares and similar tools, families are often the only authority figures, even though they hold just a minority interest. However, these types of situations are common, so external shareholders can carefully consider the pros and cons of investing in a family firm.
Irrespective of the pandemic, however, the spectrum of investment opportunities has actually widened further. "If not now, then when?" expresses an increased willingness to rethink matters at a fundamental level. The new opportunities and challenges this creates are explored in this issue of Scope.
1 The Family 1000: Post the pandemic Credit Suisse Research Institute, Credit Suisse Group AG, September 2020
