Family comes first for risk-averse fund managers

LONDON Tue Aug 20, 2013 9:51am EDT

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LONDON (Reuters) - Investors seeking less volatile returns from their stock portfolios are turning their attention to family-owned firms that play for pride as well as profit.

In the wake of the 2007-09 financial crisis, when investors worldwide were badly burnt by companies' laxer attitude to risk, some fund managers are increasingly drawn to firms with family legacies to protect.

"When you have seen your parents work hard to grow a business, you try your best. You have to add value and improve things so you have growth for future generations," said Jose Luis Jimenez Guajardo-Fajardo, CEO of March Gestion, the fund management arm of Spain's Banca March.

While some corporate governance experts turn their noses up at family-run firms for their tendency to promote blood over talent or get embroiled in clan disputes, recent studies have shown they have a good track record on returns.

A study by Madrid-based IE Business School found that 1,000 euros invested in a family business portfolio weighted by market capitalisation would have delivered 3,533 euros over a 10-year period to 2010 against 2,241 euros for non-family firms.

The IE study defined a family business as one in which an individual or family held at least 20 percent of its shares and at least one family member sat on the board of directors.

The IE research supported the thesis of an earlier study by U.S. academic Jim Lee, which found that U.S. family firms averaged 14 percent revenue growth and a 10 percent net profit margin in a 10-year period to 2002, compared with 9 percent and 8 percent, respectively, for non-family businesses.

Banca March has used such research in building its 31 million euro Family Business Fund, which launched in November 2011. The fund returned 22.7 percent in the year to July 31, compared with 18 percent for funds in its Lipper Global Equity peer group, Thomson Reuters data shows.

Its top 10 holdings include Switzerland's Swatch Group (UHR.VX), German carmaker BMW (BMWG.DE), pharmaceuticals firm Roche (ROG.VX) and Warren Buffett's Berkshire Hathaway (BRKa.N).

But not all family businesses are paragons of virtue. Weak succession planning, conflict around growth plans, particularly those that involve diluting the clan's stake as well as the risk of family members expropriating assets, are all potential dangers.

"Family firms that are professionally run and are well-governed are great enterprises ... But there are significant risks, and it's telling that only 10-15 percent of family firms survive beyond the third generation," said Simon Wong, adjunct professor of law at Northwestern University and an independent advisor on corporate governance.

"Investors shouldn't base decisions to invest in one of these firms solely on the fact that it's a family firm. You need to look carefully at how the company is structured, governed and its philosophy in terms of succession of family members."

Investors in French cosmetics giant L'Oreal (OREP.PA) took fright when members of the Bettencourt family clashed over the role and guardianship of stock owned by elderly matriarch Liliane, who conceded her place on the board in February 2012.

L'Oreal shares tumbled 13 percent in the 90 days to October 2011, when a French court took control of the feud and ruled that France's richest woman was no longer capable of handling her business interests independently.

And there's a world of difference between firms run by families and firms run by entrepreneurs, Guajardo-Fajardo said.

"With entrepreneurship, you run a business to make it more attractive to buyers, sell it and then move to Mallorca for the rest of your life. That's not a family business," he said.

LONG-TERM STRATEGY

Alexander Gunz, manager of the Helicon Fund at Heptagon Capital, is another fan of family firms, citing typically lower debt levels, their preference for conservative expansion and accounting policies and longer-term strategic decision-making.

But one of the most compelling reasons to choose a family-run stalwart over a new start-up or broadly owned bluechip is the deeper alignment of interests between the minority investors and the controlling family on long-term strategy, Gunz argues.

This notion is echoed by S&P, which rates 18 percent of the family businesses they analyse as "strong" for management and governance, compared with 13.1 percent of other businesses.

The agency also found that European family businesses tended to have more stable credit ratings with a median credit rating of BB+, one notch above non-family businesses.

"Since the family's welfare is closely tied to firm performance ... company and shareholder interests become significantly aligned, creating a culture typically with high levels of dedication," Gunz said.

Gunz points to the hefty losses suffered by News Corporation (NWSA.O) in its UK satellite television arm before BSkyB became market leader, and how Switzerland's Lindt (LISP.S) toiled for years before becoming the United States' leading chocolatier.

"Neither of these businesses would necessarily have been permitted by their external shareholders to persist (with these projects), yet the long-term benefits have been indubitable," Gunz said, flagging Heptagon's positions in News Corp.

Thomson Reuters Corp. (TRI.TO)(TRI.N), the owner of Reuters, is more than 50 percent owned by Woodbridge Co, the Thomson family company.

(Editing by Will Waterman)

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