Don’t ignore family-owned businesses

Investors largely concern themselves with traditional publicly traded firms – many of which are controlled by large, institutional investors. Often overlooked are companies that are owned by families and have a portion of their shares available to investors. These family members frequently have controlling interest in the firms that their parents or grandparents (or even they themselves) founded, and have made running these legacy firms their life’s work.

In general, we at the Invesco International and Global Growth team believe the family-run approach can lead to attractive opportunities for our strategies that have the flexibility to hold small- and mid-capitalization companies. Here’s why.

Family-owned companies: A history of outperformance

According to a 2015 study, UBS found that family-owned firms tend to generate higher margins and return on equity than their peers, and have consistently outperformed benchmark indices over the past decade.¹ The study’s authors added that this is especially the case with small- and mid-cap firms.

While past performance isn’t a guarantee of future results, the strong performance of family-owned companies makes sense if you assume that families by their very nature are concerned about long-term survivability. Given this assumption, family owners may be unlikely to take undue risks or engage in destructive activities that could undermine their legacy firms’ long-term viability.

Less debt, more dividends

We have found from our own experience that many family-owned firms tend to have less leverage on their balance sheets and place emphasis on sustainable growth over near-term quarterly profits. In our view, another advantage of many family-owned companies is reasonable management compensation. This family advantage is magnified in an international context; through our research, we have found that management compensation generally tends to be a lot lower in Europe than in the U.S. Many family-controlled companies also pay dividends – a big plus for income-oriented investors.

Liquidity a concern, but can be manageable

There is a flip side, of course. Family-controlled companies can often be more illiquid than traditional publicly traded firms. This stands to reason. Because families often control a large percentage of shares outstanding, these firms tend to have a lower trading float. Limited float can lead to wide bid-ask spreads and more difficulty for investors looking to trade in and out of shares. The key for portfolio managers, in our view, is to keep assets to a manageable size, with enough of a cash position to handle unforeseen market turbulence.

For investors who are seeking the potential for sustainable growth and income, we believe exposure to family-owned companies can make a lot of sense. And while past performance is no guarantee of future results, we believe the historical performance of family-owned companies merits close consideration for our strategies, which emphasize companies’ Earnings, Quality and Valuation (EQV) characteristics.

The strategies our team manages seek to invest in reasonably priced, quality growth companies. We keep an eye out for well-run, family-controlled companies with sustainable earnings growth and strong balance sheets.