Investing for the long-term is something that naturally appeals to most of us. Some of the most celebrated investors are those that focus on generating long-term returns, including Terry Smith and Nick Train in the UK, or Warren Buffet across the pond in the US. 
But beyond investing in these managers, it can be difficult for a retail investor to invest for the long-term. How do you know your chosen fund manager is truly long-term, for example, and that their commitment to the long-term counts for more than just a fuzzy marketing slogan?
What’s more, you have to be confident that your chosen fund manager will remain in charge of their fund for a sufficiently long period of time. That’s not a problem for a manager like Terry Smith who has set up on his own, but it can be an issue for fund managers at larger investment houses.
Long-term investing starts at home
Fortunately, however, there does appear to be a solution to the long-term dilemma. Investors might want to consider the idea that investing starts at home, and buy stakes in family-owned companies. Doing so has historically proven to deliver above average returns. According to Credit Suisse, family-owned companies have significantly outperformed their non-family counterparts since 2006, returning almost three times as much.
While the Credit Suisse data only goes back to 2006, there is wider academic evidence to support the idea that family-owned businesses tend to do better long term than non-family businesses. They are at the heart of economies in Germany and Italy, and there are several notable examples of successful publicly listed family businesses in the UK such as Hargreaves Lansdown.
Why do family-owned companies produce better results?
Put simply, family-owned companies tend to take a longer-term approach to their business. They have a stronger inclination to focus on growing their revenues over the long-term, and often develop new products and opportunities using money generated from their own business. In other words, they invest more in their own growth, and they invest using their own money, rather than borrowing too much from the bank or taking risks which they can’t afford.
Are there any drawbacks?
Family-owned businesses still carry all the usual risks of investing – your money can still go down as a well as up – but some have raised more specific concerns too. To begin with, there is a risk that families retain too much control if they have extra voting rights or control over the management team.
When Credit Suisse looked at this issue, they didn’t find much evidence in support of this. Returns for family-owned companies with a disproportionate say were slightly worse in Europe and Asia ex. Japan, but better in the US. While special voting rights are a risk to watch for investors, they don’t appear to be a reason to avoid family businesses entirely.
You may also want to consider what kind of geographic exposure family-owned companies give you. The majority of family-owned businesses are found in Asia ex. Japan, making up about half the total, with Europe coming in at 23 per cent and the US at 12 per cent. This is a very different country breakdown compared to global equity markets, with the US accounting for about half the value of all publicly traded companies in the world.
How can I invest in family-owned businesses?
There are several options in terms of how to invest in this area, and you may well be doing some of them without realising it. Richard Pease’ FP Crux European Special Situations fund has significant family or founder ownership, with over 40 per cent of the portfolio holdings having a material interest from the founders, family or CEO’s. These types of companies are actively sought by Pease within the investment process. Another example is Matthews Asia Ex Japan Dividend, which again has a strong focus on family-owned businesses, in part because the founders are often as keen on receiving a good dividend income in alignment with other investors.
There are also a number of tracker funds offering exposure to the theme of family-owned businesses. I would add a note of caution for these – the Credit Suisse data is selective on the type of companies that qualify for its group of businesses, and so the broader performance of a passive vehicle might not match the returns Credit Suisse have calculated. But with this caveat in mind, playing happy families is something investors may want to explore more closely.
Nick Wood is head of investment fund research at Quilter Cheviot. The views expressed above are his own and should not be taken as investment advice.