Investors should note that family-owned businesses tend to think not just years but decades ahead, says Janus Henderson’s Glen Finegan.
The best fund managers think long term, but even they can’t compete with Japan’s family businesses.
In 2017, more than a thousand Japanese companies will celebrate their centenary. Yet a century isn’t such a big deal for an established Japanese corporation; the five oldest companies in the world – all of them Japanese – date back to between 578 and 771 AD.1
Japan is an exceptional case, especially among developed markets; but for several of the largest developing markets, family businesses are a central plank of the economy.2
Such companies might be dismissed as an anachronism in an age of ‘quarterly capitalism’, with its constant churn of M&A activity. Yet the reality is that they can be compelling investment propositions, in great part thanks to their intergenerational focus. It is a focus that obliges the company’s management to place as much emphasis on reputation and longevity as on interim profits.
“The unique ownership structure of a family business gives them a long-term orientation that traditional public firms lack,” says Glen Finegan, Head of Global Emerging Market Equities at Janus Henderson Investors. “In traditional public firms, any diversion from maximising profits on a consistent quarterly basis is likely to lead to dismissal, so it’s understandable if the executive management team prefers to fail conventionally by following the herd and taking on too much risk than never fail at all.”
Mention of a ‘family business’ usually triggers images of small enterprises with a very local focus. However, family-owned businesses include some of the biggest names in the marketplace: Walmart, Heineken, Tata Group, and Porsche.
In the US, France and Germany, family businesses account for some 30% of those companies with sales in excess of $1 billion, according to Boston Consulting Group (BCG) figures.3 Japan has the highest concentration of family businesses by almost any measure.
Yet it is in emerging markets that family businesses are most dominant. BCG found that they account for 55% of large companies in India and Southeast Asia, and for 46% in Brazil.4 EY research found that 85% of companies in the Asia-Pacific region are family-owned.5
“We believe in the ability of many such groups to generate wealth in a risk-averse manner,” says Janus Henderson’s Finegan, who manages the St. James’s Place Global Emerging Markets fund. “In aggregate, family groups make up over a quarter of the fund – and account for four of the top ten holdings.”
Blood is not enough
However, such companies are still very capable of making poor decisions and of developing a damaging corporate culture. Take the recent case of Samsung. In August this year Lee Jae-yong, acting chairman of Samsung and South Korea’s third-richest man6, was sentenced to five years in prison. His crimes included offering bribes and perjury. The scandal even toppled the South Korean president, Park Geun-hye.
“Trust has to be earned and we do not simply make an assumption that a family owner will act in the common good and emphasise stewardship over greed,” says Finegan. “The Samsung case speaks to the fact that not all family-founded firms create strong governance structures that protect minority shareholders.”
Finegan’s team tests this premise through its bottom-up stock research, and asks a number of questions in the process.
- How has the family treated its minority shareholders in the past?
- What businesses does the family own outside the listed entity and are there conflicts of interest?
- Are there good-quality, independent board members providing oversight?
- Does the family conduct government-related business and, if so, how does it win contracts or licences?
- How is the family regarded by non-financial stakeholders such as local communities and environmental non-governmental organisations?
Family companies that perform well under such scrutiny can provide strong investment opportunities. Finegan believes that such companies often excel at taking far-sighted, sometimes contrarian decisions that a professional management team could overlook – or deprioritise in favour of short-term goals and stock market pressure. Antofagasta, a Chilean mining company, is one example of a company that Finegan believes has proven its aptitude to think long term.
“In 2015 it acquired an excellent copper asset from a financially distressed seller,” says Finegan. “In contrast to many of its peers, it had maintained a strong balance sheet throughout the last decade, and was able to act as other miners, who were facing pressure from a weakening copper price and highly leveraged balance sheets, were forced to dispose of high-quality assets. This kind of counter-cyclical behaviour is exactly how we believe mining companies should act, but it requires a management team able to resist short-term market pressure, which in this case the family provides.”
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The opinions expressed are those of Glen Finegan of Janus Henderson Investors and are subject to change at any time due to changes in market or economic conditions. This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. The views are not necessarily shared by other investment managers or St. James’s Place Wealth Management.
3 See 2
4 See 2