Buying the family - avoid family business indexes

Photo by zhudifeng/iStock / Getty Images
Photo by zhudifeng/iStock / Getty Images

This week a family business index tracker product was launched to tempt investors into the sector. Listed on the Swiss stock exchange and available in various currency denominations, if you’re interested the Solactive Global Family Owned Companies Index is marketed by UBS. But, here’s the thing, don’t expect spectacular returns, if past performance is any guide.

The main index tracking the performance of family businesses over a meaningful time period is the Credit Suisse Family Index. The index comprises around 900 businesses, with each company owned at least 20% by a family. Most of the companies that comprise the index are based in the US - so maybe the best index for benchmarking is the S&P500.

But, unfortunately for the CS index, the S&P 500 index has outperformed it for much of the last five years. OK, time periods and benchmark indices can be changed to show that the CS Family Index has performed well. But, even when they have been changed, performance hasn’t been spectacular enough for investors to get too excited.  

Rupert Murdoch’s job doesn’t depend on the performance of his companies share prices, unlike a CEO of a non-family controlled listed business

Here’s some reasons why investing in family business indices might not be such a good idea. Family businesses, even when they are listed, will follow their own set of performance benchmarks that might have little to do with the performance of their stock price. Rupert Murdoch, the CEO and chairman of News Corp and 21st Century Fox, no doubt looks at the share prices of the two companies he owns with his family, but probably not as often as a CEO of a non-family listed business. That’s because his job doesn’t depend on his share price, unlike the boss of a non-family listed CEO.

Other performance criteria are likely to be more important to listed family businesses, like the longevity of the business to ensure a family succession and its relations with other stakeholders. Consequently, the efficiency of its share price, in some cases, might be third, or fourth on the list of importance when it comes down to the success of the business in the eyes of the family.

Also, the listed bit of family business is likely to be a small part of the total equity of the business, and when it’s larger, the family may still have the final say on big decisions through controlling voting class shares. So concerns for minority shareholders in most cases will be minimal at family-controlled businesses.

If investors still want to buy into family business performance, buying an index linked to the S&P 500, where 40% of the companies that comprise the index are family owned, might be a better way. And because not all the constituent parts of the index aren’t family owned, it better diversifies risk for investors. Likewise, the main French, the CAC40, and German, DAX, stock market index, where family businesses dominate, might also be a useful proxy index to invest in with strong family business involvement.

Perhaps the best way to access the performance of family businesses, if money’s no object, is to invest in them directly. As Family Capital mentioned last week, family businesses appear to be more willing to sell equity in their businesses than ever before. But you’ll still be a minority shareholder, even with a seat on the board.