Family businesses: Insights on an attractive investment prospect
September 2020
Pictet-Family – Fund manager interview
Pictet Asset Management has developed a new investment strategy that invests in listed family businesses, companies that count founding families as major shareholders.
Written by
Cyril Benier
Senior Investment Manager
Alain Caffort
Senior Investment Manager
Share this article
The portfolio is a repositioning of the Pictet-Small Cap Europe fund and is managed by Cyril Benier and Alain Caffort.
In this Q&A, they discuss the strategy’s guiding philosophy.
What exactly is a family business?
How you define a family business is a matter of interpretation. Sometimes it’s obvious, say when founders hold very large stakes in their own names. But the boundaries can sometimes be blurred. We take a systematic and rigorous approach to our definition. Family businesses that make up our investment universe are public companies in which an individual or family holds a minimum of 30 per cent of voting rights. The family can be by blood or marriage, the stake can be held through a foundation or some other vehicle. Such information is rarely freely available; unearthing it often requires painstaking research.
Why 30 per cent?
Research shows that active participation in the general assemblies of publicly listed companies averages around 60 per cent of share ownership. At 30 per cent, a shareholder (or group of closely tied shareholders) effectively has the casting vote and, thus, control.
Why focus on family businesses?
Family businesses are the lifeblood of our society and the backbone of the global economy. They contribute between 50 per cent and 70 per cent of countries’ gross domestic product and employ the majority of their workforces.
Society's true backbone, both economically and socially
Source: Tharawat Magazine, Economic Impact of Family Businesses – A Compilation of Facts, 06/01/2016 – over 40 sources used including IMD and KPMG
*Data representative of private employers only
There’s a large body of research showing family businesses tend to outperform their peers – financially and in terms of shareholder returns.
Of course, as anyone with experience of families and family disputes knows, this type of ownership can also lead to a number of problems – which is why it is also crucial to take an active approach to investing in these companies. And that’s where we can make a difference – ensuring we avoid the pitfalls in this otherwise attractive investment landscape. Please read our related article on the universe for more about why it makes sense to invest in family businesses with an active approach.
This suggests corporate governance is a big focus for you, is that right?
Environmental, social and governance (ESG) factors are all important sources of investment performance. But when it comes to investing in family businesses, governance is key. That’s because governance is intrinsic to a company’s overall values and culture.
We use several bespoke indicators in order to draw out what’s acceptable and what isn’t. For example, we tolerate a lower degree of board independence from family companies – after all, the close alignment between the family’s and business’ fortunes is one of the reasons these companies do so well – but we’re much more stringent on the composition and approach of the company’s audit, remuneration and nomination committees.
What sorts of family businesses do you invest in?
We look for high quality businesses with strong revenue growth and balance sheets that are well managed and leaders in their sectors.
We have no geographic or size preference – with the caveat that the shares have to have a fairly substantial minimum daily liquidity of USD5 million. We accept that this liquidity requirement keeps us from investing in some potentially interesting companies, but it also protects our clients from the worst effects of market dislocations such as we’ve recently seen.
Importantly, even after applying this stringent criteria, there are enough investable companies left – our universe is made up of 500 companies globally that operate across all sectors. It’s also worth noting that our liquidity limitation means that our strategy’s performance isn’t down to size effects. It’s not a case of trading performance for liquidity and thus volatility, as is the case with many small-cap funds. So we know that the outperformance of family businesses really is down to family effects.
Are family firms weighted to certain countries and sectors?
Not in a way that narrows our investment options. Family companies operate across all sectors and industries. And we have a more balanced regional distribution than capitalisation-weighted global equity indices – for instance, 59 per cent of the MSCI All Country Index is based in North America, while our weighting is around 44 per cent.
But it is true we prefer some sectors to others. For example, Consumer Discretionary companies make up around 11 per cent of the MSCI ACWI but have nearly twice the weighting in our portfolio. And the majority of these companies are based in Europe, including some of the great luxury goods companies.
We’re also relatively heavily weighted towards Communication Services and Consumer Staples. By contrast Energy makes up more than 5 per cent of the MSCI ACWI but less than 2 per cent of our holdings.
Why Pictet Asset Management?
Pictet-Family brings together the core capabilities of the Pictet group: Family businesses, Global funds, identification of winning market themes and a strong focus on ESG factors.
We know what the drivers of a successful family business are and what characteristics of a family business we are looking for. After all, we have a strong case study right at home: Pictet is a family business and a very successful one.
Webcast
>
Click the icon below to access our latest Pictet-Family webcast
Cyril Benier joined Pictet Asset Management in 2015 as a Senior Investment Manager. Before joining Pictet, Cyril had been working at AXA IM since June 2008 as a Portfolio Manager within the Small Cap Equities Team. He was in charge of the coverage of Industrial, Chemical, Mining and Energy for their European and Global small cap portfolios. He co-managed the European Small caps fund and managed the AXA Deutschland fund. Prior to that Cyril spent four years at Natixis Asset Management, as a mid- and small-cap equities Portfolio Manager. He was also responsible for the Natexis Eurovalue fund from 2005-2008 and for the European Smallcaps fund from 2007. Cyril began his career at Crédit Lyonnais Asset Management as a small-cap Analyst in 2002.Cyril is a graduate of the SFAF, has a specialised Master’s degree from HEC, a leading French business school (2002), and an engineering degree from the UTT-Groupe UTC (2001).
About
Alain Caffort
About
Alain Caffort
Alain Caffort joined Pictet Asset Management in 2011 as a Senior Investment Manager in the Small Cap Equities team, covering Europe and EAFE strategies. In 2019, he started managing the Pictet Family strategy and joined the newly created Specialist Equities team. Before joining Pictet, he was with Groupama Asset Management since 2000. From 2004 to 2011 he headed the small-cap unit and was the lead manager for an open-ended UCITS fund specialized in European small and mid-caps. Over this period, his responsibilities also included managing a Global Technology Fund. Previously he was a credit and equity buy-side analyst for four years covering global telecommunications equipment and operators as well as semi-conductors. Alain holds a Bachelors degree in Econometrics from Toulouse University. He also holds a masters degree in Finance from SKEMA Business school and a masters degree in International Finance from Westminster University in London. He is a member of the S.F.A.F. (Société Française des Analystes Financiers).
Share this article
Important legal information
This marketing document is issued by Pictet Asset Management. It is neither directed to, nor intended for distribution or use by any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Only the latest version of the fund’s prospectus, the KIID (Key Investor Information Document), regulations, annual and semi-annual reports may be relied upon as the basis for investment decisions. These documents are available on assetmanagement.pictet.
This document is used for informational purposes only and does not constitute, on Pictet Asset Management part, an offer to buy or sell solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. The effective evolution of the economic variables and values of the financial markets could be significantly different from the indications communicated in this document.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or for any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
EU countries: the relevant entity is Pictet Asset Management (Europe) S.A., 15, avenue J. F. Kennedy, L-1855 Luxembourg
Switzerland: the relevant entity is Pictet Asset Management SA , 60 Route des Acacias – 1211 Geneva 73
Hong Kong: this material has not been reviewed by the Securities and Futures Commission or any other regulatory authority. The issuer of this material is Pictet Asset Management (Hong Kong) Limited.
Singapore: this material is issued by Pictet Asset Management (Singapore) Pte Ltd. This material is intended only for institutional and accredited investors and it has not been reviewed by the Monetary Authority of Singapore.
For Australian investors, Pictet Asset Management Limited (ARBN 121 228 957) is exempt from the requirement to hold an Australian financial services license, under the Corporations Act 2001.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).
In Canada Pictet AM Inc. is registered as Portfolio Manager authorised to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA. In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.
This website uses cookies to enhance user navigation and to collect statistical data. To refuse the use of cookies, change your settings or for more information, please click on the following link: Cookies policy. By continuing to browse this website, you accept the use of cookies for the above purposes.
