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
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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.
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Cyril Benier joined Pictet Asset Management in 2015 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, Cyril had been working at AXA IM since June 2008. He was co-manager of the European small-caps fund and the Global small-caps 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 Natixis Eurovalue fund from 2005-2008 and for the European Small Caps 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 (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).
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