LISTED STOCKS OF FAMILY BUSINESSES
France, Germany, Switzerland, Sweden and the Netherlands have the most comprehensive landscape of listed family businesses in Europe by market capitalisation. In terms of the number of companies, Germany is at the forefront of Europe with 146 companies. Germany’s economy is characterised by medium-sized family businesses – however, the stock exchange is not popular neither with German savers, nor with German companies as a source of equity. Traditionally, German companies have financed themselves primarily through banks. The UK, on the other hand, which accounts for around 20 per cent of the market capitalisation in the STOXX Europe 600 stock index, has only 66 family businesses – it accounts for only 3 per cent of listed family businesses in Europe by market capitalisation. This could among other things be due to the corporate financing culture (the UK is much more market- and equity-oriented), the industry distribution or the many companies that use the British capital market without having major activities in the country. The British’s affinity for the stock market doesn’t help either. The UK have a shareholder ratio (shareholders aged 14 and over relative to the total population) of almost 25 percent – in Germany the shareholder ratio is well below 10 percent. The total market capitalization relative to gross domestic product in Great Britain is around 100 percent – in Germany, on the other hand, it is only slightly over 50 percent.
In terms of sectors, the dominant industries by market capitalisation are Consumer Durables & Apparel (an area in which the French are particularly strong), Food, Beverage & Tobacco, Pharmaceuticals, Biotechnology & Life Sciences, Automobiles & Components (Germany leads the way here, although major changes are expected in light of electromobility and climate protection) and Capital Goods (German companies are also strongly represented here and are producing machinery for the global upturn, not least for production facilities in Asia). These five sectors represent around half of the universe’s entire market capitalisation.
How can long-term investors take advantage of the superiority of family businesses? Stocks of family-owned companies usually perform significantly better than other stocks over the long term, i.e. beyond the cycle. In the long term, listed family businesses clearly outperform other European equities. The annualized total return outperformance is 4-5 percent.
How to profit from family businesses stocks in a market crisis?
Stocks of family-owned companies usually perform significantly better than other stocks over the long term, i.e. beyond the cycle. However, the resilience of these stocks to crises is not necessarily reflected in a lower fall during or shortly after a stock market crisis, but mostly in the long-term. As investors, we need to know this and take it into account in our investment processes. Especially with a focus on medium-sized and/or small companies, a portfolio of family businesses can also lose more than the overall market in market crises. Long-term orientation and implementation discipline are therefore essential prerequisites for investment success with a portfolio of family businesses. We must first adopt the long-term orientation of family businesses and refrain from actionism. We need to give family entrepreneurs the time they need to seize opportunities and solve problems.
"As a family business, we think in terms of generations. When investing in other family businesses, we know that they, like us, have the long-term "grandchild capability" (or “Enkelsicherheit” in German) as their top priority. This makes it easier to endure even the most difficult market phases!"
What can we expect from family businesses and their stocks in the crisis? For investors, realistic expectations are invaluable: How much (excess) return can we expect in which scenario? Where exactly will this come from (more trading, lower costs, multiple expansion, selection of individual stocks...)? How should my investment behave in which market phase? What are the risks to consider? For example, a stock market crisis can be divided into five phases: from the buildup, the displacement phase, the panic and the technical rebound to normalization.
In the long term, the quality of the company and its long-term prospects of success are decisive. However, markets are often self-absorbed, especially during a crisis, so that the quality factor is often overlooked for a long time.
Family businesses are crisis-proof because they are tough, crisis-aware and experienced. In crisis, we see how great the advantage is when business leaders have already successfully steered their companies through other crises. You'll know what to do much faster. Family entrepreneurs focus on the essentials and live for the company. Especially during a crisis, one's own money and one's own reputation are at stake. Family businesses make long-term and sustainable decisions. Investments are geared towards passing the company on to the next generation in a better shape than it was inherited by the previous one. So family business owners know that they or their children, and not the next manager, have to deal with crises themselves. That's why they usually go into the crisis with stronger balance sheets and sufficient liquidity. In this way, they can concentrate calmly on the operational side of things, even in times of crisis.
The "family business ecosystem", which has been cultivated for many years, benefits from strong, supportive roots: These include long-term relationships with investors, employees, customers and suppliers. In a crisis, it makes a big difference if you have known each other for years and can rely on each other. In addition, family businesses are known for veteran as well as for pragmatic employees with enough experience and leeway to act in crisis. A fitting quote for this is attributed to Peter Drucker: "Culture eats strategy for breakfast." This is exactly what family businesses stand for.
What lessons can we learn from investing in family businesses?
First and foremost, we must adopt the long-term orientation of family businesses, refrain from actionism and act prudently. We need to give family businesses the time they need to realise opportunities and solve problems. As entrepreneurs, we know that good things often take time. Once again, the prerequisite for success remains implementation discipline.
At the same time, we need to focus on the strengths of family businesses in our selection and portfolio structuring process. Our risk management must also address the specific weaknesses and risks of family businesses. We summarize the strengths in our internal, qualitative CONREN Family Business Strength Score and the risks in our CONREN Family Business Risk Score.
Long-term thinking that extends beyond the economic cycle, current trends and shortterm figures is something that we, too, as investors should learn from family businesses. From constantly seeking out something new or hectic toing and froing to fixating on current performance or the last month‘s returns, all of these habits are real return killers for investors too.
We need the courage and independence to think about processes in a long-term way. Although this might sound obvious, it is by no means simple. In order to achieve long-term success, we sometimes need to demonstrate considerable discipline in implementation, wait and see, and at times be prepared to spend quite a while swimming against the tide. Only the composure that comes from fundamental principles, market expertise and a long-term outlook can open up the possibility of exploiting any short-term opportunities that may arise.
Truly active investing without consideration for reporting dates or benchmarks is highly suitable for business families. No entrepreneur would allow themselves to be restricted by such artificial lines or parameters. Business families look at the long-term opportunity and long-term increase of purchasing power. This means that short-term market noise does not unsettle them so much; in any event, key volatility indicators are of little significance for investment strategies with a long-term focus.
Active risk management – combined with capital preservation and crisis resilience – plays a crucial role. All of this can be summed up by the German term ‘Enkelfähigkeit’, which means ‘securing the estate for future generations. As most family business entrepreneurs think in generations, they see the companies and family assets that they manage first and foremost as loaned items to be preserved and enhanced for the next generation. The management of cycles, transitions and rifts plays a significant role for family business entrepreneurs with a multi-generational mindset. Generally exercising caution yet choosing the right moments to be bold gives family businesses the best opportunities to not just survive but thrive in the face of change. However, passively swimming with the market and having blind faith in tried-and-trusted methods can be dangerous and even destroy livelihoods.