Like many of us, Azhar Pervez has neither the expertise, nor the ability to understand the ins and outs of evaluating a company or a share. But the 29-year-old, who runs a fitness centre in Hyderabad, has made a pretty packet on the stock market. Take a look at some of his picks over the past four years. He bought Reliance Energy at Rs 750 and booked 100% profit when the stock hit Rs 1,500. He picked Titan Industries at Rs 170 and sold at Rs 280; he purchased Tata Steel at Rs 700 and disposed it of when it reached Rs 900.So, is Pervez actually more savvy than he appears to be? He says, "I only invest in family-controlled enterprises. This ensures that they are genuine and are there for the long haul. If held for the long term, stocks of well-known family companies hardly disappoint shareholders."
Like Pervez, innumerable investors still go by the family or group name. These companies have proven track records and are easily identifiable through their products and services. Even during downturns, they are more aggressive in finding new growth opportunities and are at the forefront of adapting to changing times. Due to their long-term view, these companies also weather the downturn better than the rest.
Consider this: in the 10 years between 1998 and 2008, the profits of 146 family-run business entities that are listed on the Bombay Stock Exchange registered a cumulative annual growth rate of 21.8%. Their market capitalisations rose at a swift 29%. Even after the recent stock market correction, Rs 100 of familycontrolled entities' market capitalisation in 1998-99 is now worth Rs 713.
So, yes, family-controlled companies could be worth your while. But choose wisely among these. Do you want an exposure to a family-controlled, family-run group like Reliance, which is generally seen as being aggressive in finding new opportunities? Or would you rather invest in a family-controlled, professionally run firm like the Mahindra group, which relies on professionals to create the best products? Or do you prefer to invest in a trust-controlled, professionally managed group like Tata, which brings in best corporate governance practices?The good news is that companies in all three types of family firms have created significant shareholder wealth in the past. The trick is to look for a family-controlled company that has survived beyond the second generation of leadership. From a historic loss of Rs 500 crore in 2000-1, Tata Motors emerged as a much stronger company after a series of cost rationalisation exercises and portfolio overhauls. By March 2005, the company's profits stood at Rs 1,237 crore. The stock has risen multifold from its 2001 low of Rs 60 per share. It is this phoenixlike rise that draws investors to family-controlled businesses. If brand equity makes investors stay put, pedigree and strong support from the group entities help them emerge stronger.
Experts are in favour of investing in family-controlled, professionally managed companies. "It gives the best of both worlds. Investors can get long-term safety and the expertise of professional management, which keeps them ahead of the competition. This can lead to wealth creation in the long-run," says Anil Advani, head of research, SBICAP Securities.
It's an interesting demographic that family-controlled businesses are more popular among the older investors. The younger, more aggressive investor often tends to shrug off these companies. But when it comes to multinationals and their subsidiaries, the young and old tend to agree. "They mostly operate in niche segments and bring in global expertise. With them, investors can be assured of stable management and consistent returns," says A. Balasubramanian, chief investment officer, Birla Sun Life Mutual Fund.
Even if the MNC subsidiaries are not as aggressive as family companies, they offer consistent growth and are sensitive to shareholder concerns. Most MNC subsidiaries operate in the defensive FMCG and pharma space. Due to their strong parentage, they are privy to patented products and technologies, which command a premium. Most importantly, they reward the shareholders consistently through the regular payment of dividends, bonus shares as well as buybacks."These companies are perceived to offer better products and enjoy brand loyalty. Most MNCs have strong cash balances, high dividend payout ratios, low debt-toequity ratios and healthy return ratios. When the markets turn volatile and risk aversion increases, investors look for safer bets," says Swati Kulkarni, fund manager, UTI MNC Fund.
This is evident from the fact that both the Birla and UTI MNC funds have been outperformers in the past one year. UTI's MNC Fund lost 22.4% in one year; in the same period, the Sensex lost 40%. "The differentiated portfolio of MNCs is the main advantage in investing in an MNC fund," says Kulkarni.
Over 10 years (1998-2008), MNCs have registered a cumulative annual growth of 18.7% in profits and 10.9% in sales. Another advantage of investing in MNC subsidiaries is that they are cashrich and generate good cash flows. These enable them to pay back investors consistently. This is why the NSE MNC Index has outperformed in the current bear market. Between January 2008 and February 2009, the Nifty lost more than 55%, whereas the the MNC Index confined its losses to 42%.
The Bottom Line
Both family-controlled businesses and MNCs have a strong pedigree and a long-term view. Both categories of businesses can focus on developing strong models instead of getting mired in ownership issues. Even if the current slowdown poses serious challenges, their track records of emerging stronger from economic downturns make them attractive long-term investments.
Of course, there are risks unique to these models. Succession issues and over-dependence on a few people are significant risks for family-run concerns. "While there is no doubt that family businesses face particular challenges—governance and succession issues, to name just two—they also have unique strengths. They often have a longterm perspective, stable leadership and a strong identity drawn from the shared objectives of family members. Taken together, these factors can give the family business a strong advantage over many listed companies," says a Barclays Wealth report, based on a survey of family firms.
Whatever the risks, it is evident that the inherent advantages can tilt the scale in favour of these two categories.