Investing in Family Businesses
Family businesses generate more stable returns than the average. Here’s why a Family Business ETF can be a good investment product.
In 2015, a selection of 30 Canadian family-controlled businesses in different sectors and regions throughout the country demonstrated a stronger performance than the S&P/TSX composite index by 120.3% over a period of 10 years. Among all American businesses on the Fortune Global 500, 15% of them are family-run, according to statistics reported in this study conducted by the National Bank.
Family businesses have good returns, but they also account for a large portion of the business sector in many countries. In Canada and the United States, nearly 90% of businesses are still owned by families.
Taking this into account, NBI offers the Canadian Family Business ETF (NFAM) that tracks and replicates the returns of Canadian family businesses since the beginning of 2019. A family company is a business in which family members have a significant influence on strategy, planning and decision-making.
This ETF is based on the NBC Canadian Family Index, which replicates the performance of 43 Canadian family-controlled businesses on the Toronto Stock Exchange (TSX). For example, Rogers Communications, Cogeco Communications, Quebecor, Saputo, Transcontinental, Power Financial Corporation, Canadian Tire, Alimentation Couche-Tard, Loblaws, Cascades, Molson Coors, Power Corporation of Canada and CGI Group are part of this index.
Their strength: A long-term vision
There’s a simple explanation for the success of these family businesses. The main reason: their leaders aren’t looking for quick results; rather, they have a long-term vision for sustaining the business. It’s important for owners of a family business to be able to pass on their legacy to the next generation so they may experience in the years to come what the present owner may have inherited from their own parents.
Family businesses are also more cautious. On the one hand, expenses are more controlled. On the other hand, these companies manage their growth and are more selective when comes the time to make investments or grow through acquisitions. As a result, they generally have less debt. Since they’re in a better financial situation, that means they’re also better able to get through market fluctuations, particularly economic crises.
People management in family businesses is different too. It’s very important for the owners to be able to trust their management team. This leads management to socialize and share their personal lives with the owners throughout the company. Thus, strong relationships are formed, which contributes to reducing staff turnover.
While the tenure of CEOs in large American businesses averages 4.6 years, those heading the 100 biggest family businesses have an average tenure of 13 years, according to the National Bank’s The Family Advantage study. This approach to human resources management often goes hand in hand with a strong company culture, which unites employees and increases their loyalty.
ETFs, an easy investment
The company culture for these businesses is centred on social responsibility, more so than for other corporations. This represents another advantage for these companies because these days, those who don’t pay attention to their environmental and social impact take risks that can eventually lead to major financial consequences.
They’re often better integrated into their community, with a stable base of local repeat customers. Their national identity, particularly in the case of Canadian businesses, and their familial sense of belonging combine to create a relationship with their customers: consumers are encouraged to stay loyal due to their pride in supporting local Canadian businesses.
But family-run businesses still face risks, just like any other company. They can’t avoid typical business challenges and they also have their own difficulties. For example, their successors could be a strength if they’re well-prepared and competent, and if the transition goes smoothly. That being said, 70% fail in passing the torch to the next generation, and 90% fail with the generation after that. But nowadays, owners are better supported and more informed, so transitions are planned earlier than ever with the help of experts, which increases the chances of success.
When the founder remains highly involved in the company’s business, family companies obtain vastly superior results compared to non-family businesses on the index, according to a study by Bain & Company on corporations on the S&P 500 index. Why? Because of the founder’s fundamental and structural vision.
Family companies perform better, are stable and are generally well-managed. Investing in these businesses can therefore prove to be a winning strategy. And it’s easy to do with an ETF!
National Bank of Canada does not make any representation or warranty, express or implied, to the owners of the NBI Canadian Family Business ETF or any member of the public regarding the advisability of purchasing, selling or holding any product linked to the NBC Canadian Family Index generally or the NBI Canadian Family Business ETF specifically or the ability of the NBI Canadian Family Business ETF to track the performance of the NBC Canadian Family Index or meet its stated objectives. National Bank of Canada has no obligation to take the needs of the National Bank Investments Inc. or the owners of the NBI Canadian Family Business ETF into consideration in determining, composing, calculating or maintaining the NBC Canadian Family Index.
National Bank of Canada does not guarantee the adequacy, accuracy, timeliness or completeness of the NBC Canadian Family Index or any data included therein or, the results obtained from the use of the NBC Canadian Family Index and/or the calculation or composition of the NBC Canadian Family Index at any particular time on any particular date or otherwise. National Bank of Canada shall not be subject to any damages or liability for any errors, omissions or delays therein.