Professionally-managed firms offer better returns than family businesses

Shareholders of family-owned companies saw 5% annualised erosion in their investments

Seven of the top 10 best performing stocks in the last five years are family-owned. For example, Godrej Consumer and Bajaj Auto stocks are up six and a half times, while the Wockhardt stock has gone up six times.

But an analysis of the top 100 companies based on market capitalisation shows shareholders of professionally-managed firms have bigger reasons to smile. While these companies gave annualised returns of 11 per cent on an average in the last five years, shareholders of family-owned companies saw five per cent annualised erosion in their investments.

The analysis done by Morgan Stanley for the last five years as well as for the last 10 years shows minority shareholders are better off investing in a professionally-managed company which does not have a dominant single shareholder. (Click for graphic)

Within family-owned companies, those with 40 per cent or higher promoter holding outperform their peers.

“The widely held view is that respect for minority shareholders is more likely in a professionally-managed company than in a family-owned one,” says Ridham Desai, managing director of Morgan Stanley India.

The rewards for good governance and being fair to  minority shareholders outweigh any concern over poor use of cash. After all, the market is paying multiple times profits in market capitalisation. To that extent, and given the long-term horizon that families tend to have about businesses, the bias is questionable, Desai said.

The data show investor bias is not wrong — stocks of professional-managed firms outperformed those owned by families.

In the longer term of 10 years, the average annual returns by family-owned companies are 17 per cent compared with 28 per cent by professionally managed companies. Returns from multinationals such as Hindustan Unilever are also good, at 21 per cent during the period.

Analysts said professionally-managed companies such as L&T and ITC have managed their businesses far better than family businesses in the downturn of the last five years. While L&T went abroad to hunt for more construction contracts, ITC’s focus on consumer products helped it face the slowdown.

Shareholders of Reliance Industries have lost 40 per cent in the last five years, while ITC’s stock price is up 200 per cent. “There are many factors that are in favour of professionally-managed companies. For example, free float and liquidity are far higher in such companies, apart from a takeover opportunity premium attached to them. Besides, investors pay a premium for companies with a higher corporate governance record,” says Avinash Gupta, head of financial advisory at Deloitte.