Why you should consider founder-led companies
In this week’s video insight, I discuss the long-term outperformance of founder-led companies and why they should be a core component of your investment portfolio. Amid the noise of reporting season, it’s essential to focus on the proven resilience and strategic vision of businesses like ARB (ASX:ARB), Reece (ASX:REH), WiseTech (ASX:WTC), and Macquarie Technology (ASX:MAQ), where the founders or their families continue to drive success. Backed by robust research, I explore how these companies not only deliver superior shareholder returns but also maintain a strong company culture, innovate with a long-term perspective, and prioritise sustainable growth over short-term gains.
Transcript:
Hi, I’m Roger Montgomery, and welcome to this week’s video insight. It’s easy to get distracted by all the announcements made during reporting season. But one theme I am always reminded of is the long-term outperformance of founder-led companies. When, for example, ARB, Reece, Wisetech, and Macquarie Technology report their full-year results, I also remember that the people behind these businesses are still driving strategy and ignoring the noise associated with the market and analysts’ short-sighted demands. The fact that the bulk of their personal wealth is tied to the outcome of their efforts is reason enough to keep a close eye on the companies whose share registers are dominated by founders, their families, and friends.
As an investor, what gives me plenty of comfort is the copious research justifying that sense of well-being. Wouldn’t you be comfortable with the circa-10-year share price returns for ARB (+220 per cent), Reece (+310 per cent), Wisetech (+2685 per cent), and Macquarie Technology (+1748 per cent)?
Backing the argument to focus your investment efforts on founder-led listed companies is one of the most comprehensive studies on the subject by Credit Suisse. The “CS Family 1000” report examined 1,000 publicly traded companies where the founder or founding family still had significant influence, finding that founder-led companies outperformed broader equity markets by approximately 4.5 per cent annually over the long term.
In another study by Bessemer Venture Partners, they looked at the performance of companies in the Russell 3000 index for the three years between 1998 and 2018 and found that founder-led companies generated returns of 10.1 per cent per year, compared to 7.2 per cent for non-founder-led companies.
And finally, Bain & Company’s “Founder’s Mentality” framework revealed that companies that maintain founder-like qualities achieve higher revenue growth and superior shareholder returns.
I think you can build a pretty resilient “all-weather” portfolio by finding founder-led businesses that also meet the quality criteria we have talked about here at Montgomery for more than a decade.
Founder-led firms tend to be more focused on innovation and long-term strategy. They often have a strong company culture rooted in the founder’s vision, take more calculated risks, can be more disruptive and insurgent, and almost always focus on long-term growth rather than short-term gains.
And whether it’s America’s Bezos, Gates, Jobs, Zuckerberg, and Musk, or in Australia, the Tudehopes at Macquarie Technology, the Browns at ARB, the Wilsons at Reece, or Richard White at Wisetech, one of the most significant and observable advantages of founder-led companies is the alignment of leadership with long-term shareholder value.
By contrast, hired professional CEOs, while often highly capable and motivated to make money, can lack the same level of personal investment in the company’s success. Their career plans and corporate-ladder-scaling dreams ensure compensation is frequently tied to short-term performance metrics, which may not be in the best interest of the company’s long-term health. Perhaps Qantas comes to mind as a recent example – a business now left with a damaged brand, but most certainly, a multi-billion-dollar bill for replacing an ageing fleet of planes.
I think, with their significant equity stakes, founders are more likely to prioritize sustainable growth, innovation, and long-term strategic planning. They’re not going to waste money on brand-building advertising follies.
Another critical factor setting founder-led companies apart is their ability to build and maintain a strong company culture and greater resilience in the face of adversity. This resilience often stems from the founder’s personal attachment to the company’s success. When times are tough, founders are more likely to double down.
I have seen this multiple times. There’s an often-ignored ratio in business called asset turnover. The ratio compares the company’s gross revenue to the average total number of assets to reveal how many sales were generated from every dollar of company assets. When founders spend on research and development or invest in assets for long-term revenue creation, this ratio plummets and, almost predictably, every time, impatient analysts become nervous, causing share prices to plunge. When you see this occur, especially to a reputable founder-led company with a long-term vision and great quality metrics like great rates of return on equity, it’s time to ignore the market and take advantage of its short-termism.
The bottom line is this: Founder-led businesses should represent a meaningful part of your portfolio. That’s all we have time for today. Thanks for joining us this week. We look forward to you joining us again next week. Please continue to follow us on Facebook and X.
The Montgomery Small Companies Fund owns shares in ARB Corporation and Macquarie Technology. This article was prepared 28 August 2024 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade ARB Corporation or Macquarie Technology, you should seek financial advice.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
