Product showcase: Follow the leaders

Founder-led companies have historically outperformed - it's been established many times over through both industry and academic research.

In perhaps one of the most notable examples, having observed that profitable growth was becoming more challenging for listed companies, while working at Bain and Company, Chris Zook and his team looked at all public companies across the globe and their performance over 25 years. It found the companies that were most successful at maintaining profitable growth over the long term were disproportionately those where the founder was still involved in the business in some way, shape or form, or where the founding principles were still practised. In some cases, they're as much as three times more likely to generate superior long-term returns.

Ziller Funds Management founder and chief investment officer Joseph Ziller describes founder-led equities as "a very interesting pool to fish in" for global equities investors.

"What you get in a founder-led stock is leadership with: an owner's mindset, frontline obsession and business insurgency," Ziller says.

A fan of Zook's work, Ziller notes an example often cited by Zook, being MS Oberoi, founder of Oberoi Hotels.

"He had a frontline obsession; well into his nineties, he would walk down to the customer suggestion box in the hotel lobby, take out the suggestions, hold them so close to his eyes that they touched his nose because he was almost blind, and then handwrite responses one-by-one to each of the guests' queries," Ziller recalls.

"There was a love of the customers and an obsession with service at the front line."

These kinds of qualities create a unique operating culture that influences the workforce, the product, and the financials because of their overall impact on value proposition. As a result, the stock price benefits and returns grow.

Still, simply being founder-led doesn't necessarily guarantee success from a stock selection perspective; there are still other factors to consider.

"The bell curve of returns for founder-led stocks versus non-founder-led stocks has fatter tails. So, you can get disproportionately attractive returns from the stronger founders, but also disproportionately unattractive returns from the weaker ones," Ziller explains.

"This is so much so that our internal testing quantifies the advantage of investing in the strongest founders as similar in magnitude to the advantage of investing in founder-led stocks as a whole."

As a result, Ziller employs an extremely rigorous approach to selecting stocks for the Ziller Global Fund and, by extension, the newly launched Ziller Global Fund Active ETF.

Ziller Funds Managements maintains a list of the largest 800 founder-led stocks across the globe and regularly runs them through its proprietary qualitative analysis tool it calls Ziller quartiles. In addition, a quantitative checklist addressing each founder's control, alignment, focus and tenure is also completed on each company. These steps help to identify a focus list of 80 high quality founders.

"The Ziller Global Fund then only invests in this focus list of 80 founder-led stocks - only in the top 10% of our founder universe," Ziller says.

When you take a step back and look at it, this style of investing is a very focused means of gaining exposure to growth stocks and themes.

"By investing in the strongest founders, they tend to be a growth engine for their businesses - so by nature, this is a Growth portfolio," he explains.

Historically, a small set of growth themes has generally driven a disproportionate amount of sharemarket value creation. For example, from 1760 to 1840 it was textiles and steam that powered the Industrial Revolution, then it was railways, steel and electricity, followed by petrochemicals in the early 20th Century and microprocessors in the 1970s and 1980s, he notes.

Today, artificial intelligence, e-commerce, cybersecurity and alternative energy sources are doing the same job.

"In particular, over the last 30 years, sharemarket wealth creation has been particularly narrow with half of all global stockmarket wealth created by only 0.2% of companies," Ziller notes, citing 2023 research from academics at Arizona State University, Hong Kong Polytechnic University, and Tulane University.

"When we dive into this, our research suggests that half of this value was generated by founder-led companies, and this is despite founder-led companies only representing one tenth of the broader market."

In terms of what makes a business the right fit for the Ziller strategy, the firm looks for one that demonstrates a growing economic moat, either via a growing product value proposition, improving capital structure or shrinking disruption risk. More broadly, it looks for an incremental return of equity for each business.

Once the right founder and business are identified, Ziller then buys the stock with a margin of safety in its purchase price.

"We want to get significantly more than we pay for; we want a margin of safety in our purchase price to limit the risk of financial loss from the investment over our five-year time horizon," Ziller says.

Such an approach is well suited to the current market environment, in Ziller's opinion, as founder-led companies offer opportunities for long-term capital appreciation even amid volatility.

"Short periods of volatility can be uncomfortable, but they are also a very natural part of a market cycle. For us, volatility can also present opportunities because stocks can become quite unloved but remain fundamentally strong," Ziller says.

As an example, he highlights the experience of Nvidia and Palantir, both of which sold off significantly from their highs in late 2022. The issues that caused this proved to be transient, and their intrinsic value remained intact, and both stocks have since soared.

"Every so often we get these periods of volatility, and during these periods, bargains of a decade can arise," he says.

On Ziller's side is the fact that his universe of founder-led stocks, as identified by the proprietary model, are run by founders who have experienced multiple cycles while running the same business, proving their ability to withstand the tough times.

The typical tenure for a chief executive is less than five years, he notes - less than a whole economic cycle. At the founder-led companies currently in the Ziller portfolio, it's about 19 years.

"So, that's almost four times longer than the median tenure of a chief executive," Ziller comments.

"This tenure and track record of success allows us to selectively lean into compelling opportunities when they arise with the conviction that these founders have been there before and come out the other side stronger."

Disclaimer: Perennial Investment Management Limited ABN 13 108 747 637, AFSL 275101 (PIML) is the issuer of this investment product. Past performance is not a reliable indicator of future performance. Nothing contained in this article should be construed as a solicitation to buy or sell any security or financial product, or to engage in or refrain from engaging in any transaction. You should read the relevant Product Disclosure Statement (PDS) and Target Market Determination (TMD) before making any recommendations to a client. The disclosure documents can be obtained from www.zillerfm.com.