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Latin American family firms resist short-term gains

Family ownership structures in Latin American corporates reduce shareholder pressure for short-term returns, new research from Fitch Ratings has revealed.

Family ownership structures in Latin American corporates reduce shareholder pressure for short-term returns, new research from Fitch Ratings has revealed.

The findings come as the return on equity among the region’s corporates begins to weaken, following strong returns for the previous four years from 2008 to 2011.

According to the report, ROE Trending Negative for Latin American Corporates, 45% of Latin American corporates with international ratings reported ROE of less than 8% in 2012. Between 2008 and 2011 61% of corporates in the region had ROE exceeding 8%.

The report found shareholders of family-owned companies were less likely to request extraordinary measures such as share buybacks or increased dividends when ROE decreased.

According to Joe Bormann, a managing director in Fitch Rating’s Latin American group: “As Latin American companies remain family owned it allows them to take a longer term perspective of their investments.”

Bormann said US companies, which are more commonly publicly listed, are regularly under pressure from shareholders to take extraordinary measures when ROE dropped and referred to Apple as an example.

In April, following public pressure from hedge funder and shareholder David Einhorn, the tech giant announced it would increase the size of its share buybacks to $60 billion and increase dividends 15%.

According to Fitch Ratings, half last year’s laggards in the investment-grade category (BBB- or better) were family owned or controlled, compared to 60% in the broader sample.

Brazil and Chile experienced the lowest ROE in 2012, with figures in the mid-single digits. This compared unfavourably with Mexico and Peru, which had ROE of 12%, and 10% in Columbia and Argentina.

Pulp and paper were among the most consistent underperformers, hit by excess capacity and weak demand in Europe.

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