Oct. 01, 1991
Oct. 01, 1991

Table of Contents
Oct. 1, 1991



If you believe the rich are indeed different, you'll love this
novel strategy for trouncing the market: bet on the publicly traded
companies the rich still control.
That's the winning approach of the Pitcairn Family Heritage Fund,
which manages $140 million, mostly for heirs to the century-old
Pittsburgh Plate Glass fortune created by John Pitcairn. The fund
invests in family jewels: Anheuser-Busch, H.J. Heinz and other firms
long ruled by wealthy clans. Since its launch in November 1989, the
fund has returned 32%, vs. 21% for S&P's 500- stock index. This year,
the fund gained 27% to Aug. 1, vs. 20% for the S&P. ''The fund's
performance,'' says manager David Lawson, 40, ''confirms its premise
-- that well-run family-controlled firms are tops over time.''
To profit from Lawson's strategy, small investors can only follow
his lead, because to get into the fund, they must deposit at least
$4 million with sponsor Pitcairn Financial Management in
Jenkintown, Pa. The $1.3 billion firm serves about 100 Pitcairn
families plus 37 unrelated households.
The long-term payoff of Pitcairn's approach, as explained at left,
was first documented by a Wharton study showing that, over the 20
years through 1989, an index of 165 closely held companies gained
nearly four times more than the S&P 500. Family money, Lawson
explains, has the big advantage of being patient money. Exemplars
among such firms pay scant dividends, which are taxable. Instead,
they tend to plow cash back into new products and plants that sustain
tax-deferred growth in stock prices.
About 200 companies meet the fund's eligibility standards by
having at least $200 million in shares outstanding and 10% or more of
the stock in family hands. Lawson recommends five firms that, as a
group, recently had a miserly dividend yield of 1.8% (vs. 3.2% for
the average stock); low debt-to-equity of 13% (vs. 66%); and a high
return on equity -- a basic yardstick of profitability -- of 21% (vs.
12%). In addition, he believes each is capable of five-year profit
growth of at least 16% annually, double his projection for the
typical stock. Yet most are priced close to the S&P 500's recent
earnings multiple of 16 (based on his profit forecasts for 1992).
Lawson's five favorites:
-- Hillenbrand Industries ($1.7 billion in shares outstanding; 63%
owned and run for 130 years by the founding family). Low-profile
Hillenbrand, with $1.2 billion in annual sales, long prospered in the
casket business before branching out into hospital beds, American
Tourister luggage and Medeco locks. What many investors overlook,
says Lawson, is the strong growth potential of its newest venture --
funeral insurance -- marketed through its oldest customers,
undertakers. He expects the insurance business to grow by 25%
annually over the next five years to $118 million.
-- FlightSafety International ($1.8 billion; 34% owned by chairman
Albert Ueltschi and family). Lawson believes the shake-out in the
airline industry has unduly depressed the stock of this specialist in
pilot training and flight simulators, which has had 19% annual growth
over the past five years. While earnings have stalled in 1991, he
says, the $275 million company figures to rebound much faster than
the down-sized airline sector. Reason: the surviving megacarriers
will increasingly hire FlightSafety rather than keep their costly --
and underutilized -- in-house training centers.
-- International Flavors & Fragrances ($3.2 billion; 30% owned by
the van Ameringen and Haebeler families). Scents for cosmetics and
other consumer products account for 61% of this perennial growth
stock's $1 billion in revenues. But Lawson is most smitten with the
firm's key role in today's $16 billion market for leaner, quicker
cuisine. ''The problem with many low-fat and pop-in-the-microwave
products is blandness,'' he says. ''This company has the solutions.''

This is an article from the Oct. 1, 1991 issue

-- Northern Trust ($1.7 billion; 20% owned by the Smith family).
More and more investors, says Lawson, are realizing that Chicago's
102-year-old carriage- trade bank (assets of $12.4 billion) bears
little resemblance to its problem-loan-plagued peers. Recently,
delinquent loans were a tiny 0.8% of its portfolio. And 43% of its
revenues come from its thriving trust department.
-- Eli Lilly ($22.4 billion; 18% owned by the Lilly Endowment, a
family foundation). With many drug stocks hitting all-time highs,
Lilly recently traded at $84, down from its $90 peak last year. The
culprit, says Lawson, is investors' unwarranted fears about lawsuits
claiming that Prozac -- Lilly's blockbuster antidepressant that's
generating about $900 million of the company's $6 billion sales --
can trigger violent behavior. The controversy, he adds, has also
obscured Prozac's sterling prospects for regulatory approval,
probably next year, as a treatment for obesity.
Notably absent from his family album is $6 billion PPG Industries
(nee Pittsburgh Plate Glass). The Pitcairns, he explains, sold their
highly fragmented 15% stake in 1985 partly in anticipation of 1986's
sweeping tax reforms.
And what about $57 billion Wal-Mart, from which 40% owners Sam
Walton and kin amassed America's biggest fortune? ''It was among the
fund's oldest holdings until March, when I unwisely took my profits
at $38 a share,'' says Lawson. Wal-Mart lately has sold for $50 a
share, 36 times his estimate of full-year earnings. ''Even $38,'' he
says, ''was too rich for my blood.''

These family-controlled firms are ranked by Lawson's projected
percentage gains in share price by year-end 1992. Northern Trust
trades over the counter; the remain der are listed on the New York
Stock Exchange.