Can investors benefit from seeking out companies with unequal voting rights for different share classes? The message from investment research firm MSCI, which recently posted a study examining the performance of such stocks, is yes, they can.
That’s despite the fact that the very idea of owning shares with less voting power than other shares rankles many investors.
The analysis looked at roughly a decade of returns (ending in August, 2017) of 2,493 constituents of the MSCI ACWI Index, a global stock benchmark, and teased out the returns of the 243 stocks with unequal voting rights in the index, the largest of which included Google parent Alphabet Inc., Facebook, Warren Buffett’s Berkshire Hathaway, Samsung and Visa.
The unequal-voting-rights stocks in the index returned close to an annualized 7.5%, while the index itself returned less than 5%.
Put another way, excluding the unequal-voting-rights stocks would have reduced the index’s total return by 0.30 percentage points, on average, each year. Given the relatively small number of such stocks in the index, that’s a big lag.
Unequal voting rights are certainly a hot button topic. Advocates of the one-share-gets-one-vote approach complain that unequal voting rights unfairly entrench management that may pay little attention to shareholder concerns and that may block takeover attempts that would benefit shareholders. In contrast, supporters of unequal voting rights stocks say they provide a safeguard against efforts by activists or short-term investors to interfere with long-term corporate strategies. At a rising number of public companies, outside investors get reduced or even zero voting power, while insiders may get voting power that far exceeds the number of shares they own.
But why should the stocks with unequal voting rights outperform?
The most obvious answer is that they tend to be technology stocks, the white-hot sector that has been powering index gains in the bull market.
Another reason, favored by proponents of unequal voting rights, is that such share class structures concentrate voting power in the hands of smart management.
The MSCI study frames the key question thusly: “Are companies with unequal voting rights better managed because of concentrated voting power or in spite of it?”
So MSCI examined the companies with unequal voting rights to determine what was driving outperformance. Overall, such companies tended to be exceptionally big, fast-growing, highly profitable, and, yes, definitely in the technology industry.
But mostly, MSCI found that the turbocharged returns were due to “company-specific” reasons—without defining precisely what that meant. Presumably, that would include factors such as smart asset allocation or product development that can drive returns. In other words, it is talented management that drives outperformance more than anything else.