Playing happy families made me a million

After 50 years of investing it is hardly surprising that I know exactly what characteristics to look for in companies that I would consider investing in, and the types of shares that I feel comfortable holding for the long term.

Smaller, established, profitable, conservative dividend-paying companies that are cash positive (or with low levels of debt) are for me, and they preferably have a recognised brand or "USP" and also trade internationally.

Frequently shares that meet these criteria are what I term "family" or "proprietorial" companies - with control passing through the generations where the emphasis is on "stewardship", one of my favourite investment words. In such cases there are usually family members on the company's board conscious of the efforts of earlier generations who created and developed the business, and conscious also of their responsibility to add worth and value during their tenure in a conservative way.

An example would be to adopt a strategy of organic growth with perhaps an acquisition from time to time, but no excessive risk-taking or "betting the shop" on a large, overreaching deal.

In addition, those in an executive role often find that there are widows, maiden aunts or siblings with significant shareholdings totally reliant on the dividends from the "family" plc for their lifestyle.

There used to be the saying "clogs to clogs in three generations" - particularly applicable to many old mill-owning families but, as a generalisation, those days are thankfully long gone. The current generation of "family" plcs have hopefully recognised that to pass the reins to a member of the family who is just not up to it is a recipe for disaster. These days one usually finds that a successful family plc board has a judicious mix of family and outsiders, promoted or brought in for their professional abilities rather than the size of their shareholdings.

Over the years I have profited greatly from investing alongside families, albeit with much more modest holdings. It was in the 1970s when I started to focus on such companies by buying into the three "P"s - Pifco, Pochin, and Paterson Zochonis (now PZ Cussons) - all based in my north-west homeland.

Pifco was a manufacturer of small electrical appliances - hairdryers, kettles - acquiring Russell Hobbs as it grew. It ran a very tight ship, operating from an old converted mill and always maintaining a large cash pile - Pifco was my first ever personal equity plan (PEP) holding. Like PZ, it then had ordinary and "A" non-voting shares. But as both companies were family-controlled whether I held voting or non-voting shares was somewhat academic, though the "A" shares were cheaper. Ultimately - with no family succession - Pifco was taken over by Salton in 2001, delivering me a significant profit.

Construction services/property developer Pochin was originally a great success story; I was impressed with its reputation as a "quality" builder of schools, offices and warehouses, with its own property developments becoming increasingly important and profitable. My £15,000 investment grew steadily until it was worth over £1 million by 2007. Fortunately, concerned that the share price of nearly 400p was too "toppy", I sold some between 367p and 399p - quadrupling my original investment, but still leaving me with an extraordinary paper gain.

Then, sadly, near-disaster struck; overstretched in property development joint ventures, the 2007-8 banking/property crash nearly capsized the firm. Thankfully it survived, but as a shadow of its former self with the shares currently limping along around 25p or at 1/16th of their former peak. It shows that nothing is certain in stockmarket investing - equity investment always involves a degree of risk.

PZ Cussons has to be one of Manchester's greatest commercial success stories; originally founded by Paterson, a Scot and Zochonis, a Greek, in the 19th century to export textiles and basic commodities from the UK to Nigeria.

Now controlled by the wider Zochonis family, PZC has become a major international manufacturer of soaps, detergents and cosmetics with substantial operations particularly in Indonesia, Nigeria and the UK (I declare an interest, having been an employee and non-executive director).

When PZC went public in the 1950s it was capitalised at just over £1 million; today's capitalisation of £1.5 billion represents spectacular long-term growth with shareholders not having to put in any further capital. I have been a happy holder for 36 years - today it is one of my largest holdings - with an annual dividend return of approximately 34% on original cost. This is what long-term investment is all about.

Greater Manchester can also boast two other "golden" family stories: international floor coverings manufacturer James Halstead has had an outstanding record of year-on-year profits and dividend growth - both my daughters are appreciative shareholders, and in more recent years soft-drinks manufacturer Nicholls has really taken off following its decision to outsource the production of Vimto, focusing its energies on growing sales to the Gulf states and beyond.

I first invested in Nicholls in 1991 but only started to build up a worthwhile holding in 2000. What we have seen with Halstead, Nicholls and PZC is not only real profits growth but also a significant re-rating - moving on to a much higher price/earnings ratio - thus delivering the "double whammy" that is so beneficial to investors.

Other "happy family' successes for me include London-based electrical accessories manufacturer GET - taken over by Schneider of France - and three current holdings: Birmingham-based short-term lender S+U, controlled by the Coombs family; Redditch industrial lighting manufacturer

FW Thorpe, controlled by the eponymous Thorpe family; and Leeds property investor Town Centre Securities, controlled by the Ziff family.

Overall this sector has proved a rich seam. Some investors regard "family control" as a negative, as they have dominating directors' shareholdings. I take the opposite view - I want those running my plc investments to have large holdings, the larger the better. Then I know our interests are truly aligned.

About the author

John Lee is a former Conservative minister and is now a Liberal Democrat peer. His political interests include defence, tourism, trade and industry and investment. He has been a regular columnist for the Financial Times "My Portfolio" series. In 2003 he revealed how he had grown £126,000 of regular investments in PEPs and ISAs into more than £1 million.