Stockholm (NordSIP) – Companies which focus on stewardship stand to outperform companies which are focused on short term profit maximization. This is the belief behind The Good Governance Fund. Indications of good stewardship can be found in the language used by corporate leaders, which was the conclusion reached by Professor Didier Cossin of IMD in Lausanne who developed a model over the last ten years, based on his systematic analysis of the language used by companies in their 10k-reports.
Professor Cossin wrote a dictionary of 5,000 words that could be found in the annual report of companies in the S&P500. They were then ranked from worst to best. Many dimensions were included e.g time-horizon, emotion and tone, a company’s relationship with employees, its customers, and other stakeholders like the environment. According to Professor Cossin, the analysis of the use of language reveals the true culture and values of a company. From that, it is possible to draw conclusions as to which companies are driven by long term values and which are solely short-term oriented.
Pascal Botteron (pictured right) and Eric Everard (pictured left) paid a visit to NordSIP to talk about Green Blue Invest and its Good Governance Fund. This interesting thematic fund is based on a new concept. Launched in February with seed money, the good governance fund invests in the 100 best-ranked companies in the S&P500, according to the model. From 2007, a theoretical portfolio based on the model’s selection of the 100 best companies was created for every year based on the review of the 500 companies’ annual report. “This portfolio has generated an outperformance superior to 4% per annum,” says Botteron. “The goal going forward is to continue on the same strategy with the same performance objective”, he explains. “Most of the alpha is generated by avoiding the worst companies according to the model.”
“Alpha comes conceptionally from good management of companies. Practically, from one year to another, the model is very strong in excluding stocks with problems,” Botteron continues. Financials are regularly excluded because of short-mindedness. Through a principal decision, oil, defence and tobacco companies are excluded. “The model, during its 11 years of existence, would have selected 3 of those stocks,” Botteron says. He believes the Good Governance Fund is the first fund to address only the ‘G’ and thus have a different approach to asset strategy. He also stresses that having a good ‘E’ or ‘S’ doesn’t automatically mean having a good ‘G’, but “if you have a good ‘G’ there is a high probability that you will have a high E and S,” Botteron concludes.
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