Yesterday, I became aware of an ETF that caught my attention, when I read about the non-profit JUST Capital Foundation that billionaire Paul Tudor Jones founded to create a better way to index for socially responsive (I meant to say "responsive" not "responsible") investing.
When investment billionaires talk, it is a good idea to listen and seriously consider what they have to say. Here is a video where Jones speaks for himself about the origins, nature, and need for the index:
That ETF, by Goldman Sachs, is traded under the symbol JUST, inception date 06/07/2018, 20 basis point expense, so far with $200 million in assets. But I suspect it could grow in size nicely based on Goldman as the sponsor, and more importantly, how well it will harmonize with arguments that will be so hotly debated in the coming election campaign year.
Let me be clear, I am not making any social argument this way or that, I just want to make more investment income and profits, which, to a certain degree, means going with the flow of ideas that attract investors - and toward that end, investors should pay attention to what attracts customers and employee talent to corporations.
Jones argues that companies on balance that are more responsive to the broad public's desires for corporate behavior are more likely to succeed in their businesses than those that are less responsive. That makes good sense to me. So, I looked more closely at what the JUST Capital Index was all about.
In summary, they do an annual survey of many thousands of people in a representative sample of the U.S. population and ask them what they want from corporations. They then convert that into components, and then rank the 1000 largest companies based on their fit with those components.
From the JUST Capital Foundation website, here are the most recent survey summary-level components of the JUST Capital Index, followed by how they process the survey data (the website has more detail on the sub-components):
- Workers (25% weight) - How a company treats its employees and contractors, including fair pay, good benefits, and safe working conditions. Customers (18% weight) - How a company treats its customers, including providing positive experiences, protecting their privacy, and providing fair sales terms.
- Products (14% weight) - A company’s products and services, including fair pricing and quality, as well as the benefit or harm of the product.
- Environment (13% weight) - A company’s environmental impact, including overall environmental responsibility, using resources efficiently, and minimizing pollution.
- Jobs (12% weight) - The positive impact a company has on the job market in the U.S., including the number of people the company employs and the number of new jobs created.
- Communities (11% weight) - How a company manages risks to human rights internationally, including minimizing forced labor or operations in countries with oppressive governments, and how it engages with local communities.
- Company Leadership and Shareholders (8% weight) - How a company’s leadership acts ethically and with integrity, achieving long-term financial growth and creating value for its shareholders.
"How We Do It
In our 2018 Survey, the American public prioritized seven key Issues that define just business behavior. Each Issue comprises multiple specific criteria, which we call Components. These determine what we actually measure in the model, and there are 36 Components in total. Through extensive quantitative polling, we derive weights for the Issues and Components, which correspond to their relative importance in the public’s opinion. We make sure the opinions we gather are as representative as possible of all Americans.
To produce the Rankings, we collect and evaluate data from different sources on how each company actually performs across the various Components. We do this in as fair, unbiased, and rigorous a way possible, taking care to gather the best and most reliable information we can. We share this analysis to each company before we publish it, giving them the opportunity to provide feedback, and share any additional or up-to-date data.
We work with a diverse Research Advisory Council of academics, economists, and subject matter experts, who advise us on how we measure corporate behavior. We also provide full transparency on our methodology, to ensure what we are doing and how we are doing it is accessible and understandable to anyone."
Let's call that a "bottom-up" form of social responsiveness indexing. That compares to most or all other ESG (environmental, social and governance) indexes that are effectively "top-down", in that they are built by experts and reflect the view of those experts - and the demands of endowments and pension plans - about what is responsible corporate behavior.
Experts are not always finely tuned into what the public thinks, feels and wants. So, that difference really struck me as interesting and potentially something that could create an edge of sorts in stock selection.
However, the traditional ESG funds have a wider following and more asset flows into them.
Therefore, I wondered how much overlap there was between the index constituents of the bottom-up (socially responsive) JUST Capital Index and the top-down ESG (socially responsible) indexes. Presumably, stocks that are constituents of both bottom-up and top-down indexes should be expected to have stronger asset flows than stocks in only bottom-up or top-down indexes.
While ESG is a term tossed around a lot, there is actually no accepted definition of ESG, such that the major ESG indexes only resemble each other but are not clones.
The concept of socially responsible investing is to be able to align portfolio holdings with personal values. In fact, I believe that is only extremely roughly possible in most cases because of the broad and somewhat opaque nature of the major top-down indexes. They try to put everything in, including the kitchen sink.
While certain religion-based funds may be able to closely align with the canon of the faith (Christian and Shariah funds are available), broad or universal ESG funds try to please everybody and thoroughly please far fewer.
Here, for example, is the description provided by MSCI for their ESG index process. I sure as heck have no idea what that means at a practical level, until I look at the constituents and make my own judgement one constituent at a time.
With the bottom-up approach of the JUST Capital Index, the criteria, or at least the reasons for the criteria, are more clear to me.
Of course, an argument against the JUST Capital Index is that it is based on what the American population wants from corporations, not what investors want or what the endowments and pensions have demanded as they pursue the values of their trustees.
A counter argument, though, is that the American population decides which corporations to buy from, and talent decides which corporations to work for, so indirectly, they are creating the results that investors seek.
Three major ESG index providers are FTSE, MSCI and STOXX, for which there are index ETFs:
- OTC:ESGV (from Vanguard based on the FTSE US All-Cap Choice Index)
- ESGU (from BlackRock iShares based on the MSCI USA Extended ESG Focus Index)
- ESG (from Northern Trust FlexShares based on STOXX US ESG Impact Index)
The first step in filtering to get to the 23 stocks selected for this article was to find those stocks that are common to all 4 indexes.
We did not want only JUST and ESG stocks. We also wanted stocks that are fundamentally sound, so we found the stocks in common with the Russell/RAFI US index fundamentally weighted ETF (FNDB) from Schwab.
However, we have a value bias in our thinking, so we required the list to also be constituents of VLUE (from iShares based on the MSCI USA Value Factor Index). Filtering for value after filtering for fundamentals is meant to minimize value traps.
Because we also have a dividend yield bias, we required the remaining names to have a yield of 2% or more, and to have paid and increased their dividends for 5 years or more.
The result of all that is a list of 23 stocks, within which there are most likely some attractive candidates for eventual investment.
Here is the list and their weights in each ETF we used for the filters.
|WRK||WestRock Co. Inc. A|
|LYB||LyondellBasell Industries NV|
|VLO||Valero Energy Corp.|
|ETN||Eaton Corp. PLC|
|SJM||J.M. Smucker Co.|
|ADM||Archer Daniels Midland Co.|
|EMN||Eastman Chemical Co.|
|JCI||Johnson Controls International PLC|
|DAL||Delta Air Lines Inc.|
|LNC||Lincoln National Corp.|
|WBA||Walgreens Boots Alliance Inc.|
|BAC||Bank of America Corporation|
These are performance charts for those 23 stocks daily over 3 years, with shaded areas representing 1, 2 and 3 standard deviations from the 200-day moving average:
It is not an appealing picture in those charts, but neither is the overall market looking so hot. At some point, some of these names may become attractive at the chart level.
The Street 12-month target prices are more encouraging, but some have lower average 12-month targets than the approximate 11% higher average target for the S&P 500.
Here is a 3-month view of the ETFs we used for filtering, plus the leading S&P 500 index ETF (shown in bright green).
As the Democratic primaries heat up, the House of Representatives puts forward more of their agenda and the national "conversation" evolves, ESG-type investments may take a higher profile. It is probably a good idea to watch how their asset flows develop. The ESG funds in this article and the filtered stocks from those funds may be worth continuing observation.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclosure: QVM has positions in some of the securities identified in this article as of the publication date. We make no representation about present or future plans to purchase or sell any security. We certify that except as cited herein, this is our work product.