Burgess COMMENTARY

Peter Burgess

Barbara Gray, CFA – November 15, 2012 – For the last few years, I have been driven by a dream: to create a way for people to invest in “good” companies and play the appreciating value of the new form of equity I call social capital. To be honest, I had no clue about how I would achieve my dream. But I had a sense that if I just openly shared my research and tried to connect with people interested in my social capital investment thesis, something good might come of it…

Now, on the eve of the first anniversary of Brady Capital Research, I am excited to share that my dream has come true. Today, along with my colleague (and husband) Greg Scott and our business partners, Jeff Cherry (CEO of The Porter Group) and Gary Williams (CEO of wRatings Corporation), I am happy to announce the launch of the Customer Value Index 200 (CVI 200).

Unlike most indices which are just the result of blindly slicing and dicing the stock universe by sector, market cap, or investment strategy, the CVI 200 is a research-based analysis that provides investors with exposure to the top 10% of North American listed companies with a market cap over $1 billion that score the highest in terms of competitive position, social attributes, and authentic core values. Our collective research suggests that in this new Social Era, the companies best positioned to leverage the high level of connectedness and create new generative moats are the ones that have already established a high level of positive social capital (i.e. established a high level of trust and built up strong relationships) with their customers, employees, and business partners. The bottom line is that I believe the CVI 200 will offer long-term strategic investors a way to play the expected appreciation of social capital over the next decade.

I feel honored to have had the privilege of collaborating over the past year with such intelligent, visionary, and principled guys as Jeff and Gary. It’s interesting to note that if not for LinkedIn, I probably wouldn’t have had the good fortune to meet them. As you know, a year ago I published my research report “Social Capital: A New Strategic Play for Investors” and as Brady Capital Research didn’t have the luxury of a sales or trading desk, I decided to use LinkedIn as a platform to share the Executive Summary of my report. One of the LinkedIn Groups that I posted to was the Conscious Capitalism Institute and it was through this forum that I connected with Jeff Cherry, a former architect, CEO, consultant, and hedge fund manager who was just in the process of launching The Porter Group, an investment firm based on the vision to “transform capitalism into a force for the greater good” (how cool is that?). It turns out Jeff was also a consultant on the book “Firms of Endearment” – which is the book I read two years ago that inspired me to start thinking about the concept of companies having a greater purpose. And it was through Jeff that I met Gary Williams, the founder & CEO of wRatings, one of the leading customer research firms in North America that ranks companies on how well they’re meeting customer expectations and identifies their sources of competitive strength.

Over a number of discussions, we developed a strategy to create an Index based on my social capital investment thesis, Gary’s Customer Value research, and our collective ideas on companies with a broader purpose. First, we used Gary’s patented wRatings research process to screen the universe of 2,000 plus companies to identify those that ranked above-average in terms of competitive and social strength. Our next step was to apply Brady Capital Research’s proprietary Social Attributes Assessment to score each company’s level of transparency, authenticity, and engagement in terms of their core values, culture, and community by using their corporate Facebook, Twitter, and LinkedIn social media sites as listening posts. We then combined the Strength Analysis with the Social Attributes Assessment to arrive at our proprietary Social Capital Score which provided us with the final list of companies based on how well they are generating economic profit through customer engagement and a business built on a broader purpose.

As the benchmark was our “heart and soul” companies (lululemon, Starbucks, Whole Foods, Chipotle Mexican Grill, LinkedIn), I had a sense that the portfolio would be heavily weighted towards consumer-facing, high-growth companies. As you can see by the Portfolio Metrics of the CVI 200 (source: Bloomberg) that did indeed prove to be the case:

• Sector Exposure: Consumer Discretionary (50%), Info Technology (20%), Consumer Staples (15%), Industrials (15%)
• Country Exposure: US (92%), Canada (3%), Foreign (5%)
• Stock Style: Growth (50%), Core (30%), Value (20%)
• Portfolio Financial Statistics (Median) : 17% ROE, 10% historical EPS growth, $5.5B market cap
• Portfolio Valuation Statistics (Median) : 16.4x P/E, 3.3x P/BV, 1.1% yield

Given this portfolio’s limited diversification, growth orientation, and high beta (i.e. more volatile than the market), we believe it is most reasonable to consider the CVI 200 as a strong growth component in the diversification strategy for existing or new portfolios. The CVI 200 also provides a unique solution for Canadian investors seeking greater exposure to the Consumer and Info Technology sectors. I don’t know if you are aware, but if you invest in just the Canadian TSX 300 (which most Canadian fund managers benchmark themselves off of), you will be heavily underweight Consumer Discretionary (4% vs 11% for S&P 500), Info Technology (1% vs 19% for S&P 500), and Consumer Staples (3% vs 11% for S&P 500), not to mention the fact that you will be missing out on a lot of highly quality names listed on the NYSE and NASDAQ.

I don’t know about you, but I would feel a lot more comfortable investing my hard-earned savings in companies that are transparent, authentic, and engaging in terms of their core values, culture, and community and actually care about their stakeholders, not just their shareholders.

As of this writing, we are currently in discussions with a number of global financial firms to create an investable product around the Index. Our plan is to officially announce the launch of the Customer Value Index 200 in early December, at which time you will be able to go onto our website (currently under construction) and download our white paper. In the meantime, I would love to hear your thoughts.

Disclosure: I have a LONG position in the following stocks: Chipotle Mexican Grill (CMG-NYSE), LinkedIn (LNKD-NYSE), lululemon (LULU-NASDAQ), Starbucks (SBUX-NASDAQ), Whole Foods Market (WFM-NASDAQ).