Jul 22, 2014 - Greetings,. We at Cup & Handle Macro like to think of ourselves as progressive investors for a variet
July 22, 2014
Greetings, We at Cup & Handle Macro like to think of ourselves as progressive investors for a variety of reasons. Our background is in macroeconomics, where investors need to constantly adapt and think outside-the-box in order to be profitable. Thorough research should always be part of an investment decision, but we believe that identifying the variant perception is just as important. Variant perception is a concept developed by Michael Steinhardt, one of the most successful hedge fund managers of all time, which identifies a contrarian, differentiated view that has yet to be picked up by the market. Truth be told, an investment with insightful variant perception can often be more profitable than one with strong fundamentals. One variant perception that we’ve been looking into recently has been investing in companies with female management. In 2013, only 16.6% of Fortune 1000 companies had female corporate directors. This is surprisingly small when you consider that women comprise half of the total US workforce, half of all lower-level management positions and are responsible for almost 80% of all consumer spending. In addition, for the first time in 50 years, the share of couples in which the wife is “marrying down” educationally is higher than those in which the husband has more education. Therefore, it would be logical for companies that incorporate a women’s point
of view to outperform. This is certainly a variant perception, but a thesis like this requires more homework on the fundamentals. In October 2007, Catalyst, a non-profit research group, published a report showing that Fortune 500 companies with the highest representation of women board directors attained significantly higher financial performance, on average, than those with the lowest representation of women board directors. The report found that gender-diverse board directors outperformed male-dominated board directors in three important metrics: return on equity, return on sales and return on invested capital. The outperformance in return on equity was particularly noteworthy at 53% (chart, right). This is certainly powerful evidence to support our hypothesis, but there’s also evidence that companies led by female CEO’s tend to outperform. As of June, 50 members of the Fortune 1000 were led by female chief executives. Of those 50 companies, 41 have been trading publically since the stock market bottomed on March 9, 2009 after the great financial crisis. Since that date, the S&P 500 has rallied over 192% behind extreme monetary stimulus and improving sentiment. Remarkably, the average gain of the 41 companies led by women is 378%. More than 50% of those companies outperformed the S&P 500 over that time period, in many instances dramatically. This is not the product of a small sample size either. While female CEO’s account for 5% of the Fortune 1000, they lead a prestigious and diverse group of companies. For example, Meg Whitman has held the CEO role at Hewlett-Packard (ticker: HPQ) since September 2011, and was (along with Condoleeza Rice) the first female member of Augusta National Golf Club. Indra Nooyi has held the Chairman and CEO title at PepsiCo (ticker: PEP), a $135 billion company, for over seven years. Ellen Kullman has worked at Dupont (ticker: DD) since 1988, and has held the Chairman and CEO titles since January 2009. Under her leadership, Dupont has expanded its agriculture division and shares have climbed 306% since Ms. Kullman’s appointment to CEO. Women are also leading companies in traditionally masculine industries like defense contracting and energy. Marillyn Hewson is the Chairman, President and CEO of Lockheed Martin (ticker: LMT) where more than 1/3 of board directors are women. Duke Energy (ticker: DUK), the largest electric power holding company in the United States, is led by CEO Lynn Good, who also serves as the company’s Vice Chairman and President.
Fortune 1000 Companies with Female CEO's
Current Px
Price on March 9, 2009
% Gain
Under/Out Performance vs. S&P 500
Average: 379.4% HEWLETT-PACKARD CO INTL BUSINESS MACHINES CORP ARCHER-DANIELS-MIDLAND CO PEPSICO INC LOCKHEED MARTIN CORP DU PONT (E.I.) DE NEMOURS MONDELEZ INTERNATIONAL INC-A GENERAL DYNAMICS CORP TJX COMPANIES INC DUKE ENERGY CORP XEROX CORP SEMPRA ENERGY ROSS STORES INC AVON PRODUCTS INC CAMPBELL SOUP CO REYNOLDS AMERICAN INC MYLAN INC INGREDION INC GANNETT CO FRONTIER COMMUNICATIONS CORP YAHOO! INC KEYCORP WILLIAMS-SONOMA INC OIL STATES INTERNATIONAL INC HSN INC ALLIANT ENERGY CORP HAWAIIAN ELECTRIC INDS REGAL ENTERTAINMENT GROUP-A AMERICAN WATER WORKS CO INC VENTAS INC ULTA SALON COSMETICS & FRAGR CRACKER BARREL OLD COUNTRY SCHNITZER STEEL INDS INC-A BROWN SHOE COMPANY INC BENCHMARK ELECTRONICS INC ITT CORP ANN INC INTL GAME TECHNOLOGY ARCBEST CORP HCP INC CONVERGYS CORP
34.41 187.08 44.92 89.21 161.40 65.69 38.06 117.00 53.55 73.87 12.43 104.19 66.47 14.59 46.18 60.36 52.43 77.37 31.71 5.82 35.41 14.52 72.73 64.16 60.33 60.39 25.28 21.34 49.31 64.32 93.29 101.10 26.62 29.29 25.99 48.55 41.62 16.01 44.73 41.53 21.81
25.53 83.48 25.83 45.81 58.24 16.14 13.89 36.31 10.86 35.43 4.17 36.72 14.66 15.20 25.65 16.47 12.00 17.95 1.95 5.39 12.66 6.06 7.55 6.63 4.15 20.46 12.24 10.40 16.66 22.17 4.29 22.26 25.05 2.14 8.67 10.69 2.82 7.12 16.72 16.45 5.56
34.8% 124.1% 73.9% 94.7% 177.1% 307.0% 174.0% 222.2% 393.3% 108.5% 198.0% 183.7% 353.6% -4.0% 80.0% 266.5% 336.9% 331.0% 1525.9% 8.0% 179.7% 139.6% 863.3% 867.3% 1353.7% 195.2% 106.5% 105.2% 196.0% 190.1% 2074.6% 354.2% 6.3% 1268.7% 199.8% 354.0% 1375.9% 124.8% 167.5% 152.5% 292.3%
-157.6% -68.3% -118.4% -97.6% -15.2% 114.7% -18.3% 29.9% 201.0% -83.9% 5.6% -8.6% 161.2% -196.4% -112.3% 74.1% 144.6% 138.7% 1333.5% -184.4% -12.7% -52.7% 671.0% 675.0% 1161.4% 2.8% -85.8% -87.2% 3.6% -2.2% 1882.2% 161.8% -186.1% 1076.3% 7.4% 161.7% 1183.5% -67.6% -24.8% -39.9% 99.9%
S&P 500
1977.85
676.53
192.4%
-
**Note: GM, Guardian, CST Brands, CH2M Hill, Graybar Electric, Neiman Marcus Group, Bloomin' Brands, Puget Sound Energy and Taylor Morrison Home also have female CEO's but were not included due to insufficient historical data.
There have been other studies showing the benefit of female participation in C-level management. Thomson-Reuters “Mining the Metrics of Board Diversity” report found that not only does female involvement in board directors leads to higher returns, but also that female participation on corporate boards is growing. In 2012, 59% of the companies in the Reuters data set reported female board members, up from 56% in 2008. In addition, 45% reported that more than 10% of their board is made up of women, up from 39% in 2008. There’s even scientific research that tries to explain “how” gender-diverse companies outperform. Researchers at the University of British Columbia analyzed a large number of acquisition bids from Fortune 1500 companies from 1997-2009, and found that each woman added to a board reduces the price of a successful acquisition by 15.4%. The authors say this suggests that women have less interest in risky deals and are more focused on a higher return on investment. This is yet another data point in a growing body of evidence that suggests gender equity on corporate boards isn’t just about fairness, but also about good business sense. Despite valid evidence showing that more women in management leads to stronger performance, there have been few ventures to capitalize on this trend. At a time when there is seemingly an ETF for everything, there are no securitized products that give investors direct exposure to companies with a strong female presence. That indicates there’s a variant perception worth exploiting here. We’ve now outlined the fundamental justification, but it’s clear that the market has not yet come around to this idea. The construction of a board is usually an afterthought for most investors, but there is clear evidence that it makes a difference, and gender diversity is a positive one. Source: Reuters – Link Here
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Cup & Handle Macro
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