RepuStars Variety Corporate Reputation Index, the first-ever composite equity index linked to reputation, achieved today briefly a new record high value of 2502.12. This represents a growth of 14.93% for the 2012 calendar year and a cumulative growth of 150.21% since its inception 31 December 2001. The Index, which has been calculated by Dow Jones Indexes and distributed under the ticker symbol REPUVAR since 1 Nov 2011, tracks up to 57 company stocks that appear to be underpriced relative to their Steel City Re Corporate Reputation Rankings. Read More.

Bonds and equity are two very different animals. Bonds have few surprises. They have a defined coupon, a termination date, and if held to maturity, usually perform as expected. Equity has none of that, but everyone knows that equity comprises embedded options, intangible assets, that have value. Enter Ireland, which has married the surprise value of options -- real options at that -- with the bland expectations of  bonds.

According to Bloomberg (Feb 28, Flynn), "under proposals to be laid out next month, the government will offer the visas to investors who spend at least 2 million euros ($2.7 million) on a new “low-interest” security, 1 million euros on property or invest in an Irish company. The sale is aimed at people from outside the European Union (EURR002W) who need permits to live and work in the 27-member bloc." That's right: Visa Bonds. Bloomberg adds that "The government hasn’t yet set the coupon, the rate of interest payable to bondholders. Buyers will be able to bring family members with them, the Justice Ministry said."

Huygens gives a tip of the hat to Ireland for innovative intangible asset monetization.

Weekly Reputation Index Metrics

The RepuStars® Variety Corporate Reputation Index calculated by Dow Jones Indexes is the first-ever composite equity index based on a quantitative value strategy informed by the Steel City Re corporate reputation metrics. The RepuStars Variety Index has two versions: a total returns index and a price index, whose ticker symbols are, respectively, REPUVART and REPUVAR.  Click here for real time quotes.

Analysis

The reputation-linked RepuStars Variety Composite Equity Index continues to outperform its benchmark. The greatest gains in the 2012 reconstituted RepuStars portfolio are Whirlpool Corporation (WHR) at 31.08%, Silver Wheaton Corporation (SLW) at 23.02% and Holly Frontier Corp (UAL) at 20.31. These are three of the 38 firms identified by the RepuStars Variety algorithm as companies whose reputation values did not appear to have been realized previously.

RepuStars Variety is a quantitative arbitrage strategy that assumes equity investors will discover what other stakeholders already know about a company’s prospects. With fear over the Euro-crisis ebbing, risk appetites and a willingness to discover are returning.

Side Note: A description of the 2012 portfolio constituents can be obtained here: click here.

Weekly Update

At the close of trading 24-Feb-12, REPUVART and REPUVAR stood at 2838.26 and 2468.92 respectively. Over the past four weeks, the former has changed by 6.30%, while the latter has changed by 6.27%. The benchmark S&P500 Composite Index stood at 1189.59 (31 Dec 2001=1000) and has changed over the past four weeks by 3.75%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by 9.27% and 7.99% respectively; the S&P500 Composite Index has changed by 3.47%. Since January 2009, the REPUVART and REPUVAR have changed by 126.82% and 114.98% respectively; the S&P 500 Composite Index has changed by 46.57%. Other interval changes in the magnitude of the indices are shown below.

Background

The RepuStars Variety Corporate Reputation Index is the first index based on a quantitative model for analysts, investors, and company managers to determine the actual impact of reputation on corporate equity prices. The companies selected for the RepuStars Variety Index are chosen algorithmically to capture the disparity between value at which a company is currently trading and its value as calculated by Steel City Re’s reputational metrics.

The RepuStars Variety Corporate Reputation Index tracks up to 57 company stocks that appear to be underpriced relative to their metrics as measured by Steel City Re’s proprietary Corporate Reputation Index™, which tracks 5500 companies weekly. In using the RepuStars Index as an investment strategy, investors can take advantage of this price disparity. The principles behind Steel City Re's reputation metrics are discussed in the book, Mission:Intangible (see below).

The RepuStars indices are reconstituted annually in the first week of January. The Indices were last reconstituted 20 Jan 2012.  Click here for additional information on the index.

Reputation, Risk and Finance

Reputation management through superior control of a company's intangible assets may be one of the best paths to value creation today. If it is not on your agenda, perhaps it should be. Here are several things you can do right now to start creating value for your organization:

1. Become better informed. Participate in our regular Mission Intangible Monthly Briefings held on the first Friday of every month or read the book, Mission: Intangible. Managing risk and reputation to create enterprise value, available at the IAFS Store, specialty finance sector retailers, or other leading online book retailers. 
2. Become a member of the Intangible Asset Finance Society and engage.
3. Join our community on Linked-In and stay in the information flow.

Notices

STEEL CITY RE and REPUSTARS are registered trademarks of C. Huygens & Co. LLC and are used under license. Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC, or their respective affiliates and none of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC and their respective affiliates make any representation regarding the advisability of investing in such products. Inclusion of a company in any of the indexes in this piece does not in any way reflect an opinion of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates on the investment merits of such company. None of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates is providing investment advice in connection with these indexes. The RepuStars Variety Corporate Reputation Indexes are calculated by Dow Jones Indexes, the marketing name and the licensed trademark of CME Index Services, LLC. (CME Indexes). Dow Jones Indexes is a service mark of Dow Jones Trademark Holdings LLC. (Dow Jones). Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by CME Indexes, Dow Jones or their respective affiliates, and CME Indexes, Dow Jones and their respective affiliates make no representation regarding the advisability of investing in such product(s).

Weekly Reputation Index Metrics

The RepuStars® Variety Corporate Reputation Index calculated by Dow Jones Indexes is the first-ever composite equity index based on a quantitative value strategy informed by the Steel City Re corporate reputation metrics. The RepuStars Variety Index has two versions: a total returns index and a price index, whose ticker symbols are, respectively, REPUVART and REPUVAR.  Click here for real time quotes.

Analysis

The reputation-linked RepuStars Variety Composite Equity Index continues to outperform its benchmark. The greatest gains in the 2012 reconstituted RepuStars portfolio are Whirlpool Corporation (WHR) at 31.08%, TRW Automotive Holdings (TRW) at 26.99% and United Continental (UAL) at 20.90. These are three of the 38 firms identified by the RepuStars Variety algorithm whose reputation values did not appear to have been realized previously.

RepuStars Variety is a quantitative arbitrage strategy that assumes equity investors will discover what other stakeholders already know about a company’s prospects. As fear over the Euro-area meltdown and the end of Western civilization as we know it subsides, it appears, equity investors are once again keen to discover.

Side Note: A description of the 2012 portfolio constituents can be obtained here: click here.

Weekly Update

At the close of trading 17-Feb-12, REPUVART and REPUVAR stood at 2815.28 and 2448.94 respectively. Over the past four weeks, the former has changed by 8.77%, while the latter has changed by 8.74%. The benchmark S&P500 Composite Index stood at 1185.66 (31 Dec 2001=1000) and has changed over the past four weeks by 3.49%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by 5.64% and 4.40% respectively; the S&P500 Composite Index has changed by 1.36%. Since January 2009, the REPUVART and REPUVAR have changed by 124.98% and 113.24% respectively; the S&P 500 Composite Index has changed by 46.09%. Other interval changes in the magnitude of the indices are shown below.

Background

The RepuStars Variety Corporate Reputation Index is the first index based on a quantitative model for analysts, investors, and company managers to determine the actual impact of reputation on corporate equity prices. The companies selected for the RepuStars Variety Index are chosen algorithmically to capture the disparity between value at which a company is currently trading and its value as calculated by Steel City Re’s reputational metrics.

The RepuStars Variety Corporate Reputation Index tracks up to 57 company stocks that appear to be underpriced relative to their metrics as measured by Steel City Re’s proprietary Corporate Reputation Index™, which tracks 5500 companies weekly. In using the RepuStars Index as an investment strategy, investors can take advantage of this price disparity. The principles behind Steel City Re's reputation metrics are discussed in the book, Mission:Intangible (see below).

The RepuStars indices are reconstituted annually in the first week of January. The Indices were last reconstituted 20 Jan 2012.  Click here for additional information on the index.

Reputation, Risk and Finance

Reputation management through superior control of a company's intangible assets may be one of the best paths to value creation today. If it is not on your agenda, perhaps it should be. Here are several things you can do right now to start creating value for your organization:

1. Become better informed. Participate in our regular Mission Intangible Monthly Briefings held on the first Friday of every month or read the book, Mission: Intangible. Managing risk and reputation to create enterprise value, available at the IAFS Store, specialty finance sector retailers, or other leading online book retailers. 
2. Become a member of the Intangible Asset Finance Society and engage.
3. Join our community on Linked-In and stay in the information flow.

Notices

STEEL CITY RE and REPUSTARS are registered trademarks of C. Huygens & Co. LLC and are used under license. Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC, or their respective affiliates and none of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC and their respective affiliates make any representation regarding the advisability of investing in such products. Inclusion of a company in any of the indexes in this piece does not in any way reflect an opinion of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates on the investment merits of such company. None of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates is providing investment advice in connection with these indexes. The RepuStars Variety Corporate Reputation Indexes are calculated by Dow Jones Indexes, the marketing name and the licensed trademark of CME Index Services, LLC. (CME Indexes). Dow Jones Indexes is a service mark of Dow Jones Trademark Holdings LLC. (Dow Jones). Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by CME Indexes, Dow Jones or their respective affiliates, and CME Indexes, Dow Jones and their respective affiliates make no representation regarding the advisability of investing in such product(s).

On 11 October 2011, AIG rolled out reputation restoration insurance. "ReputationGuard", being sold through its Chartis property-casualty group, pays out when a policyholder faces a public relations crisis and needs to hire either of two big-time PR firms, Burson-Marsteller or Porter Novelli. Think of it as a gift card to buy ambulance services when you find yourself at the bottom of a cliff. The product, and the firm, were instantly derided.

Wrote The Consumerist, “Someone at AIG must have a sense of humor. The bailed-out insurance behemoth — and, more importantly, one-time Worst Company In America champ — has announced it will now offer insurance policies that help defray the costs for damage control after a company does something that puts in the ranks of widely reviled businesses like AIG.” At the Ritholtz blog, the story made the daily “WTF Video.” The New York Times’ Dealbook was more charitable: “A.I.G. knows a little bit about crisis communications, of course. After its initial $65 billion bailout by the government, the insurer became a target of widespread scorn, its very name a shorthand for the excesses that led to the financial crisis.”

Fast forward four months, factor in empirical data, and you might come to the reasonable conclusion that AIG really does know a thing or two about reputation restoration. The Steel City Re reputation risk metrics show a company whose reputation – a leading indicators of economic activity -- is well ahead of its equity performance. If Huygens gave financial advice, this would be a buy.


As of 9 Feb and from a pool of 7448 companies of which 174 comprise members of the Insurance industry, AIG ranked just below the median at the 44.5th percentile relative to its peers. Given that one year ago, its rank was nearly at the bottom at 1.2%, it is not surprising that over the past year, as well as past three months, its reputation metrics have been far more volatile than the industry as a whole. However, its return on equity is only in the 12th percentile relative to its peers. As they say, “It’s reputation all the way up.”

Weekly Reputation Index Metrics

The RepuStars® Variety Corporate Reputation Index calculated by Dow Jones Indexes launched into widespread distribution on November 1, 2011. Previously calculated on a proprietary basis and available only on the Mission Intangible blog of the Society, it is the first-ever composite equity index based on a quantitative strategy exploiting value opportunities exposed by discrepancies between the Steel City Re corporate reputation metrics and share price. The RepuStars Variety Index has two versions: a total returns index and a price index, whose ticker symbols are, respectively, REPUVART and REPUVAR.  Click here for real time quotes.

Analysis

More than one wag noted that it will be ironic to look back at history and note that both the beginning and end of Western civilization as we know it began with the Greeks. Nevertheless, the reputation-linked RepuStars Variety Composite Equity Index continues to outperform its benchmark.

The greatest gains so far this year in the reconstituted RepuStars portfolio are Whirlpool Corporation (WHR) at 29.25%, United Continental (UAL) at 22.87%, and Holly Frontier Corp at 19.28%. These are three of the 38 firms identified by the RepuStars Variety algorithm whose reputation values did not appear to have been realized previously.

Side Note: At the close of markets 20 January, the RepuStars Variety Composite Index underwent its annual rebalance and reconstitution. Companies where the Steel City Re Corporate Reputation Index metrics suggest the greatest arbitrage opportunity for the coming year replaced those companies that already realized that opportunity. An description of the 2012 portfolio constituents can be obtained here: http://www.steelcityre.com/finance_management_index.shtml.

Weekly Update

At the close of trading 10-Feb-12, REPUVART and REPUVAR stood at 2769.71 and 2409.66 respectively. Over the past four weeks, the former has changed by 8.79%, while the latter has changed by 8.78%. The benchmark S&P500 Composite Index stood at 1169.47 (31 Dec 2001=1000) and has changed over the past four weeks by 4.15%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by 4.97% and 3.69% respectively; the S&P500 Composite Index has changed by 1.01%. Since January 2009, the REPUVART and REPUVAR have changed by 121.34% and 109.82% respectively; the S&P 500 Composite Index has changed by 44.09%. Other interval changes in the magnitude of the indices are shown below.

Background

The RepuStars Variety Corporate Reputation Index is the first index based on a quantitative model for analysts, investors, and company managers to determine the actual impact of reputation on corporate equity prices. The companies selected for the RepuStars Variety Index are chosen algorithmically to capture the disparity between value at which a company is currently trading and its value as calculated by Steel City Re’s reputational metrics.

The RepuStars Variety Corporate Reputation Index tracks up to 57 company stocks that appear to be underpriced relative to their metrics as measured by Steel City Re’s proprietary Corporate Reputation Index™, which tracks 5500 companies weekly. In using the RepuStars Index as an investment strategy, investors can take advantage of this price disparity. The principles behind Steel City Re's reputation metrics are discussed in the book, Mission:Intangible (see below).

The RepuStars indices are reconstituted annually in the first week of January. The Indices were last reconstituted 20 Jan 2012.  Click here for additional information on the index.

Reputation, Risk and Finance

Reputation management through superior control of a company's intangible assets may be one of the best paths to value creation today. If it is not on your agenda, perhaps it should be. Here are several things you can do right now to start creating value for your organization:

1. Become better informed. Participate in our regular Mission Intangible Monthly Briefings held on the first Friday of every month or read the book, Mission: Intangible. Managing risk and reputation to create enterprise value, available at the IAFS Store, specialty finance sector retailers, or other leading online book retailers. 
2. Become a member of the Intangible Asset Finance Society and engage.
3. Join our community on Linked-In and stay in the information flow.

Notices

STEEL CITY RE and REPUSTARS are registered trademarks of C. Huygens & Co. LLC and are used under license. Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC, or their respective affiliates and none of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC and their respective affiliates make any representation regarding the advisability of investing in such products. Inclusion of a company in any of the indexes in this piece does not in any way reflect an opinion of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates on the investment merits of such company. None of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates is providing investment advice in connection with these indexes. The RepuStars Variety Corporate Reputation Indexes are calculated by Dow Jones Indexes, the marketing name and the licensed trademark of CME Index Services, LLC. (CME Indexes). Dow Jones Indexes is a service mark of Dow Jones Trademark Holdings LLC. (Dow Jones). Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by CME Indexes, Dow Jones or their respective affiliates, and CME Indexes, Dow Jones and their respective affiliates make no representation regarding the advisability of investing in such product(s).

Social Capital: A New Strategic Play for Investors
Look for Companies with Heart and Soul

Barbara Gray, CFA, Equity Analyst, Brady Capital Research

For those of you who participated in the Monthly Briefing last Friday “Sure, They Say They're Socially Responsible: ESG meets CSR”, with Rick Frazier (Founding Member and Research Director of Concinnity Advisors LP) and myself, you probably got the sense that neither Rick nor I are big fans of ESG or CSR. Although it is important for investors to incorporate ESG (Environmental, Social, Governance) factors into their analysis and valuation process, we believe that ESG is only one piece of a company’s risk/growth profile. And while it is encouraging that more and more companies are starting to undertake CSR (Corporate Social Responsibility) initiatives, we view this as more of a defensive politically correct move. We are more interested in how a company actually treats all of its stakeholders (customers, employees, suppliers, community, environment).

As I stated on the call, I believe social media is leading to the creation of a new form of equity called social capital with the following four investment characteristics:

• Liquidity - Facebook, Twitter, and LinkedIn are global, dynamic, 24/7 social exchanges that convert a company’s stakeholder relationships into highly intangible liquid assets and/or liabilities called social capital.
• Time Horizon - Social capital is a new form of equity that we expect to appreciate in value as Facebook, Twitter, and LinkedIn’s user bases continue to grow, new social exchanges such as Google+ emerge, the number of user connections within and between different social exchanges grows, and corporate penetration and usage increases.
• Unique Characteristics - Social media empowers the individual with a platform to influence, expose, and disseminate.
• Regulatory and Legal – Social media provides concerned citizens with a platform to self-organize, increasing their bargaining power to push for regulatory and legal changes and reform.

As evidenced by the fact that Time’s Person of the Year for 2011 was “The Protestor”, I believe social media is the catalyst that is ushering in the era of the Social Revolution. I expect the Social Revolution will lead to a rise in legal and regulatory reforms, which will in turn, erode the economic moats of companies whose competitive advantage is derived by exploiting constituents in their stakeholder base. This will increase the company’s risk profile, reduce its future growth opportunities, and result in the creation of negative social capital. A company’s negative social capital with its stakeholders is an intangible liability that, unlike goodwill, does not show up on a company’s balance sheet. However, from a discounted cash flow (DCF) valuation perspective, the simultaneous increase in a company’s assumed discount rate and decrease in its expected growth rate will lead to a negative multiplier effect and contraction in the company’s value.

On a more positive note, as I explored in the research report I published in November titled: “Social Capital: A New Strategic Play for Investors – Look for Companies with Heart and Soul”, I am excited about how the Social Revolution will foster in a new source of competitive advantage for companies with heart and soul that are focused on making a positive difference in the world. I believe the strong and authentic stakeholder foundation of a heart and soul company will convert into a high velocity of social capital as the company leverages the high level of enthusiasm and deep psychological attachment to the company’s brand and greater purpose.

If you are interested in finding out more about my Social Capital investment thesis, I would be happy to send you a copy of my in-depth research report. I recently launched Brady Capital Research as an investment research platform to pursue my Social Capital investment thesis with the vision to: “build a community connecting investors with heart and soul companies and leading-edge business strategists”. I would love to share and discuss my ideas with you from the Intangible Asset perspective. You can reach me at barbcfa@gmail.com.

Editor's Note:

Blog readers may purchase an audio file of the Mission:Intangible Monthly Briefing (MIMB) program, "Sure, They Say They're Socially Responsible: ESG meets CSR," from the IAFS store. Members of the Society receive fabulous discounts on these and other products. Click here for details.

Weekly Reputation Index Metrics

The RepuStars® Variety Corporate Reputation Index calculated by Dow Jones Indexes launched into widespread distribution on November 1, 2011. Previously calculated on a proprietary basis and available only on the Mission Intangible blog of the Society, it is the first-ever composite equity index based on a quantitative strategy exploiting discrepancies between Steel City Re corporate reputation metrics and share price. The RepuStars Variety Index has two versions: a total returns index and a price index, whose ticker symbols are, respectively, REPUVART and REPUVAR.  Click here for real time quotes.

Analysis

Not withstanding Kenneth Rogoff’s reasonable concerns, the equity markets continue to rediscover their appetite for risk and the companies comprising the recently reconstituted RepuStars Variety Corporate Reputation Index are continuing to realize their previously undiscovered reputational value.

This discovered value is the basis for the added equity value of nearly 6% being realized by the constituents of the RepuStars Index this calendar year. The average annual additional equity value associated with an enhanced reputation is around 6.5% -- a value that closely mirrors the average 7% loss in value associated with an adverse reputational event.

Side Note: At the close of markets 20 January, the RepuStars Variety Composite Index underwent its annual rebalance and reconstitution. Companies where the Steel City Re Corporate Reputation Index metrics suggest the greatest arbitrage opportunity for the coming year will replace those companies that have already realized that opportunity. A description of the 2012 portfolio constituents can be obtained here: http://www.steelcityre.com/finance_management_index.shtml.

Weekly Update

At the close of trading 3-Feb-12, REPUVART and REPUVAR stood at 2777.31 and 2416.58 respectively. Over the past four weeks, the former has changed by 10.10%, while the latter has changed by 10.10%. The benchmark S&P500 Composite Index stood at 1171.43 (31 Dec 2001=1000) and has changed over the past four weeks by 5.25%.

Over the trailing twelve months, REPUVART and REPUVAR have, respectively, changed by 6.18% and 4.85% respectively; the S&P500 Composite Index has changed by 2.60%. Since January 2009, the REPUVART and REPUVAR have changed by 121.95% and 110.42% respectively; the S&P 500 Composite Index has changed by 44.33%. Other interval changes in the magnitude of the indices are shown below.

Background

The RepuStars Variety Corporate Reputation Index is the first index based on a quantitative model for analysts, investors, and company managers to determine the actual impact of reputation on corporate equity prices. The companies selected for the RepuStars Variety Index are chosen algorithmically to capture the disparity between value at which a company is currently trading and its value as calculated by Steel City Re’s reputational metrics.

The RepuStars Variety Corporate Reputation Index tracks up to 57 company stocks that appear to be underpriced relative to their metrics as measured by Steel City Re’s proprietary Corporate Reputation Index™, which tracks 5500 companies weekly. In using the RepuStars Index as an investment strategy, investors can take advantage of this price disparity. The principles behind Steel City Re's reputation metrics are discussed in the book, Mission:Intangible (see below).

The RepuStars indices are reconstituted annually in the first week of January. The Indices were last reconstituted 20 Jan 2012.  Click here for additional information on the index.

Reputation, Risk and Finance

Reputation management through superior control of a company's intangible assets may be one of the best paths to value creation today. If it is not on your agenda, perhaps it should be. Here are several things you can do right now to start creating value for your organization:

1. Become better informed. Participate in our regular Mission Intangible Monthly Briefings held on the first Friday of every month or read the book, Mission: Intangible. Managing risk and reputation to create enterprise value, available at the IAFS Store, specialty finance sector retailers, or other leading online book retailers. 
2. Become a member of the Intangible Asset Finance Society and engage.
3. Join our community on Linked-In and stay in the information flow.

Notices

STEEL CITY RE and REPUSTARS are registered trademarks of C. Huygens & Co. LLC and are used under license. Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC, or their respective affiliates and none of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC and their respective affiliates make any representation regarding the advisability of investing in such products. Inclusion of a company in any of the indexes in this piece does not in any way reflect an opinion of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates on the investment merits of such company. None of Technology Option Capital, LLC, C. Huygens & Co, LLC, Steel City Re, LLC or any of their respective affiliates is providing investment advice in connection with these indexes. The RepuStars Variety Corporate Reputation Indexes are calculated by Dow Jones Indexes, the marketing name and the licensed trademark of CME Index Services, LLC. (CME Indexes). Dow Jones Indexes is a service mark of Dow Jones Trademark Holdings LLC. (Dow Jones). Investment products based on the RepuStars Variety Corporate Reputation Indexes are not sponsored, endorsed, sold or promoted by CME Indexes, Dow Jones or their respective affiliates, and CME Indexes, Dow Jones and their respective affiliates make no representation regarding the advisability of investing in such product(s).

From the time of the pioneering work by Fombrun and others in the 1990's, market observers generally agreed that reputation was a source of equity value. When good, it drove customers to buy more at higher prices, employees to work harder for less, vendor and creditors to offer superior terms, equity investors to bid up multiples, and regulators to cast a more benign eye. Since then, punters have sought methods for linking to concepts into an equity strategy.

The dominant challenge has been the inherent nature of reputation. It is an epiphenomenon of the interplay between culture and operational matters on one hand, oversight and governance practices on the second, and allowing for a third hand -- how the package is presented and delivered to stakeholders. The latter is recognized as being generally in the domain of marketers, and since it represents the "last mile" to the stakeholder, it has received the lion's share of attention.

Reputation value can be teased out of equity value through major adverse reputational events. Many have been documented in this blog over the years. Informal estimates suggest that the cost of an adverse reputational event is around 5% of market cap. Steel City Re, the reputation risk insurance specialist, calculate a value closer to 7% but their model arguably ignores "lesser" reputational events. Since 2005 when the Economist Intelligence Unit published its seminal article on reputation risk, reputation management gained a new internal stakeholder - the enterprise risk manager.

These data affirmed management's need to avoid reputational risk, but they provided little in the way of guidance of how to avoid it. Also, while they suggested how much to invest in the avoidance effort, the lumpy nature of reputational events ensured that any classical actuarial model would leave a firm statistically comfortable with its risk management strategy and yet woefully underprepared.

In November 2011, Steel City Re announced that its data on reputational value indicators had been incorporated into an equity strategy and was available through Dow Jones Indexes. The ten-year history, several years of which have been published weekly on this site, indicated a significant outperformance relative to the benchmark S&P500 index. Critics suggested that the outperformance could be attributed to higher beta securities rather than an inherent value proposition associated with exploiting latent reputation value.

We now report an additional analysis of the RepuStars algorithm in which the stock selection was limited to the S&P500 constituent members only. Details on the 3-year old RepuStars Variety algorithm and the underpinning reputational statistics are provided elsewhere. In this study, stocks were selected by the algorithm at the beginning of each of ten years beginning December 2001. In general, the portfolios comprising stocks selected using the RepuStars Variety algorithm outperformed the universe of S&P500 firms (the Index) each of the ten years. The single exception was 2008 (image below). The ten year average was 6.5%, a value surprisingly similar to the 7% losses realized with adverse reputational events.


From an investment perspective, the portfolio based on the above would have produced an annual 9% cumulative return which is within 10% of the RepuStars Variety price index returns that are reported each Monday (image below).


The upshot is the reputation management is not only good risk management. It is a source of value creation. Firms that do it right can expect, on average, an additional 6.5% in equity value growth, and protection against 7% in equity value loss, all other things being equal. Arguably, there are very few managerial strategies a firm can pursue today short of inventing the next i-device or replacement for facebook that can deliver such value.