Corporate culture ETFs aim to make money from happier employees

The claim that a company’s best assets are its people has now been incorporated into the investment strategies fueling three exchange-traded funds seeking to profit from the underestimation of an employee-friendly corporate culture.

Dan Ariely, a professor of psychology and behavioral economics at Duke University who helped build the strategies Harbor Capital uses for its ETFs, argues that companies that “do the right thing” by creating a culture where employees feel truly valued and motivated enjoy an improvement in financial performance and share price.

“Happy, motivated employees can drive better results for companies and investors,” said Ariely.

The theory also holds that scandals, such as the one currently engulfing the CBI extensiona vocal advocate for workplace best practice standards now embroiled in accusations of a toxic workplace culture: destroy value.

Workers’ opinions of their companies are assessed in seven categories to create a human capital rating by Irrational Capital, the investment research boutique co-founded by Ariely and David van Adelsberg, a former fund management executive.

The data to construct each rating is drawn from a proprietary database and public websites, such as Glassdoor, where employees review their former employers. No financial data is used in the assessments.

Ariely said the strongest stock price signals come from harder-to-measure metrics such as employees’ perceptions of autonomy, fairness, trust, interest alignment and psychological safety. More easily measurable metrics like job titles and benefits provide weaker performance signals.

Amin Rajan, chief executive of consultancy Create Research, said investors were paying more attention to the broader social aspects of corporate behavior as a firm’s investment attractiveness could be hurt by the spread of poorer working conditions. secure.

“The gig economy, which has no paid sick leave, health care or retirement benefits, shows how socially undesirable labor practices have acquired a cloak of legitimacy and undermined the long-standing social contract between employers and employees,” he said. Rajan.

It is a leap to assume that companies with a strong corporate culture will continue to outperform once the pricing anomaly is identified

Kristof Gleich, chief investment officer at Harbor Capital, said current accounting rules don’t always capture the value of a company’s investment in its brand, research and development or people.

“It has become a cliché for business leaders to say ‘our people are our best asset.’ But it’s also true that we live in a knowledge economy,” said Gleich, who previously served on the manager selection teams at Goldman Sachs and JPMorgan.

The Harbor Corporate Culture ETF (HAPI), is a modified market capitalization-weighted portfolio of approximately 150 US companies that has produced a total return of 19% since it launched in October 2022. HAPI has accumulated $240 million of assets that are almost entirely owned by the $143 billion state of Wisconsin Investment Board which oversees the investment activities of public pension plans in the Midwestern state.

Harbor Capital also offers a Corporate Culture Leaders ETF (HAPPY), which tracks an equally weighted index of 70-100 US companies with a market value of at least $1 billion that have the best human capital scores. It has raised just $10 million in assets and has returned a disappointing -8.5% since it launched in February 2022, versus -4.4% in the same period for TO SPYthe largest ETF tracking the S&P 500.

Harbor Capital’s third ETF based on Irrational Capital’s work launched just last month and has $91 million in assets. It tracks a market capitalization weighted index of approximately 200 small US companies and is known as the HAPS extension.

“New investment drivers don’t show up very often. Human capital felt like the missing piece of a puzzle,” Gleich said.

Despite the divergent returns of ETFs in Harbor Capital’s corporate culture offering, quantitative analysts at JPMorgan also identified Irrational Capital’s work as a potential source of alpha: above-market returns.

“The human capital factor shows a significant long-term outperformance versus the [US equity] market,” JPMorgan analyst Ayub Hanif wrote in a research note in November.

Ariely said Irrational Capital is working with the bank to develop a corporate culture strategy tailored to meet the needs of insurance companies.

However, Greg Davies, head of behavioral finance at consultancy Oxford Risk, said that while it made sense for investors to understand company culture to help them identify well-managed companies, this was no guarantee of future stock price outperformance. actions.

“Companies with a strong corporate culture should actually present less risk to investors,” Davies said. However, he also cautioned that backsliding strategies don’t always meet investors’ expectations once they start trading.

“It’s a leap to assume that companies with strong corporate cultures will continue to outperform once the pricing anomaly is identified. We have seen other examples where arbitrage opportunities quickly disappear after attracting a lot of new money,” she said.