125 Half Mile Road, Suite 200
•
Red Bank, New Jersey 07701
•
(732) 933-2727
I
NVESTING
I
N
V
ALUE
B
ASED
M
ANANGED
C
OMPANIES
Value Aligned Investing Study Hypothesis
Does a stock selection strategy based on companies that adopt a Value-Based Management (“VBM”) program such as Economic Value Added (“EVA”) produce superior risk-adjusted returns? Rapidan’s
Value Aligned Investing
philosophy holds that a public commitment to VBM by a management team whohas been unwilling, unmotivated or unable to address issues that are within its control, triggers tactical andstrategic changes that increase shareholder value. In this study we test whether a portfolio of VBMadopters who publicly commit outperform popular benchmarks like the S&P 500, NASDAQ and Russell2000.
Description of the Study
We used two sources to identify the VBM adopting companies (“
Value Aligned Portfolio
”) and when theyfirst committed to their programs. Primarily, we used the list of former and current Stern Stewart & Co.
1
clients as published in its research entitled “
EVA Works II
”. We also searched through quarterly and annualSEC filings contained in the EDGAR database. The Value Aligned Portfolio was weighted equally andrebalanced monthly. Equally weighting the portfolio eliminated “back-ward looking” style or factor bias(valuation, sector and/or size). Monthly rebalancing allows for the addition of those companies beginning aVBM program and allows for the subtraction of companies that may no longer trade (i.e. acquired). After we added a company to the portfolio, we held it through December 2002. We chose the period 1988-2002to make sure we studied the
Value Aligned Portfolio
performance during bull and bear markets andeconomic periods of expansion and contraction.
2
1
Stern Stewart & Co. is a global consulting firm that specializes in the design and implementation of EVA programs in companiesthroughout the world. For more information and a list of Stern Stewart clients go towww.eva.com.
Value of $1,000 Invested in Value Aligned Long Only Portfolio vs.S&P 500, NASDAQ and Russel 2000 (1988 - 2002)
$0$2,000$4,000$6,000$8,000$10,000$12,000$14,000
198819891990199119921993199419951996199719981999200020012002
PortfolioS&P 500NASDAQRUSSELL 2000
Value Aligned$9,296S&P 500$5,095NASDAQ$4,041Russell2000$3,181
Period FromDecember 2002Value-AlignedPortfolioS&P 500
2
NASDAQ
2
RUSSELL2000
2
3-MonthT-Bill
15 Years
16.0%
11.5%9.8%8.0%4.9%10 Years
13.6%
9.3%7.0%5.7%4.3%7 Years
11.8%
6.9%3.5%2.8%4.3%5 Years
5.3%
-0.6%-3.2%-2.6%4.0%3 Years
2.9%
-14.5%-31.0%-8.8%3.5%
CAGR Return
Table 1. Summary Annualized Returns for Long Only Value Aligned Portfolio Results ForPeriods Ending December 2002.
Leave a Comment