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3-Year-Old Engaged Company Stock Index Tops S&P 500 by 20%

The Engaged Company Stock Index (ECSI), a collaboration between the Enterprise Engagement Alliance and HR analytics company McBassi & Co., has outperformed the S&P 500 each year by an average of 6.2 percentage points since its inception, racking up a compounded 19.9% rate of return greater than the S&P 500 during that same period. The portfolio is based on McBassi’s Good Company Index, which each year scores about 300 of the Fortune 500 organizations for their levels of engagement across the enterprise – customers, employees and communities – based on data from about a dozen sources.
 
As of Sept. 30, 2015, the ECSI stood at $16,152, up 61.5% from its launch at $10,000 on Oct. 1, 2012. During the same period the S&P 500 stood at $14,163 (including dividends), up 41.63% from its base of $10,000 when the index was established. The ECSI was created for demonstration purposes only; it is not an ETF (exchange traded fund). Click here for a list of the companies in the ECSI, the names of those removed and added, and for additional details on the ECSI’s history and approach. 
 
The performance of the fund is interesting from various perspectives. According to a Morningstar report highlighted on Bloomberg.com, only about 20% of money managers outperformed their benchmark indices in 2014, a rate that has been consistent over the years. Even those money managers who do beat their benchmarks rarely do so consistently, according to a report earlier this year in the Washington Post.
In its first three years, the ECSI has consistently outperformed the S&P 500 benchmark by about 6.2% each year and, in the latest stock slide, the ECSI fell one percentage point less.
 
A Perspective From the ECSI Manager 
Following the ECSI’s third-year anniversary, we thought it would be a good time to catch up with Dan McMurrer, Chief Analyst and Co-Founder of McBassi & Company, to see what he has learned from the Index.
 
ESM: What changes have you made in the portfolio this year – i.e., stocks added or subtracted? 
 
McMurrer: About 60% of the portfolio is the same as last year, meaning about 40% turned over. This is a fairly typical ratio. Specifically, the companies added were Alcoa, Allstate, Boston Scientific, Campbell Soup, CenterPoint, Cisco, Cognizant, CSX, Ecolab, Fluor, Hess, Humana, L Brands, PepsiCo, PPL, Prudential, Whirlpool and Whole Foods. Companies removed were Apple, Abbot, Allergan, Amgen, Anadarko, Air Products, Biogen Idec, Celgene, Delta, Deere, Ford, GE, Lockheed Martin, Medtronic, Microsoft, NetApp, Sherwin Williams, Southern and Unum.
 
ESM: Can you tell us why you made those changes, in general terms, based on the overall premise of the index?
 
McMurrer: The changes reflect a variety of different factors. I’ll discuss the two most important ones. The index is based on a company’s combined scores as an employer, seller and steward of the community and environment. Therefore, changes in a company’s score are certainly the most common reason a company is added to the portfolio or removed from it. Some companies seem to remain quite constant from year-to-year (UPS and Intel are good examples of companies that have received high marks consistently.) Other company scores move up or down based on all sorts of factors – changes in leadership, corporate practices or behavior (such as how a company handles a crisis or decline in business), or new information that’s publicly come to light (such as corporate actions that generated fines or other sanctions from a government regulatory body).  
 
Secondly, because we work to ensure representation across all broad economic sectors, how a company’s scores compare to those of other companies in its industry can also be an important factor. So one company might hold steady, but if it’s passed by a competitor that is doing new, great things that are improving its scores, the original company might fall out of the portfolio. Similarly, some companies might move up if a company or two above them takes a tumble in scores.  
 
ESM: You have now been doing this for three years. How would you rate the ECSI’s performance against what are general norms for returns in such types of investments?
 
McMurrer: We’ve been very pleased with the performance of the index. Over the last three years it has outperformed the standard benchmark – the S&P 500 (total return) – by over six percentage points per year. There have naturally been a few bumps along the way, but that’s inherent in the nature of the stock market. The portfolio’s overall trend has consistently been to outdistance the performance of the stock market as a whole.
 
ESM: What have you learned from doing this?
 
McMurrer: I’d say we’ve learned two primary things. First, as we work to calculate company-level scores each year, we get a good sense of trends in all sorts of areas related to our primary company categories of employer, seller and steward. The one trend that has really jumped out at us over the last couple of years has been the increase in penalties and fines assessed against large U.S. corporations. At some level, this has to reflect an increasing intolerance on the part of the public for corporate bad behavior. Second, we’ve been struck by the portfolio’s consistent market outperformance over time. Going in, we believed strongly that there were many reasons that good employers, sellers and stewards should outperform their business competitors. To see it actually reflected in dollars and cents in the stock market, however, has been an important discovery. It’s concrete evidence that these factors really do matter.
 
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