Quantifying the softer aspects of a business is never easy — but when done right, it can be highly rewarding.
The performance of the M&E LatinFinance Brazil Stars Index bears this out: the index has consistently outperformed almost all of Brazil’s other benchmarks over the past three years. Only the Novo Mercado index has matched it — both have returned 34% over the period, according to data from Management & Excellence (M&E).
The performance of the Brazil Stars Index puts it in another category entirely from the country’s largest index, the IBovespa — although it hardly seems fair to compare it with an index that has seen its methodology change in reaction to its poor performance over the past three years.
Still, the Brazil Stars Index has outperformed the Dow Jones Sustainability Index, which has returned 13% over the same period, as well as Bovespa’s ITAG index (11%), Corporate Governance Index IGC (8%) and IGCT Governance Index (3%), according to M&E data.
The components of the Brazil Stars Index are weighted according to management value: well-managed companies count more. The goal is to quantify management processes within a firm — such as corporate governance and compliance with best practice — that are difficult to measure, but which have clear implications for a company’s revenue and profits.
The index takes into consideration four aspects of a company’s operations to calculate management values, which are displayed for the first time in the accompanying table.
Compliance, good practice and governance make up one area. The company’s strategy is another — that brings in elements including product development plans and risk management. Historical performance data and ratios are also incorporated. A risk scoring takes into account the volatility of the indicators, and is subtracted from the overall score. The end number, in effect, represents the human management value of the company.
The management scores are multiplied by the market capitalization of each company to determine their weightings.
Recalculated on a monthly basis only, the index is made up of 16 components. It has benefited particularly from the exclusion of Petrobras, a stock that has dragged down valuations in the rest of Brazil. The inclusion of AmBev has also had a positive effect on the index’s performance.
Mid-cap stocks, among the best-performing Brazilian shares in recen t years, could be included next in the index. The inclusion of a broad number of mid-cap companies have helped the IGC Novo Mercado’s performance. Some of the larger mid-cap companies are already under consideration, with the idea of incorporating some in the next six to 12 months. LF