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What are we looking for?

A new, enlightened way to beat the market.

The screen

Academics almost unanimously agree that the vast majority of traditional mutual fund managers fail to outperform their respective benchmarks after fees. The past decade has seen a huge rise in “quant funds,” which scour every quantitative piece of information from company financial statements to try to find factors that might allow them to beat the overall market.

But perhaps, as illustrated by the Thomson Reuters Diversity and Inclusion Index (TRDI), there is a simpler answer, and one you wouldn’t find on a company’s balance sheet. The Diversity and Inclusion Index is a simple, market-cap weighted index of the 100 companies globally with the highest Thomson Reuters Diversity and Inclusion Scores. This score is made up of four pillars – diversity, inclusion, people development and news controversies related to these areas. It does not consider any financial-related metrics, yet the index has outperformed the global stock market on a three- and five-year basis, on both an absolute and risk-adjusted basis. It appears, maybe not surprisingly, that a company with a strong culture of diversity and inclusion, which develops its people and prevents controversies, is a sign of strong management – which leads to stocks that perform well on a long-term basis.

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· Of the 100 stocks in the TRDI, we select the 27 North American companies (24 American and three Canadian) as the initial universe for our screen.

· And then, we screen for good investments among this enlightened group using simple, traditional financial metrics. We require an estimated next-twelve-month (NTM) dividend yield (Thomson Reuters SmartEstimate) of at least 2.5 per cent, and a SmartEstimate forward price-to-earnings ratio (P/E), again NTM, of no more than 12.

More about Thomson Reuters

Thomson Reuters delivers trusted news and intelligent information to over 1 billion people in 140 countries every day. Our content, software and technology support the way professionals work in a rapidly changing, ever more complex world. Thomson Reuters Eikon is the platform used by financial and corporate clients to access top research, portfolio analytics, charting and screening for every asset class.”

What did we find?

The screen yields six companies across the tech, consumer products and financial sectors.

In the tech sector, HP recently announced it has agreed to acquire Apogee Corp. – the largest print services provider in Europe – for roughly US$500-million, which should give HP access to higher margin profit pools. The deal is in line with the company’s strategy to develop enhanced managed print services offerings and is generally viewed positively by Wall Street.

On the financials side, bank stocks generally benefit as interest rates rise and their margins expand. There is concern of a slowdown in the Canadian economy, but Bank of Montreal has relatively less exposure to Canada (and relatively more exposure to the United States) than its “Big Five” Canadian peers, and this is generally viewed as a competitive advantage.

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Select companies with strong management

Company Ticker Country TRBC Economic Sector Div. Yield (NTM) P/E (NTM)
The Gap Inc. GPS-N USA Consumer Cyclicals 3.26% 11.38
HP Inc. HPQ-N USA Technology 2.59% 11.23
Bank of Montreal BMO-T Canada Financials 3.90% 10.98
Macy's Inc. M-N USA Consumer Cyclicals 4.11% 10.71
Citigroup Inc. C-N USA Financials 2.58% 10.06
Canadian Imperial Bank of Commerce CM-T Canada Financials 4.61% 9.68

Source: Thomson Reuters Eikon

Hugh Smith, CFA, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.

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