Blog

12
Mar

Global LAMP Index® Outperforms Global Benchmarks

In 2014, the Global LAMP Index® returns continued to outperform leading global benchmarks. Measured on a market capitalization basis, LAMP returned 5.51% versus 4.47% for the FTSE World Index, 5.50% for the MSCI World Index and 3.09% for the S&P Global 100. Measured on an equal weighted basis, the Global LAMP Index® returned 8.48 percent, beating those global benchmarks by a wide margin.

A Focus Group comprised of seven companies from the Global LAMP Index® is featured in my forthcoming book, Companies That Mimic Life. This group represents the “best of the best” of the LAMP Index. Focus Group returns are correspondingly higher than those of the parent Index.

Table 1:
Global LAMP Index® Returns vs. Global Comparator Indices
Cumulative Compound Annual Growth: 1995 – 2014

2015tablea

Table One presents rates of return on a cumulative compounded annual basis for selected time periods. This is derived from data in Table Two, which will follow as this narrative progresses. The crucial point of Table One concerns the advantage of consistent excess performance.

Results for the equal and market cap weighted Global LAMP Index® shown in Table One are derived from rates of return calculated by Northfield Information Services (www.northinfo.com). Northfield’s testing of 2014 Global LAMP Index® results was its third such analysis, the others being for years 2006 and 2007. We retained Northfield because of their excellent reputation in the field of risk-reward analyses and because their experience with the Index gave them a unique perspective on its composition and credibility. Further, since the Index is a learning lab – not a publicly visible commercial product – the continuity of their experience enabled them to determine whether the few Index changes made between 2007 and 2014 were reasonable or whether they were performance goal-seeking.

Before moving on to the risk-reward elements of Northfield’s analysis, it is worth examining the annual results of the Index and Focus Group in Table 2. The cumulative compounded returns shown in Table 1 are derived from this data.

Table 2:
Global LAMP Index® vs. Global Comparator Indices
Annual Returns: 1995 – 2014

tableb

Since world markets today are under increasing ecological, economic and financial stress, please note the resilience of the Global LAMP Index® during prior bear markets and the recovery years that followed. In the bear market of 2000 – 2002 and the five-year recovery period that followed, the market cap weighted LAMP gained 45% while the equal weighted LAMP gained 132% and the Focus Group returned 294 percent. By contrast, the three global comparators gained only 26% on average.

From the crash of 2008 through yearend 2014, the market cap weighted LAMP Index gained 38%, the equal-weighted LAMP gained 63% and the Focus Group gained 130 percent. By contrast, the benchmark average regained only 26% of its value.

While inserting the Focus Group into these comparisons may be criticized as cherry picking, it shows what the ‘best of the best’ of life-mimicking companies can do. The composition of the Focus Group is relevant here because it represents a diversity of industry sectors from deep cyclical steel (Nucor), to specialty chemical products (Henkel), capital goods (United Technologies), consumer non-durables (Unilever), consumer durables (Nike), banking (Westpac) and pharmaceuticals (Novo Nordisk).

Although Northfield’s analysis did not cover the Focus Group – it represents too small a sample – its findings on the broader Global LAMP Index® are worth noting.

Risk/Reward Results

According to Northfield, the equal-weighted Global LAMP Index® had positive alphas relative to the FTSE World Index of 5.6 for the entire 20-year period and 2.9 for the final 10-year period. These are excellent results. An alpha of 1.0 means LAMP outperformed the FTSE World by one percentage point on a risk-adjusted basis. Alphas in excess of 1.0 are rare.

The market cap-weighted Global LAMP Index® had a positive alpha of 1.41 for the 20-year period and a slightly negative -0.06 for the final 10-year period in spite of showing better returns. The negative in this case likely reflects the fact that LAMP constituents included slightly higher than average beta (risk).

The comparability of Global LAMP Index® returns is validated by R-squared numbers between .87 and .90 for the 10 and 20-year periods. A high R-squared (between .85 and 1.00) indicates LAMP’s performance patterns are reasonably comparable to benchmark returns. Northfield finds the cap-weighted excess performance of LAMP to be statistically significant (T value of 2.3) based on T-stat tests.

“The LAMP portfolio on a capitalization weighted basis outperformed popular capitalization weighted indices. This favorable result was statistically significant against all indices and index combinations for some time periods within the full sample of 1995-2014.  Against the FTSE World Index, statistically significant outperformance was observed for the overall time period.  No periods of statistically significant negative performance were observed against any index or index combination studied.”  – Northfield Information Services

LAMP as Learning Lab

The Global LAMP Index® was conceived in 1995 as a learning laboratory of progressive life-mimicking companies. Over the decade to 2004, the Index went through a number of iterations as we worked to identify “best of breed” companies within each sector and to make its industry/sector diversity comparable to the FTSE and MSCI benchmarks.

Performance of the lab from 1995 through 2006 is based on the same 60 companies with no substitutions. Between 2006 and 2014, there was a turnover of only six companies: four due to mergers and acquisitions and two due to behaviors that were inconsistent with LAMP standards.

While the Global LAMP Index® would be different in composition if we built it from scratch today, we have learned a great deal by observing those on the original list as they navigate the increasingly difficult rapids of ecological overstep, climate change, disruptive new technologies, the growing influence of emerging economies, rising debt/GDP ratios and evolving social norms – to name a few. A lot can happen in 20 years and, on the whole, companies on our original list have adapted well as their business ecosystems changed.

Thankfully, once companies get firmly on a life-mimicking path, they rarely fall off. So there’s much to learn from our low turnover approach. The best ones, such as those in our Focus Group, continually push the frontiers of bio-mimicry. As they succeed, they garner imitators. That is ultimately how their DNA spreads.

Early LAS leaders that currently lag best practices have good intentions but are constrained by a number of self-imposed conditions: complacency (not listening enough to new ideas, penetrating questions); growing too fast to properly maintain their cultures (taking on too much debt, failures of accountability); inability to find an organizational balance (between decentralizing and centralizing authority); lack of transparency (not sharing enough information with stakeholders to get helpful feedback); and failures to engage supply chains (not spreading best practices that feed back to a healthier business ecosystem).

Like all companies, life-mimicking ones make mistakes and occasionally get into trouble. What’s more important, however, is how they use their mistakes and errors of judgment to inform future learning. The best ones – remember Nike’s supply chain issues during the 1980s and early 1990s – use these as wake-up calls and move on with determination to live and work in closer harmony within the larger living systems that support them (society and Nature).











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