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A young Paul Tudor Jones once claimed in a documentary that a pair of tennis shoes he bought at auction that had belonged to Bruce Willis helped him stay lucky in the markets. Filmed a year before the 1987 stock market crash, the film star’s old shoes (“the man’s a stud,” Mr Jones beamed at the time) appeared to do the trick as the trader correctly bet on a huge sell-off — “it will be earth-shaking; it will be sabre-rattling” — and made a fortune.
More than three decades on, Mr Jones has moved on from celebrating the magical trading properties of Mr Willis’s used footwear in favour of promoting a new social impact investing exchange traded fund he claimed this week may one day “rival the S&P and the Nasdaq”.
The Just Capital US Large Cap Diversified Index, launched alongside Goldman Sachs Asset Management, only includes companies that score well on environmental, social and governance (ESG) metrics according to data in part gathered by an annual survey of the American public. The idea is that a company’s stock price will, in some way or another, over time correlate with the way it treats its employees, protects people’s data and tackles pollution among other issues related to corporate responsibility.
Mr Jones’ initiative may be well intentioned but there still exists little evidence to support his overarching premise. Over time, the stock market has proven to be largely amoral and so-called “sin stocks” have tended to outperform the wider market rather than underperform. Research conducted by Elroy Dimson, Paul Marsh and Mike Staunton found that tobacco and alcohol stocks have led returns in the US and UK stock markets since 1900. The back tests used for the Just Capital index go back all of two years.
And while Just Capital’s use of surveys of the public and a large number of data points may make the fund more nuanced than other ESG vehicles, its methodology may be overlooking an uncomfortable truth: many companies hated by the general public tend to perform very strongly in the stock market. Over the past decade, airlines, telecoms companies and social networks have frequently ranked among the “most hated companies in America”, but are in many ways disliked by the public for precisely the reasons that have made them profitable and their share prices rise.
The irony is that genuine oversight of corporate behaviour is most likely undermined by precisely the sort of passive, pseudo-governance encouraged by funds such as this.
