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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 & Inclusion (TRDI) Index, there is a simpler answer, and one you wouldn't find on a company's balance sheet.

TRDI is a simple market-cap weighted index of the 100 companies globally with the highest Thomson Reuters Diversity & 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, perhaps 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.

Of the 100 stocks in the TRDI Index, we select the 30 North American companies (28 American and two Canadian) as the initial universe for our screen.

Then, we screen for good investments among this group using simple, traditional financial metrics. We require an estimated next-12-month (NTM) dividend yield (Thomson Reuters SmartEstimate) of at least 2.5 per cent, and a SmartEstimate forward P/E, again NTM, of no more than 13.

More about Thomson Reuters

Thomson Reuters delivers trusted news and intelligent information to more than one 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, health care and financial sectors.

In the tech sector, HP Inc. has positioned itself well to capitalize on the growth of microbusiness and the rise of the gig economy. On Tuesday, it unveiled what it touts as the world's smallest laser printer, which will allow entrepreneurs to scan and print business documents on the go from a shared working space, coffee shop or wherever they might find themselves.

On the consumer-products side, there is a very strong long-term argument against department stores in general, but Macy's Inc. may represent a rare exception. Shares fell to below US$20 in late 2017 (from a high of above US$70), but have since rebounded to about US$30 based on optimism surrounding a few initiatives. One example of these is the "Growth 50" plan to revamp 50 key stores by, among other things, making them more customer-focused (as opposed to brand showcasing), expanding shopper-oriented technology in stores, and increasing the role of food and beverage (for example, Starbucks in stores). Another is the expansion of its Star Rewards loyalty program, after its initial launch in October was well received.

Investors are advised to do further research before investing in any of the companies shown here.

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

Stock screen based on the Thomson Reuters Diversity & Inclusion Index

CompanySymbolMkt. Cap. (US$)Div. yield % (SmartEstimate)P/E (SmartEstimate)Recent close ($) *1Y Rtn. (%)
Merck & Co. Inc.MRK-N147,292,887,1243.6%12.9054.63-12.0
International Business MachinesIBM-N144,945,768,1214.0%11.32157.35-6.8
Bank of MontrealBMO-T48,586,183,2434.0%10.7898.412.0
HP Inc.HPQ-N38,079,871,3712.5%11.4923.2035.7
Gap Inc.GPS-N12,532,863,4633.0%12.0232.2342.2
Macy's Inc.M-N8,923,794,8465.2%8.2729.306.1

Source: Thomson Reuters Eikon

* In local currency.