E X H I B I T 1 Descriptive Statistics—Founder CEO versus Vanguard Growth
founder CEOs becomes meaningless. We believe in the possibility of both. 25 Consequently, our mission is to evaluate whether a U.S. large-cap growth ETF/index can generate enhanced performance with a modification to weights in company securities that are deemed to fall into the founder-CEO category. We propose an approach that we believe correctly identifies founder-CEO companies on a consistent basis and provides compelling results with promising poten- tial. The model appears to work well in many market conditions but may fail significantly in others. Overall, the trading rule seems to be successful much of the time and, we believe, becomes much more likely to hold true over an extended period of time. 26 Discovering founder CEOs requires considerably more effort than a simple word search due to database inconsistencies and inaccuracies. 27 We begin our quest for founder CEOs by using data from Bloomberg, Capital IQ, SP ExecuComp, and SEC company disclo- sures. 28 We start our process with the S&P 500 Index and then expand to the Russell 1000 Growth Index as our project develops. We observe that because the data sources do not all correspond with similar responses, we need to follow up each potential entry with a more detailed, company-specific examination. Many com- panies do not identify founders within their company biography or organizational title section, thus negating any opportunity to effectively screen or search based on this simple criterion. Furthermore, many companies have been delisted over the years because of mergers/ acquisitions, bankruptcies, management buyouts, or other reasons. Consequently, to correctly compile a list of the top 30 market capitalization firms (rebalanced quarterly) without survivorship bias, selection bias, or data omission bias, we need to initiate a search on every single publicly traded company prospectus from the date of index inception and identify each and every founder, year by year, with a consistent definition. 29 This is a very tedious process that requires extensive research time to ensure accuracy. Given our desire to create an index with an inception date of 2006, including the top 30 market capitalization firms (rebalanced quarterly), we ultimately examine 1,507 company prospectuses, including 106 delisted firms. 30 The descriptive statistics IDENTIFICATION OF FOUNDER CEO S
Source: Bloomberg.
and analytics of this grouping relative to a comparable U.S. large-cap growth benchmark are shown later.
Founder-CEO Descriptive Statistics
Exhibit 1 illustrates some of the descriptive statis- tics for the founder-CEO index along with comparisons for a U.S. large-cap growth index/ETF. 31 We select the Vanguard Growth Index (ticker: VUG) because it pro- vides the best fit to our founder-CEO index among U.S. large-cap growth indexes/ETFs based on overall characteristics (e.g., highest correlation, composition). 32 We note the founder-CEO index (relative to bench- mark) has (among other differences) a lower dividend yield (0.59% for founder-CEO versus 1.29% for the benchmark), higher P/E ratio (38.72% for founder- CEO versus 27.96%), significantly higher five-year sales growth rate (14.54% versus 10.20%), and higher R&D to sales (11.79% versus 8.15%). Moreover, the founder- CEO index represents companies that have a higher concentration in the Consumer Discretionary sector (28.40% versus 14.95% for benchmark), higher weight in Financials (16.39% versus 8.32%), lower weight in Health Care (9.78% versus 12.54%), lower weight in Information Technology (IT; 19.54% versus 29.72%), and higher weight in Real Estate (4.76% versus 2.59%). 33
W INTER 2017
T HE J OURNAL OF I NDEX I NVESTING
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